Since as far back as 2009, everyone from politicians to fund managers have been shouting from proverbial rooftops that growth is slowing in China. It’s no secret that we think growth is slowing across the globe as well – growth implies a sustainable economic model. And with the Chinese rate cut this week, it’s just yet another data point that backs up our case.
Chinese construction is what everyone keeps their eye on. When construction slows, commodities like copper and rebar will see their price drop significantly, regardless of what Federal Reserve Chairman Ben Bernanke has up his sleeve. It has to do with supply and demand, no matter how outrageous that might sound these days.
The above chart tells us a bit about what’s going on China. Essentially, this is the story:
• Real rebar prices continue to decline, suggesting weak Chinese construction activity
• This is negative for construction equipment producers, many of which have become increasing dependent on sales to China (e.g. Komatsu)
• Chinese metal demand has been heavily driven by construction activity. Weakening could reduce global mine capital investment, impacting equipment suppliers like CAT and Sandvik.