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Tuesday, January 25, 2022

China’s asset crisis spoils steel sector in warning sign for economy

BEIJING—The debt woes of a major Chinese property developer have now spread into a vital artery of the country’s industrial engine—the steel sector—and passing through other important parts of the world’s second-largest economy.

The spreading balance sheet crisis at real estate firms is a warning to policymakers as a swing in the fortunes of the steel industry would have significant ramifications for China’s economy, with cement, glass and home appliances all vulnerable to a slump in demand.

Steel prices are down from their record high earlier this year, driven by lack of demand from construction activities, which account for more than half of the metal’s consumption, while steelmakers’ stock prices have also been hurt. .

Steel’s acute sensitivity to fluxes and flows in manufacturing and construction makes it a close-track for China’s economy, which has begun to slow from the second quarter. Steel firms are also large scale employers supporting a vast supply chain.

Hitting out at Steel’s operations, real estate developers have dialed back investments in projects to conserve cash in a sector squeezed by strict lending regulations that surround indebted companies, especially China Evergrande Group.

“We usually stock steel products at relatively low prices in winters and sell them when consumption resumes after the New Year holidays. But we are stuck this year,” said Qi Xiaoliang, a steel trader in Beijing.

“There is still uncertainty in the real estate market for 2022 and the situation is not expected to reverse completely for the next 6 to 12 months,” he added.

In the last quarter of 2021, the property market suffered another setback as unease in the sector rocked an already weak buyer sentiment, with unsold housing stocks in China’s 100 largest cities hitting a five-year high in November Gone.

Demand for homes is expected to decline further in 2022, impacting downstream manufacturers of home products.

Cement production, another building material, was down about 16 per cent year-on-year for September-November, and was lower than the same period between 2017 and 2019. Demand for earth quarrying has also declined in recent months.

The wider spillover effect of the asset decline was seen elsewhere as well. For example, in the appliance industry, monthly refrigerator production has been falling on an annual basis from May to November.

turn of fortune

Steel producers were among the best performers of the entire Chinese economy in the first three quarters of 2021, with China’s 28 major listed mills earning more than 106 billion yuan ($16.61 billion) in net profit, up year-on-year. 174 percent and 129 percent. Higher than pre-pandemic 2019.

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

New construction started by floor area contracted a year ahead of July – their longest stretch of decline since 2015.

The slowdown in the real estate sector has led to a decline of more than 20 percent in China’s monthly crude steel production since September.

Closely tracked steel equity instruments and commodity futures have captured a reversal of fortunes.

After gaining nearly 90 per cent till mid-September, the CSI Steel equity index has declined 27 per cent, while futures prices for construction material rebar and wire rod have declined by 24 per cent and 31 per cent, respectively. The year.

As steel producers hit the brakes, key inputs used in steelmaking also fell sharply, with Dalian Commodity Exchange iron ore futures down more than 45 percent from their record in May.

Steel Rebar’s gross profit has begun to decline from the peak seen at the end of September.

uncertain outlook

The property-related sector is the biggest contributor to China’s economy, accounting for 28 percent of GDP in 2021, down from a recent peak of 35 percent in 2016.

According to Moody’s, the share of GDP is broken down through 7 percent direct contributions from assets and 21 percent indirect contributions from construction and supply chains such as machinery and equipment.

A Chinese governing industry advisory estimates that China’s steel demand will decline by 0.7 percent in 2022, after a 4.7 percent drop this year.

Looking ahead, any extended credit constraints “could reduce demand for metals used in construction as developers pay higher prices for raw materials,” analysts at Fitch Solutions wrote in a recent note to clients. lose the ability to.”

If the contraction in construction spending continues, it will hit producers of equipment and white goods that make up a significant part of China’s vital manufacturing base.

“Asset creation has been the engine of China’s economy for more than two decades now,” said Frederick Neumann, co-head of Asian economics research at HSBC.

“With construction activity likely to remain depressed for some time, growth will inevitably shift down a gear or two.”

by Min Zhang and Ryan Woo

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World Nation News Deskhttps://www.worldnationnews.com
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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