14 Jun

Should Plummeting Car Sales in China Bother Metal Investors?

WRITTEN BY Mohit Oberoi, CFA

Metal investors

Car sales in China have fallen on a year-over-year basis for 11 consecutive months. The automotive industry is among the biggest consumers of metals like steel, aluminum, and copper. So, it goes without saying that plummeting car sales in China would negatively impact the country’s metal demand. But the impact varies for different metals.

Steel

While China is the world’s biggest automotive market, the percentage share of the automotive sector in its aggregate steel demand is much lower as compared to developed markets like the United States. The real estate and infrastructure sectors account for the majority of steel demand in China. The real estate and infrastructure sectors have been supported by the Chinese government’s stimulus measures. Notably, Chinese steel production is running at record levels. Its steel exports have also been under check, suggesting strong domestic steel demand. Chinese steel prices have been reasonably strong this year.

While President Trump’s Section 232 tariffs were expected to revive US steel companies, last month leading steel companies like U.S. Steel (X), Nucor (NUE), and AK Steel (AKS) fell to 52-week lows. However, steel stocks have rebounded this month, and U.S. Steel and AK Steel have gained 21% and 25%, respectively, in June.

Aluminum

Aluminum is a different story, and Chinese aluminum exports hit a record high last year. Plus, the current run rate suggests exports are on track for another record year in 2019. The surge in Chinese aluminum exports is coming at a time when the country’s aluminum production in the first four months is similar to the corresponding period in 2018. The automotive industry is among the biggest aluminum consumer, so sagging demand from the sector has hurt China’s aluminum demand, which is also visible in the divergence between its aluminum production and exports.

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