China’s steel demand
China (FXI) is the world’s largest steel consumer. Therefore, to gauge the outlook for iron ore, it’s vital to look at China’s steel demand indicators. The real estate and automotive sectors are the two largest steel end consumers in China. In this part, we’ll discuss these factors in more detail.
China’s property market
In July, China’s fixed-asset investment slowed to a record low. It grew by 5.5% in the January-July period. According to Reuters, “China’s fixed-asset investment increased at the slowest pace on record in July and retail sales also softened amid an escalating trade dispute with the United States.” However, due to the softer data, market participants are expecting more policy support. The government has already announced it will ramp up spending on railways and roads to boost growth.
On the other hand, the country’s other real estate indicators improved in July. The total investment in real estate development rose 10.2% YoY in the first seven months of 2018. The growth rate expanded by 50 basis points compared to the first six months of 2018.
China’s automotive sales fell in July. According to the China Association of Automobile Manufacturers, China’s vehicle sales came in at ~1.89 million vehicle units in July, which implies a YoY fall of 4.0%.
China’s economic growth might also be on a slowdown path even without the trade disputes. However, the government is trying to provide support to the economy, which should flow through to the steel sector as well. Thus, miners such as Rio Tinto (RIO), BHP (BHP), and Vale (VALE) shouldn’t see a marked decline in their realized prices. China’s supply-side reforms, on the other hand, have led steel exports to decline in 2018. US steel companies such as U.S. Steel (X), AK Steel (AKS), and Nucor (NUE) are benefitting from these reforms. Cleveland-Cliffs (CLF) also benefits from lower steel imports.