China’s property distress sours steel sector in warning sign for economy
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According to the statistics bureau, profits at China’s industry firms increased at an even faster rate in October. This was a relief for an economy that is struggling due to rising raw material prices. Here is an image of a worker counting the cast steel pipes that will be transported aboard at Lianyungang Port, Jiangsu Province.
Wang Chun | Visual China Group | Getty Images
The debt problems of a Chinese property developer are now spreading to a critical artery of China’s industrial engine, the steel sector. This has caused ripple effects to other crucial parts of the second-largest country in the world.
As a result, policymakers need to be cautious about the increasing balance sheet crisis at real-estate firms. An increase in steel’s fortunes would have severe repercussions on China’s economy. With cement, glass, household appliances and other vulnerable products all susceptible to falling demand, this is an alarming sign.
Already steel prices are falling from record-breaking highs reached earlier in the year, mainly due to lower demand from construction activities. Steelmakers’ shares prices also have suffered.
Due to lower raw material prices and easing demand, the share prices of Chinese listed companies fell from their high points in recent months.
Steel’s acute sensitivities to fluctuations in construction and manufacturing make it a key indicator for China’s economy. slow down from the second quarter. read more Massive employers such as steel firms also support an extensive supply chain.
To conserve cash, real estate developers cut back on investment in projects due to tighter borrowing restrictions that have squeezed indebted businesses. most notably China Evergrande Group.
“We usually stockpile winter steel products at relatively low prices and then we sell them once the new year holidays come around. However, we’re holding out this year,” Qi Xiaoliang said. He is a Beijing-based trader in steel.
He said that there is still uncertainty on the 2022 real estate market and that the situation will not be completely reversed in six to twelve months.
As the market for property fell further in the fourth quarter of 2020, already fragile buyer sentiment was shaken by the turmoil in the sector. The unsold inventory in China’s largest 100 cities hit a five year high in November.
The demand for housing is predicted to rise further by 2022. It will also affect downstream household product manufacturers.
The production of cement, another type of construction material, fell by around 16% in September and November year-on-year. This was lower than the same time period between 2017-2019. In recent months, there has been a drop in demand for earth-excavers.
You can also see the wider spillover effects of property declines elsewhere. The appliances industry is an example. Monthly refrigerator production has dropped from May to November annually, and it’s still falling.
Reversal in fortunes
Over the three quarters to 2021, steel producers were some of the top performers in China’s economy. China’s listed 28 mills made over 106 Billion Yuan (or $16.6 billion) in net profits. This is up 174% from the previous year, and 129% more than pre-pandemic 2019.
Profits at major Chinese steel mills listed on the Chinese market soared in the first nine month of 2021.
However, the steel industry is no longer in its boom phase. China’s massive construction sector is experiencing paralysis, which has caused a contraction of building activity in the entire country.
The floor area of new construction has declined from July 2015 to July 2016, their longest period of decline since 2015.
In recent months, China saw a decline in property investments and construction begins measured in floor area. This was due to the default crisis of developers and government controls.
China has seen a slowdown in its real estate industry, which has impacted China’s crude steel production by over 20% each month since September.
It is the closely monitored steel equity instruments that have seen the most dramatic changes and commodity futures that has witnessed them.
After gaining roughly 90% through mid-September, the CSI steel equities index has plunged 27% since, while futures prices for construction materials rebar and wire rod have tumbled 24% and 31% respectively from their historical highs to erase almost all their gains this year.
The key ingredients used in steelmaking are also under pressure. Dalian Commodity Exchange ironore futures fell more than 45% compared to their May record.
The trend has been downwards in gross profits of steel rebar since the high reached in September.
China’s recent drop in steel rebar production was due to lower property market demand.
Insecure outlook
China’s largest contributor is China’s property-related sector, which accounts for 28% GDP in 2021. This figure has fallen from 35% in 2016, when it was at its highest point.
Moody’s estimates that the GDP share includes a 7% contribution from real estate and 21% indirect contributions from construction, and other sectors in the supply chain like machinery and equipment.
China’s weak house prices indicate that the country is not as resolute in its construction sector debt.
An industry consultant for government projects that China’s demand for steel will fall by 0.7% in 2022 after a predicted 4.7% decrease this year.
Fitch Solutions analysts wrote that any credit restrictions could reduce the demand for metals in construction if developers are unable to pay high prices for raw materials.
If China continues to experience a contraction in its construction spending, this will have a negative impact on the white goods producers and appliance manufacturers that are an important part of China’s crucial manufacturing base.
China’s seasonal steel, cement, and other key appliances production
Frederic Neumann (Co-Head, Asian Economics Research at HSBC) stated that property construction is the mainstay of China’s economy over the past two decades.
Growth will naturally slow due to the fact that building activity is likely to be low for a while.
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