Worries about the pace of China’s economic expansion are hurting prices for iron ore. According to data from the Steel Index Ltd, benchmark iron ore dropped more than 8% to $104.70 a dry ton March 10, falling the most since August 2009. Over the weekend, news revealed that Chinese exports dropped a surprisingly 18.1% in February, relative to expectations calling for a 7.5% increase. According to customs data released March 8, China’s imports of iron ore were 61.24 million metric tons in February, significantly below the 86.83 million tons registered in January. The news, while not shocking, wasn’t very pleasant.
Still, we’re taking the recently-released February numbers with a grain of salt. Scares regarding the pace of China’s economic growth flood the market almost on a daily basis, and iron ore prices will always be volatile. The year-over-year comparison regarding Chinese exports is not clean either, as the Lunar New Year holiday and a harsh winter in the US likely reduced a pure apples-to-apples number. The iron ore numbers, however, may be a bit more telling of the iron ore supply/demand situation. But even these numbers can fluctuate greatly on a month-to-month basis. Though the news is less than comforting, China’s annual economic growth is expected to continue at a breakneck pace (~7%-7.5%) – see here. Volatility is inevitable and structural risks remain (an overheated real estate market and a shaky shadow banking system, for example), but the economic growth expectation continues to bode well for mining giants such as BHP Billiton (BHP) and Rio Tinto (RIO), even if monthly numbers diverge significantly from expected trend lines.
For analysts and investors focused exclusively on the mining industry, it’s difficult to keep the Chinese trade data and iron-ore price change in perspective. However, as globally-focused investors across sectors and geographies, we don’t think the trade data is too much to worry about. For one, it does little to alter the vibrant long-term growth prospects in China for consumer-oriented companies such as Yum! Brands (YUM), Nike (NKE), and Tiffany (TIF). It also hasn’t prompted China to alter its 7%+ economic growth assumption for 2014, which we would view as a more critical change. Unless the poor Chinese trade news is indicative of a coming chain reaction within the Chinese economy, where economic growth is significantly impaired and its financial system is weakened, we’re taking the export news in stride.
Valuentum’s Take
We think the mining giants have been expecting the weak data for a while. BHP Billiton and Rio Tinto are focused on reducing capital expenditures, improving free cash flow, and paying down debt. These are all moves that suggest a weaker pricing environment is on the horizon. Concerns about the pace of economic growth in China will always be a part of the equity market. The Best Ideas portfolio holds a small position in Rio Tinto on the basis of its undervaluation. It also holds a position in Chinese Internet giant Bidu (BIDU), which we believe is largely immune to cyclical considerations in the country as it is more levered to secular increases in Internet penetration. We’re not making any changes to our actively-managed portfolios on the basis of this news.
Metals & Mining – Diversified: BHP, CLF, FCX, RIO, SCCO, SLW, VALE
Related ETFs: EWZ, FXI, FXA
Other China Equity ETFs: SPDR S&P China (GXC), PowerShares Golden Dragon China (PGJ), Guggenheim China All-Cap (YAO), iShares FTSE China (FCHI), Market Vectors China ETF (PEK), Morgan Stanley China A Share Fu (CAF), ProShares Short FTSE China 25 (YXI), ProShares Ultra FTSE China 25 (XPP), ProShares UltraShort FTSE China 25 (FXP), iShares MSCI China Index (MCHI), Direxion Daily China Bull 3X Shares (YINN), Direxion Daily China Bear 3X Shares (YANG), RBS China Trendpilot ETN (TCHI), Wisdom Tree China Dividend ex-Financials (CHXF), KraneShares CSI China Five Year Plan ETF (KFYP).