By Annie Gilroy | Feb 16, 2017 2:13 pm ESTmce-anchor China’s steel prices
Among the most dominant factors driving the recent iron ore price rally are higher steel production and the rise in steel prices in China (FXI).
Although these factors helped iron ore prices in 2016, the question remains whether steel prices can remain buoyant going forward. The answer lies in the underlying demand trends for steel in China and elsewhere.
Higher prices
In December 2016, steel prices in China hit 3,557 Chinese yuan per ton—the highest level in two and a half years. While steel prices in China rose almost 60% in 2016, they started falling in the last few days of 2016 due to falling futures.
However, steel prices have stayed buoyant in 2017 YTD (year-to-date). The Chinese futures contracts for steel reinforcing bars, or rebar, have risen 17% in 2017. Nippon Steel
Japan’s largest steelmaker, Nippon Steel, also expects steel prices in China to remain strong in 2017. The company has stated: “Steel demand and prices in China have been fairly strong on the government’s stimulus.” Nippon added the following: “My guess is that coking coal prices will stay at $150–$200 a ton as China is said to be trying to cut market volatility.”
In the same vein, Nippon expects iron ore prices to move toward $90 per ton on expectations that China imports will grow. What’s really driving steel prices?
To make the domestic steel sector more efficient, a significant amount of capacity was cut in 2016. The stimulus provided by the government also helped steel mills to restock their inventories, which acted as a major driver of rising prices. The shortage of another steelmaking raw material, coking coal, also led to higher prices.
While inventory restocking provides temporary relief to steel prices, metals prices (DBC) depend on underlying real demand and supply. Impact on mining companies
Chinese steel prices and seaborne iron ore prices move in tandem. Many analysts believe that we could see moderation in iron ore prices in 2017. Any fall in steel prices could also put pressure on iron ore prices.
Notably, China’s cutbacks in domestic steel production could result in falling iron ore imports from seaborne suppliers like Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).
1M3M6MYTD1Y3Y5Y10YClick Ticker Above to Show/Hide on GraphDBCCLFVALEBHPRIOJan 30stFeb 13th$15.6$15.8$16$16.2
PART 12
Reading Iron Ore: A Surprise Surge, but What Now? PART 12 OF 14 Why China’s Real Estate Outlook Matters to Iron Ore Miners
By Annie Gilroy | Feb 16, 2017 2:13 pm ESTmce-anchor China’s property sector
China’s property sector is critical to seaborne iron ore demand. Investors in iron ore companies such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF) should keep an eye on developments in China’s property sector.
Property growth slowing
According to the National Bureau of Statistics, the real estate sector in China grew 7.7% in 4Q16, as compared to a growth of 8.8% in 3Q16. Property development investment, on the other hand, rose 11.1% in December YoY (year-over-year) as compared to a growth of 5.7% in November. This measures builders’ investments in construction and land development.
China’s home prices have started showing signs of slowing down. China’s property developers have started cutting prices for new apartments in compliance with the government’s orders to eliminate speculation. Tightening measures and price increases
A slew of tightening measures have been launched across various cities in China to rein in asset bubbles. The country’s property sales have slowed down after these tightening measures came into place.
As reported by scmp.com, “Of the 70 Chinese cities tracked by the statistics bureau, 46 reported price increases in December, compared with 55 in November. Average new home prices in China’s four biggest cities were unchanged in December on month, slowing from a 0.1% increase a month earlier.” Outlook weaker
Moody’s also expects a slower pace of growth for China’s property sector in 2017 on the back of tighter rules. According to one Moody’s analyst, “We expect nationwide contracted sales in 2017 will be largely flat or will see a slight decline from 2016, after buoyant growth that year.”
Notably, CLF makes up 1.3% of the VanEck Vectors Steel ETF (SLX).
PART 13
Reading Iron Ore: A Surprise Surge, but What Now? PART 13 OF 14 The Future of China’s Auto Sales: Life after Sales Tax Breaks
By Annie Gilroy | Feb 16, 2017 2:13 pm ESTmce-anchor China’s auto sales
China’s automotive industry is the second-largest steel consumer after the real estate sector. In this part of our series on iron ore, we’ll look at recent trends in the Chinese automotive industry. We’ll also analyze how auto sales could shape up in 2017.
Auto sales fall on tax increase
After rising by 9.1% YoY (year-over-year) in December 2016, auto sales declined by 1.1% YoY in January 2017 to 2.2 million units. Total vehicle sales, including trucks and buses, however, came in 0.2% higher YoY to 2.5 million units.
But investors should note that China’s trade figures for January could be distorted, given the timing of Lunar New Year holiday, which falls at different times. Total sales
For 2016, China’s (FXI) total sales were 28.0 million units, 13.7% higher than its sales of 24.5 million units in 2015. The growth rate in 2016 was substantially higher than the growth rate in 2015, when auto sales rose 4.7%.
Higher automotive sales in the world’s largest auto market tend to bode well for global steel demand. High auto sales also support seaborne iron ore players such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). ArcelorMittal (MT) is the leading steel supplier for the automotive sector. AK Steel (AKS) is a major supplier for US automotive companies. Sales outlook
On September 30, 2015, China announced a 50% cut in its sales tax, from 10% to 5%, on autos with engines smaller than 1.6 liters. Earlier, the tax cut was effective until the end of 2016. However, China’s State Council agreed to extend the cut, albeit at a higher rate of 7.5%.
The extension will be effective until the end of 2017. In 2018, it will revert to 10%. While auto sales could be lower than they were in 2016, people are still expected to take advantage of the lower tax in 2017. January’s sales data could have been distorted so we’ll need the data for a few more months to find out the trend for the sales data.
The SPDR S&P Global Natural Resources ETF (GNR) tracks the Natural Resources Index. Rio Tinto makes up 1.8% of GNR’s portfolio holdings.
In the next and final part of this series, we’ll discuss whether credit-fueled property growth is sustainable in China.
PART 14
Reading Iron Ore: A Surprise Surge, but What Now? PART 14 OF 14 Will Iron Ore Prices Benefit from China’s Credit Growth Prospects?
By Annie Gilroy | Feb 16, 2017 2:13 pm ESTmce-anchor China’s credit metrics and iron ore prices
Financing, or the level of credit available, is crucial to growth, as it stimulates consumption and investment in an economy. By tracking credit growth in China (MCHI), investors can gauge patterns that forecast future demand.
Record aggregate financing
Aggregate financing measures liquidity by adding the total funds provided by a financial system to nonfinancial sectors and households. China’s aggregate financing stood at ~3.7 trillion Chinese yuan in January 2017, as compared to 1.6 trillion yuan in December 2016.
This is the highest monthly figure. The median forecast called for 3.0 trillion yuan worth of aggregate financing in January. New yuan loans increase
According to the PBOC (People’s Bank of China), new loans issued by Chinese banks in January 2017 totaled 2.03 trillion Chinese yuan—higher than 1.0 trillion Chinese yuan in December 2016 and the second-highest monthly total on record. M2 money supply up
The broad money supply rose 11.3% YoY (year-over-year) in January 2017 same as December 2016. The M2 money supply includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.
All the credit metrics showed strong growth in January. Investors should, however, note that the credit numbers in China are usually higher in the initial months of the year as the government renews banks’ credit quotas. So we might have to wait for the credit data for a few more months to get a clearer picture of the growth in 2017. Slowing credit growth?
Credit growth may slow a bit, however, as policymakers resort to tightening measures to contain the asset price bubbles. Goldman Sachs (GS) believes that China’s reliance on credit growth could be a key risk in 2017.
If the Chinese government keeps its policy less supportive in the future, pressure could return to steel mills and seaborne iron ore players. Affected players would include BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and the Asia-Pacific division of Cliffs Natural Resources (CLF).
Notably, BHP accounts for 6.3% of the iShares Commodities Select Strategy ETF (COMT).
1M3M6MYTD1Y3Y5Y10YClick Ticker Above to Show/Hide on GraphCOMTBHPCLFRIOVALEJan 1nd00:00:00.001$0
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AHQ Price at posting:
3.4¢ Sentiment: Buy Disclosure: Held
