If you are concerned about the Chinese economy, you shouldn't be. Chinese exports for the month of September came in at $186 billion, a 9.9% increase year over year.
We did have a little dip to end 2008 where exports fell to about $65 billion, but since 2009, the Chinese kept growing their exports as you can see on Chart 1.
As Zerohedge's chart points out, exports and imports are mostly equal. If exports move up, imports will move up too. Mostly exports are higher than imports as China has a trade surplus.
The thing to consider is that if exports go up, imports will go up and as a result, commodities will go up in price (Chart 2). We had 3 months of consecutive drops in imports, but September has put an end to that. In September, China imported a record amount of iron ore, the highest since January 2011: 65 million tonnes. Also copper imports jumped to a 4 month high.
On Chart 3 you can see that 65 million tonnes of iron ore imports isn't that much compared to the previous months, but it's a start. China has started a 1 trillion yuan stimulus and we will certainly see the effects of this in the coming months.
Iron ore prices have slumped, but did have a small recovery to $110/metric tonne in October (Chart 4). I expect this recovery in iron ore prices to gain speed with all this stimulus. Moreover, at these low iron ore prices, many iron ore miners will have to close their business because it is unprofitable to mine the iron ore. About 100 million tonnes of iron ore production may be unprofitable in China according to Rio Tinto's (RIO) research. Many Chinese iron ore miners have closed their business as a result of this iron ore price slump. Because of this, Rio Tinto is optimistic about the iron ore price going forward.
To play the recovery in iron ore prices my best bet is Cliffs Natural Resources (CLF) as its dividend is 6%, has a very low P/E ratio of 4 and is trading at book value. Cliffs Natural Resources depends on about 25% of the seaborne market and China comprises nearly 70% of the seaborne market. So it is a perfect play on Asian iron ore demand, which has showed a recovery as I mentioned earlier.
Technically, we see CLF bottoming out at this moment (Chart 5). Analysts are very bullish about this stock. For example, Deutsche Bank rates Cliffs Natural Resources as a buy with a price target of $45/share. The following article names Cliffs Natural Resources as a top pick in the iron ore space.
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|Chart 5: Cliffs Natural Resources|