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China Getting Frustrated Over Iron Ore Prices

|Includes: BHP, IYM, MXI, RIO, Vale S.A. (VALE), XLB, XME

China Demands More Steel Production And LearnsIt Comes With A Price

China Getting Frustrated Over Iron Ore Prices
About: Vale (NYSE: VALE), BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP),iShares S&P Global Materials ETF (NYSE: MXI), Materials Select Sector SPDR (NYSE: XLB),SPDR S&P Materials & Mining ETF (NYSE: XME), Dow Jones U.S. Basic Materials ETF (NYSE: IYM)
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You may remember from your high school history class that an important element of the industrial revolution in the U.S. was the production and use of steel. In any major economy, the steel industry is worth watching. If it is performing well, that usually means a host of other sectors are doing good things as well. If the steel business is in a slump, the broader economy is probably sluggish as well.

To be sure, China's burgeoning steel industry is indicative of the country's booming demand for automobiles and the government's astute use of stimulus cash to fund useful infrastructure projects has also boosted demand for steel. The down side of increased steel consumption, at least as far as China is concerned, is the higher iron ore prices that come with using more steel.

China has to import the bulk of the iron ore it uses for steel production from the likes of Vale (NYSE: VALE), BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP), the world's three largest iron ore producers. Vale was recently able to push through a 90% price hike on iron ore purchased by Japanese steel makers and it appears China's steel producers will have to accept similar pricing.

China Getting Frustrated Over Iron Ore Prices

Vale and BHP Billiton have been able to negotiate contracts based on quarterly iron ore prices rather than annual prices. This benefits iron ore producers, not the buyers. By China's own admission, there isn't much they can do about higher iron ore prices.

While not the best news for China, higher iron prices benefit select ETFs. One of those is the iShares S&P Global Materials ETF (NYSE: MXI), a member of the ETF Profit Report portoflio. MXI is like a lot of good ETFs you may not have heard of. It focuses on an industry that has plenty of other more popular ETFs.

With materials stocks back in favor, the Materials Select Sector SPDR (NYSE: XLB), the SPDR S&P Materials & Mining ETF (NYSE: XME) and the Dow Jones U.S. Basic Materials ETF (NYSE: IYM) have generated over the past month. All get more headlines than MXI, but all have been outperformed by MXI due to MXI's weights to the aforementioned iron ore producers. In other words, MXI is another way to get profitable China exposure despite the fact that you don't hear much about this ETF.

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Disclosure: no positions