China's GDP growth rate for the fourth quarter was 7.9%, higher than the 7.8% expected and higher than the 7.4% growth in Q3. Industrial production rose 10.3% in December year over year, and was up 10.1% in November. Iron ore prices have begun to recover, with prices rising as high as $158.50 a metric ton last week. Property prices were up 0.31% in December, the biggest gain in 2 years. The world's second largest economy seems to be stabilizing and 8% GDP growth (which is up from 7.8% in 2012) seems completely reasonable. The real question is, how can we as investors benefit from this rebound?
As I said above, iron ore prices have begun to recover and are up 80% since September as Chinese steel mills start to pick up steam as the economy grows faster and more infrastructure projects are underway. The cold weather in China has curbed local production, which boosted prices. While iron ore prices may be overvalued (according to many, including the new CEO of Rio Tinto plc (NYSE:RIO)), they still are much higher than their $87 a metric ton low. Rio Tinto plc (NYSE:RIO) is the world's second largest mining company and mines more iron ore than anyone else. While they did have to take a $14 billion write-down and have a management change, this could present a great buying opportunity for the long run. Management is now projecting that they will produce 290 million metric tons of iron by the end of 2013 and 360 million metric tons by 2015.
As China's industrial production growth maintains above 10%, iron ore prices will stay at these levels. The leadership of China is forecasting for 10% industrial expansion for 2013, and because China usually lowballs estimates (and manipulates them) they probably will exceed that number. Right now China's industrial capacity is only at 60% right now, but if Europe and North America turn their economies around (especially Europe), then that capacity can be utilized and China will consume more metals and minerals.
Weakness now but the future is bright
While there currently is weakness in the steel industry and overproduction has pushed prices lower, in the long term iron ore is a good place to be. The mining industry has consolidated while the steel industry is fractured, so they can maintain higher profit margins than the downstream business. China is currently spending $157 billion on infrastructure improvements on 60 different projects, Indonesia is spending roughly $200 billion on their own infrastructure improvements over the next 2 years (the program is running from 2010-2014), and America's infrastructure is severely lacking and will need an upgrade sometime soon.
India, China, Indonesia, and Latin America offer a ton of potential for infrastructure improvements and projects as these emerging economies continue to see strong GDP growth. China is the biggest factor in this growth, as they are 40% of the global steel market. BHP Billiton Limited (NYSE:BHP) is trying to boost its iron ore production up to 220 million metric tons by the end of the next fiscal year as it plays a rebound in China's economy. While BHP is a more diversified mining play, strong iron ore prices will benefit its bottom line and will help out its other divisions as stronger GDP growth leads to more mineral consumption.