China’s Auto Sales Allayed Fears of a Slowdown, But Is It Enough?

Can Iron Ore Prices Retain Their Recent Gains through 2017? PART 10 OF 11

China’s auto demand

Because China’s automobile industry is the country’s second-largest consumer of steel after the real estate sector, it’s important to track its developments.

Recent auto sales data is helping soothe the fears of a slowdown in China’s auto market. These sales have shown a marked decline in the previous few months. However, after falling for two consecutive months, auto sales in China rose in June and July 2017.

Total vehicle sales in China grew 6.2% to ~2.0 million units in July. This number was supported by robust growth in the demand for commercial vehicles, which saw 18% growth year-over-year (or YoY). 

In the first seven months of 2017, vehicle sales grew 4.1% YoY. This growth is still nowhere near the 13.7% growth seen in the country’s 2016 auto sales. This high growth was due to a cut in the sales tax on small-engine vehicles from 10% to 5%. Although the tax cut is still in place, the tax rate rose to 7.5%.

Automakers (IYK) Ford (F) and General Motors (GM) felt the brunt of this YoY slowdown in China as their sales fell 7.0% and 2.5%, respectively, in the first half of 2017.

Is slowing growth ahead?

While demand seems to have recovered in the last couple of months, it is still lower than last year. At the beginning of 2017, CAAM (China Association of Automobile Manufacturers) forecast a growth rate of 5% in 2017. 

A slowdown in growth in auto sales in the world’s largest auto market doesn’t bode well for global steel (SLX) demand. Lower steel demand is negative for iron ore demand, which is also negative for seaborne iron ore players such as Vale (VALE), Rio Tinto (RIO), and BHP Billiton (BHP).

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