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China’s Stimulus Measures Could Support Commodity Prices

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Stimulus measures

China is introducing more stimulus into the economy to arrest the slowdown. During the annual parliamentary gathering, Chinese premier Li Keqiang announced several stimulus measures including cuts in taxes and fees worth nearly 2 trillion yuan. He also announced a reduction in the value-added tax rate for the manufacturing sector from 16% to 13%. He outlined plans to increase China’s infrastructure financing. The special bond issuance quota for local governments increased to $320 billion from $283 billion.

We have seen one weak data point after another coming out of China (FXI) in the last few months. The major drivers for China’s steel demand are the construction and auto sectors, which have been weaker. The weakness led to softer domestic steel demand.

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Property and auto sectors faltering

China’s real estate market has been faltering. The number of cities reporting a sequential drop in prices increased for the fourth straight month in December.

China’s automotive sales have also been on a downtrend for the past several months. China’s total vehicle sales fell 2.76% YoY to 28.08 million units in 2018. China’s annual vehicle sales fell for the first time since 1990.

Demand under pressure

Due to China’s waning steel demand and uncertain outlook, its steel prices are weakening. As we saw in the fourth quarter, softer Chinese steel prices have impacted global and US (SPY) steel prices. While China is slowing down, the stimulus provided by Chinese authorities could offset some of the declines. The stimulus should ease investors’ concerns regarding China’s slowdown. Therefore, investors in US steel and iron ore companies (XME) like AK Steel (AKS), U.S. Steel (X), and Cleveland-Cliffs should closely follow the Chinese government’s policy steps.

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