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China’s Auto Sales Are Again in the Fast Lane: Can It Last?

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Auto sales

China’s total vehicle sales (XLY) climbed 9.6% in May to 2.3 million, followed by an 11.5% jump YoY (year-over-year) in April. According to the China Association of Automobile Manufacturers, rising consumer demand amid a strong domestic macroeconomic environment led to this strong gain. The sales in the first five months climbed 5.7% to 11.79 million units. April’s Beijing auto show might also have added to the growth in vehicle sales witnessed in May.

While still small, the growth in sales of new-energy vehicles remains very strong. In May, new energy vehicle sales grew 141.6% to 328,000 units. The first five months saw sales soar 124.7% year-over-year (or YoY).

Impact of the tax increase

China’s auto sales rose by a lackluster 3% in 2017 and 14% in 2016, boosted by a temporary reduction in sales tax. The China Association of Automobile Manufacturers expects 3% growth this year. The government reduced its sales tax from 10% to 5% in 2016 and 7.5% in 2017 and then reverted to 10% this year. Excluding any incentives, auto sales growth is likely to remain closer to 3%.

Auto growth and iron ore

If the current trend of growth in autos continues, steel and consequently iron ore prices should remain supported. Higher iron ore prices, in turn, should support seaborne iron ore players such as Vale (VALE), Rio Tinto (RIO), Cleveland-Cliffs (CLF), and BHP (BHP).

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