Using the Iron Ore Price to Check China’s Economic Health

Let’s have a quick look at yesterday’s Chinese third quarter GDP release. From the Financial Times:

The Chinese economy expanded at an annual rate of 6.7 per cent in the third quarter, putting it firmly on track to meet the government’s full-year target of at least 6.5 per cent growth. But concerns are mounting that the rate could fall as officials try to cool an overheated property sector, a traditional motor of the country’s economy.

Every quarter it’s the same. China hits its target, but worries remain about the composition of growth and the risks posed by the long property bubble.

Rather than wonder what each set of dubious Chinese data means, I’ve simply decided to follow the iron ore price as a proxy for China’s economic health. Right now, iron ore is holding up around US$58/tonne.

This tells me things are OK…for now, at least. Can China deflate the property bubble smoothly and find another source for its growth? Experience tells us that it can’t…not smoothly, anyway.

And the iron ore price is the barometer. It’s not as sensitive to Chinese growth as it once was, thanks to a huge supply response which started a few years ago. But it’s still important.

If you see iron ore prices fall into the US$40/tonne range, you can safely assume that China’s growth is slowing again.

As I said, that doesn’t appear to be happening right now. The iron ore price resilience has surprised me.

The other China indicator to keep an eye on is Fortescue Metals [ASX:FMG]. It’s a pure iron ore producer, selling almost exclusively to China. It’s also highly leveraged, and is higher cost than BHP and RIO, which means it’s more sensitive to iron ore price moves.

As you can see in the chart, FMG is in a strong share price uptrend.

FMG


Source: BigCharts
[Click to enlarge]

It’s consolidating right now, which makes the next move from here interesting. A break above the recent high, around $5.25, suggests the upward trend will continue. But a break below the September low, around $4.60, will tell you that China’s economy is slowing down.

It’s worth keeping an eye on. It will save you trying to work out the meaning behind China’s creative accounting and data releases. And it will free up time for an indulgent and home-wrecking avocado smash.

Cheers,

Greg Canavan,
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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