China's property distress sours steel sector in warning sign for economy

Angang Steel Co

19/12/2021 01:00

* Spillover-effect of property slump poses fresh risks to
economy 
    * Steel demand, vital part of industrial engine, suffers
blow 
    * Hit to construction ripples broadly, stings cement,
appliances
    * Credit constraints, property woes show no signs of easing
soon 

    By Min Zhang and Ryan Woo
    BEIJING, Dec 19  (Reuters) - Debt problems at a major
Chinese property developer have now spilled over into a vital
artery of the nation's industrial engine - the steel sector -
and started to ripple through to other critical parts of the
world's second-largest economy. 
    The spreading balance-sheet crisis at real estate firms is a
warning for policymakers as a swing in the fortunes of the steel
industry would have significant repercussions for China's
economy, with cement, glass, and household appliances all
vulnerable to demand drops.
    Already, steel prices are down from their record highs seen
earlier this year due to easing demand from construction
activities, which account for over half of the metal's
consumption, while steelmakers' share prices have also been
hurt.  urn:newsml:reuters.com:*:nL1N2S603A
    Steel's acute sensitivity to the ebbs and flows in
construction and manufacturing makes it a closely-tracked
bellwether for China's economy, which has started to slow down
from the second quarter https://www.reuters.com/world/china/china-q3-gdp-growth-hits-1-year-low-raising-heat-policymakers-2021-10-17.
 urn:newsml:reuters.com:*:nL1N2RE03R Steel firms are also massive employers that support
a vast supply chain. 
    Hitting steel operations, real estate developers have
dialled back investment in projects to conserve cash in a sector
squeezed by tighter borrowing regulations that have engulfed
indebted companies, most notably China Evergrande Group https://www.reuters.com/business/chinas-kaisa-kicks-off-12-bln-debt-restructuring-after-missing-pay-date-source-2021-12-09
  3333.HK .  urn:newsml:reuters.com:*:nL1N2SU0DD
    "We normally stockpile steel products in winter at
relatively lower prices and sell them after the new year
holidays when consumption resumes. But we are holding off this
year," said Qi Xiaoliang, a Beijing-based steel trader. 
    "There's still uncertainty in the real estate market for
2022 and the situation is not expected to be fully reversed for
another six to 12 months," he added. 
    In the final quarter of 2021, the property market took a
further hit as the unease in the sector shook already weak buyer
sentiment, with unsold housing stock in China's 100 biggest
cities reaching a five-year high in November.  urn:newsml:reuters.com:*:nL4N2SV0WX 
    Demand for homes is expected to ease further in 2022, 
hitting downstream manufacturers of household products.
 urn:newsml:reuters.com:*:nL1N2SR0EA  urn:newsml:reuters.com:*:nL4N2SL1M1    
    Cement production, another construction material, was down
around 16% for September-November year-on-year, and was lower
versus the same period between 2017 and 2019. Demand for earth
excavators has also dropped off in recent months.
    The broadening spillover impact of the property downturn was
also seen elsewhere. In the appliances industry, for example,
monthly refrigerator output has been falling since May through
to November on an annual basis. 
    
    REVERSAL IN FORTUNES
    Steel producers were among the best performers of the entire
Chinese economy over the first three quarters of 2021, with
China's 28 major listed mills pocketing over 106 billion yuan
($16.61 billion) in net profits, up 174% year-on-year and 129%
higher than in pre-pandemic 2019.
    But the boom times in the steel sector are over. The
paralysis that has struck China's mammoth construction industry
is triggering a rare contraction in building activity across the
country. 
    New construction starts by floor area have contracted from a
year earlier since July - their longest stretch of declines
since 2015.  urn:newsml:reuters.com:*:nL4N2S21SQ urn:newsml:reuters.com:*:nL1N2S603Z 

    The slowdown in the real estate sector has dented China's
monthly crude steel output by more than 20% since September.
 urn:newsml:reuters.com:*:nL1N2S604T
    The closely-tracked steel equity instruments and commodities
futures have captured the reversal of fortunes. 
    After gaining roughly 90% through mid-September, the CSI
steel equities index  .CSI930606  has plunged 27% since, while
futures prices for construction materials rebar  SRBcv1  and
wire rod  SWRcv1  have tumbled 24% and 31% respectively from
their historical highs to erase almost all their gains this
year.   
    As steel producers hit the brakes, the key inputs used in
steelmaking have also taken a shellacking, with Dalian Commodity
Exchange  DCIOcv1  iron ore futures down more than 45% from
their record in May. 
    Gross profits for steel rebar have started to trend down
from the peak seen in late September.
    
    UNCERTAIN OUTLOOK
    Property-related sectors are the single biggest contributor
to China's economy, accounting for 28% of GDP in 2021, down from
a recent peak of 35% in 2016. 
    The GDP share is broken down into a 7% direct contribution
from property and a 21% indirect contribution from construction
and through sectors along the supply chain such as machinery and
equipment, according to Moody's. 
    A government industry consultancy forecast China's steel
demand will slip 0.7% in 2022, following an expected 4.7%
decline this year. urn:newsml:reuters.com:*:nL1N2T102U
    Looking ahead, any extended credit constraints "could reduce
demand for metals used in construction as developers lose the
ability to pay for raw materials at high prices," analysts with
Fitch Solutions wrote in a recent note to clients.
    If the contraction in construction spending endures, it will
then affect the producers of appliances and white goods that
constitute a key part of China's critical manufacturing base. 
    "Property construction has been the engine of China's
economy for over two decades now," said Frederic Neumann,
Co-Head of Asian Economics Research at HSBC.   
    "With building activity likely to remain depressed for quite
some time, growth will inevitably shift down a gear or two." 
($1 = 6.3813 Chinese yuan renminbi)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China listed steelmakers' Jan-Sept profits    https://tmsnrt.rs/3CKqDzq
China's property investment and new construction starts    https://tmsnrt.rs/3nQCAzj
China’s house prices show rare weakness as construction sector
debt woes bite    https://tmsnrt.rs/3pgheuI
China seasonal output of steel, cement and key appliances    https://tmsnrt.rs/3pCom4H
China rebar output and profits    https://tmsnrt.rs/3ITO5yt
China major listed steel prices    https://tmsnrt.rs/3pZHCJM
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Min Zhang and Ryan Woo; Editing by Gavin Maguire&
Shri Navaratnam)
 ((min.zhang@thomsonreuters.com; (8610) 5669-2105;))