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China Is Showing No Signs of a Building Slowdown

By Matt Badiali, editor, S&A Resource Report
Wednesday, December 18, 2013

Mainstream headlines tell you that China isn't growing much... and that its consumption of commodities is dropping.
 
That could happen... but it's not happening now. In fact, imports of one of China's most vital commodities just hit an all-time high. And investors should be paying attention...
 
Iron ore is the raw material used to make steel... which is one of the basic building ingredients of modern civilization. Steel goes into bridges, buildings, power lines, automobiles, and appliances.
 
Since 1998, China has grown its imports of iron ore by 18.8% per year. Think about that. For the past 15 years, China purchased nearly 19% more iron ore every year. This is tremendous growth over a long period of time.
 
The nominal amounts of iron-ore imports are just as impressive. Over the last 15 years, Chinese iron-ore imports averaged more than 50 million metric tons per year. In the past five years, China has imported more than 74 million metric tons each year. Demand is strong and growing. In the chart of China's iron-ore imports below, you'll see that imports just reached an all-time high. There's no slowdown here...
 
chinese iron ore imports
 
I expect these imports to continue to grow. You see, iron-ore production in China is dropping...
 
The U.S. Geological Survey (USGS) recently forecast that Chinese iron-ore production will decrease for the first time in more than a decade. This would mark the first decrease since Chinese iron-ore production dropped from 224 million tons in 2000 to 220 million tons in 2001. Chinese iron-ore production had increased every year since then.
 
China is trying to limit the rampant pollution in many of its cities by toughening production standards. Its efforts will reduce the number of producing iron-ore plants in the country.
 
But even if China is producing less of its own iron ore, it's still using the stuff. This will increase Chinese reliance on imported iron ore. The price for iron-ore fines (high-quality iron-ore powder) at China's Tianjin port is up more than 20% from its May low. This is good for companies that produce iron ore.
 
Producer
Price
Market Cap*
Total Sales*
Sales to China*
Vale (VALE)
$14.72
$76.1
$45.6
$16.9
Rio Tinto (RIO)
$53.01
$96.9
$51.0
$17.9
BHP Billiton (BHP)
$63.73
$170.8
$66.0
$19.4
Source: Yahoo! Finance and Capital IQ
* all $ in billions

The three major iron-ore producers listed in the U.S. are Vale, Rio Tinto, and BHP Billiton. All three are huge, global mining powerhouses. A large portion of these companies' total sales come from China. About 37%, 35%, and 29%, respectively, of total sales came from China in their most recent fiscal years.
 
And this number could increase for giant Brazilian metals producer Vale as it focuses even more on its core iron-ore business. The company recently announced it is selling off stakes in its coal, fertilizer, and steel businesses. The sales will also strengthen the company's balance sheet.
 
Vale's share price has struggled over the past few years but has seen a recent uptick. After bottoming in July under $13, shares are now trading closer to $15. It remains reasonably priced. Vale's average enterprise value (market cap plus debt minus cash) divided by earnings (before interest, taxes, depreciation, and amortization) ratio since 2009 is 7.4. As of Monday's close, it was 5.5. So Vale has nearly 35% upside if it returns to its average.
 
Look for this rally to continue as the market realizes China isn't slowing down.
 
Good investing,
 
Matt Badiali




Further Reading:

Frank Curzio says if you're looking for growth, look no farther than China. "That's why every investor should have at least some exposure to this emerging market," he writes. And there's one easy way to invest. Get all the details here.
 
"In recent years," Steve Sjuggerud writes, "Chinese stocks have moved sideways and down, so American investors have forgotten about them." That means that right now, some of the biggest blue-chip names in China are dirt-cheap. Click here to learn Steve's safe, long-term way to trade them.

In The Daily Crux
Market Notes
Japan's Nikkei is on track to be the best-performing index in 2013... up 45% since the start of the year.
 
The "fear index" is creeping higher... the "VIX" jumps 33% over the past month.
 
U.S. real estate buyer Blackstone Group surges to a six-year high.
 
Chinese oil giants are struggling... PetroChina and CNOOC hit three-month lows.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1781.00 -0.3% +24.5%
Oil (USO) 34.87 -0.2% +8.9%
Gold (GLD) 118.65 -0.9% -27.9%
Silver (SLV) 19.14 -0.4% -38.7%
U.S. Dollar 80.05 +0.0% +0.6%
Euro 1.38 +0.3% +4.9%
Volatility (^VIX) 16.21 +1.1% -0.8%
Gold Stocks (^HUI) 196.40 -0.5% -55.3%
10-Year Yield 2.84 -1.4% +61.4%

World ETFs
Symbol Price
Change
52-Wk
Israel (ISL) 16.74 +0.2% +29.7%
USA (SPY) 178.65 -0.3% +27.0%
Japan (EWJ) 11.73 +0.1% +25.6%
Russia (TRF) 14.84 +0.4% +5.4%
Taiwan (EWT) 14.13 -0.4% +5.1%
Canada (EWC) 28.52 -0.3% +1.0%
S. Korea (EWY) 62.67 -0.8% +0.9%
India (IFN) 20.21 -0.3% -0.7%
China (FXI) 37.72 -1.3% -1.1%
Singapore (EWS) 12.95 -0.7% -4.5%
S. Africa (EZA) 61.65 -0.4% -8.2%
Lat.America (ILF) 36.14 -0.4% -12.8%

Sector ETFs
Symbol Price
Change
52-Wk
Alt. Energy (PBW) 6.14 +1.3% +53.2%
Biotech (PBE) 35.26 -1.4% +51.9%
Media (PBS) 25.04 +0.2% +51.2%
Defense (PPA) 29.81 +0.0% +46.4%
Transportation (IYT) 127.30 -0.5% +37.8%
Consumer Svcs (IYC) 117.47 -0.5% +35.2%
Industrials (IYJ) 97.31 -0.1% +34.6%
Retail (PMR) 33.76 -0.2% +34.1%
Health Care (IYH) 112.58 -0.6% +34.0%
Big Tech (QQQQ) 85.15 -0.2% +31.7%
Financials (IYF) 77.68 -0.4% +30.2%
Software (PSJ) 34.81 +0.7% +30.0%
Semis (PSI) 18.27 +1.8% +29.9%
Construction (PKB) 21.19 -0.1% +24.3%
Water (PHO) 25.09 +0.3% +23.2%
Nanotech (PXN) 7.05 +0.4% +21.8%
Telecom (IYZ) 28.22 +0.5% +18.6%
Insurance (PIC) 19.01 +0.1% +18.3%
Basic Mat (IYM) 78.43 +0.5% +17.2%
Utilities (XLU) 37.64 -0.2% +9.5%
Real Estate (IYR) 62.66 +0.5% +1.4%

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