Home Critical engine China’s real estate distress deteriorates steel sector, warning sign for economy

China’s real estate distress deteriorates steel sector, warning sign for economy

3
0

Workers work at a steel plant of the Shandong Iron & Steel Group in Jinan, Shandong province, China, July 7, 2017. REUTERS / Stringer

Register now for FREE and unlimited access to Reuters.com

Register

  • The ripple effect of the real estate crisis poses new risks for the economy
  • Demand for steel, the lifeblood of the industrial engine, suffers a severe blow
  • Struck the construction widely ripples, pricks cement, household appliances
  • Credit Constraints, Housing Problems Show No Signs Of Easing Soon

BEIJING, Dec.19 (Reuters) – The debt problems of a major Chinese real estate developer have now spread through a vital artery of the country’s industrial engine – the steel sector – and have started to trickle down to other critical parts of the world’s second largest economy.

The crisis sweeping through the balance sheets of real estate companies is a warning to policymakers, as a turnaround in the steel industry’s fortunes would have major repercussions on the Chinese economy, with cement, glass and household appliances all being vulnerable to declines in demand.

Already, steel prices are down from their record highs seen earlier this year due to falling demand from construction activities, which account for more than half of metal consumption, while Stock prices of steelmakers were also affected. Read more

Register now for FREE and unlimited access to Reuters.com

Register

Stock prices of major Chinese listed companies have fallen from high levels in recent months due to falling demand and falling commodity prices.

Steel’s acute sensitivity to ebbs and flows in construction and manufacturing makes it a close indicator for the Chinese economy, which began to slow from the second quarter. read more Steel companies are also major employers supporting a large supply chain.

Hitting steel operations, real estate developers have scaled back project investments to save cash in a sector struggling with tighter borrowing regulations that have engulfed indebted companies including the China Evergrande group (3333.HK). Read more

“We normally stock steel products in the winter at relatively low prices and sell them after the New Year holidays when consumption resumes. But we wait until this year,” said Qi Xiaoliang, a Beijing-based steel trader.

“The real estate market is still uncertain for 2022 and the situation should not be completely reversed for six to twelve months,” he added.

In the final quarter of 2021, the real estate market was hit again, with industry malaise shaking already weak buyer sentiment, with unsold home inventory in China’s top 100 cities peaking in five years in November. . Read more

Housing demand is expected to slow further in 2022, affecting downstream manufacturers of household products. Read more

Production of cement, another building material, was down around 16% for September-November year-on-year, and was lower than in the same period between 2017 and 2019. The demand for excavators of land has also fallen in recent months.

The widening fallout from the housing recession has also been seen elsewhere. In the home appliance industry, for example, the monthly production of refrigerators decreased from May to November on an annual basis.

REVERSAL OF FORTUNES

Steel producers have been among the top performers in the entire Chinese economy in the first three quarters of 2021, with China’s top 28 publicly listed steel mills pocketing more than 106 billion yuan ($ 16.61 billion) from net profits, up 174% year-over-year and 129%. higher than before the 2019 pandemic.

Profits at China’s major publicly listed steel mills surged in the first nine months of 2021.

But the boom times in the steel industry are over. The paralysis that has hit China’s huge construction industry is triggering a rare contraction in construction activity across the country.

New construction starts by floor area have contracted year-over-year since July – their longest period of decline since 2015. read more

Growth in real estate investment in China and new construction starts as measured by floor space have fallen in recent months due to the developer default crisis and government controls.

The slowdown in the real estate sector has weighed on China’s monthly crude steel production by more than 20% since September.

Closely watched steel equity instruments and commodity futures captured the reversal of fortunes.

After gaining around 90% through mid-September, the CSI Steel Stock Index (.CSI930606) has since plunged 27%, while futures prices for building materials, rebar and wire rod fell 24% and 31% respectively from their all-time highs to wipe out almost all of their gains this year.

As steel producers slowed down, the main inputs used in steelmaking also suffered a bombardment, with Dalian Commodity Exchange iron ore futures falling more than 45% from their market level. May record.

Steel rebar gross profits have started to decline from the peak reached in late September.

China’s production of steel rebar has plummeted in recent months due to weaker demand in the real estate market.

UNCERTAIN OUTLOOK

Real estate-related sectors are the main contributor to the Chinese economy, accounting for 28% of GDP in 2021, up from a recent peak of 35% in 2016.

The GDP share breaks down into a 7% direct contribution from real estate and an indirect 21% contribution from construction and sectors along the supply chain such as machinery and equipment, according to Moody’s.

China property prices show rare weakness as construction industry debt problems bite

A government consulting firm predicts that China’s steel demand will decline 0.7% in 2022, following an expected decline of 4.7% this year.[nL1N2T102U]

In the future, any prolonged credit constraint “could reduce demand for metals used in construction, as developers lose the ability to pay for raw materials at high prices,” analysts at Fitch Solutions wrote in a recent memo. to customers.

If the contraction in construction spending continues, then it will affect producers of home appliances and white goods that are a key part of China’s critical manufacturing base.

Seasonal production of steel, cement and household appliances in China

“Real estate construction has been the engine of the Chinese economy for more than two decades now,” said Frederic Neumann, co-head of Asian economic research at HSBC.

“With construction activity likely to remain depressed for a while, growth will inevitably shift into high gear.”

($ 1 = 6.3813 yuan Chinese renminbi)

Register now for FREE and unlimited access to Reuters.com

Register

Reporting by Min Zhang and Ryan Woo; Editing by Gavin Maguire and Shri Navaratnam

Our standards: Thomson Reuters Trust Principles.


Source link