Veteran emerging markets investor Mark Mobius has warned of a worse-than-expected slowdown in Chinese steel production, highlighting the risks to the country's economy and the losses that could be felt in the sector.
Mobius said that while he is bullish on China's energy and metal consumption long-term, he recognised that demand may not meet "previous expectations" of various commodity-producing firms, which may have "overestimated demand growth from China and other parts of the world."
Mobius stepped back from the position of lead portfolio manager on the £1.5 billion ($2.27 billion) Templeton Emerging Market Investment Trust after over 25 years this summer, handing the reins to colleague Carlos Hardenberg. He remains a manager on the trust and leader of Templeton Emerging Market Group, an arm of U.S. asset manager, Franklin Templeton.
Performance of the trust has struggled in recent years, underperforming its "global emerging markets equities" benchmark over the past one, three and five years, but has comfortably out performed over 10 years, according to analytics firm FE Trustnet.
The slowdown in China's growth has helped push metal and commodity prices to multi-year lows, with the price of iron - a core steelmaking component - tumbling to its lowest level in around seven years this week.
Given China's huge role in the iron ore market, the global benchmark price of iron ore is based on the price on delivery at Chinese ports.
The price of iron ore for China delivery is currently trading around $43.4 per ton, holding onto levels not seen since 2008 when the steel index first started releasing data.
"The demand for iron ore is of particular significance to China, which holds 50 percent of the world's share of crude steel production," Mobius said in a note to clients.
"Of course we expect that share could decline as China's economy becomes more consumer-oriented and less dependent on infrastructure for growth while other countries such as India enter a period of high infrastructure development," he added.
Mobius said he saw growth in Chinese consumption of consumer products such as cosmetics, where he said annual sales growth of beauty and personal care products has been outpacing global cosmetic sales growth. He predicted this will help drive economic growth in China going forward.
With China producing 800 million tons of steel a year - four times more than any other country has ever produced—the sector is in severe overcapacity of some 400 million tons as construction slows in the world's second largest economy.
Apparent steel consumption in China fell 5.7 percent to 591 million tons in the first 10 months of the year, according to the China Iron & Steel Association, the nation's leading industry group.
Global chief investment officer of equities at HSBC global asset management, Bill Maldonado, said while the manufacturing and industrial sector in China has been slowing severely, he also sees strong growth in the consumer side of the economy.
"We would argue that the economy is already rebalancing away from the infrastructure led, very heavy industrial manufacturing side of the economy. Much more to a consumer led, service side of the economy," Maldonado said in an investment update call with journalists and clients.
"We see a number of signs that the Chinese economy is doing better than many commentators might suggest, particularly in the consumer and service side of the economy. Really leading the charge is e-commerce in China. This gives us a great deal of comfort and creates opportunists in terms of stock picking in many of our strategies and many of our funds," he said.