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Why China’s rising auto sales may spur strong steel demand

Yanyu Mao

Critical analysis: China's key dry bulk shipping indicators (Part 1 of 6)

Car sales and steel demand

As we noted in our guide to investing in dry bulk shipping, steel demand directly affects shipping demand for iron ore, which makes up nearly 30% of dry bulk shipping. Since steel is one of the most crucial inputs for automobile manufacturing, demand for steel should rise when automobile sales rise. This is particularly important in countries like China, where the majority of people don’t have cars.

A robust 2013

China’s automobile sales were robust in 2013. Year-over-year sales growth recovered in late 2012 as inflation rebounded and the government injected stimulus. Despite all the talks on shadow banking, bad government loans, tightening credit, and soaring housing prices, people continued to purchase more cars, and steel consumption went up. While China is slowly moving away from investment- and infrastructure-led growth to consumption-led growth, this change isn’t necessarily bad for car sales. China may not see economic growth of high single digits or double digits, but cars contribute to consumption too—especially since their value depreciates substantially when driven from the store.

A record high in January 2014

While many people are still somewhat skeptical about Chinese consumers’ purchasing power, news comes that China’s auto sales rose 6% year-on-year in January 2014 to a record all-time high. According to a China Association of Automobile Manufacturers (CAAM) statement, a total of 2.16 million vehicles sold in the world’s largest car market last month, which might be justified by relatively strong seasonal demand before Chinese New Year.

Opportunity and concern for 2014

Analysts believe Chinese consumers are gradually changing their behavior. They used to buy the most affordable cars to save money, but now they’ve become more demanding of more advanced cars, and they’re getting more comfortable with financing car purchases with loans instead of savings. We can expect this demand to grow as Chinese consumers’ incomes increase.

But there is some concern as well. In 2014, pollution and traffic jams are prompting cities to cap the number of new autos in order to meet the central government’s targets for reductions in air pollutants. This becomes a major concern that, despite the record sales in January, growth in 2014 may not be as exciting as in 2013. China’s main car association currently forecasts growth of 10% in 2014—about one-third short of the current growth rate. Lower sales growth is indeed negative. But even 10% growth will be positive for steel demand, iron ore import growth, and dry bulk shipping demand.

Continue to Part 2

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