Profits at China’s industrial companies rose at a faster rate on November 27, 2021 than in October, the statistics agency said, providing a stepping stone to an economy that is already in recession due to Raw material prices skyrocketed. Pictured is a worker counting cast steel pipes being loaded onto a ship at Lianyungang Port in Lianyungang, Jiangsu Province, China.
Wang Chun | Visual China Corporation | beautiful pictures
Debt problems at a major Chinese property developer have now spilled over into the vital lifeline of the nation’s industrial engine – the steel sector – and have begun to spread to other key parts of the country. second largest economy in the world.
The widespread balance sheet crisis at real estate firms is a warning to policymakers as the steel industry’s fortunes will have a significant impact on the Chinese economy, with Cement, glass and home appliances are all vulnerable to the drop in demand.
Steel prices have fallen from record highs earlier this year as demand eases from construction activities, which account for more than half of metal consumption, while steelmakers’ share prices have also been hit. enjoy.
Share prices of major Chinese listed companies have fallen from highs in recent months due to easing demand and falling raw material prices.
Steel’s acute sensitivity to flows and flows in construction and manufacturing makes it a closely watched chain for the Chinese economy, which has already begun slow down from second quarter. read more Steel companies are also major employers supporting an extensive supply chain.
Hitting the steel business, property developers have dialed back investments in projects to save cash in a sector squeezed by tighter borrowing regulations that have left companies stranded. sinking debt, most notably China Evergrande Group.
Qi Xiaoliang, a Beijing-based steel trader, said: “We usually stockpile steel products in winter at relatively lower prices and sell them after the New Year holiday when consumption returns. But we’re holding out this year.”
He added: “The real estate market remains highly volatile for 2022 and the situation is not expected to be fully reversed in the next six to 12 months.
In the final quarter of 2021, the property market was hit harder as uncertainty in the sector rattled already weak buyer sentiment, with an unsold housing supply in 100 cities. China’s largest hit a five-year high in November.
Demand for homes is expected to decline further in 2022, affecting household product manufacturers downstream.
Production of cement, another construction material, fell about 16% in September-November annually and is lower than in the same period in 2017 and 2019. Demand for excavators has also declined in recent months. this.
The growing spillover effects of the asset downturn are also seen elsewhere. For example, in the home appliance industry, monthly refrigerator production has decreased from May to November every year.
Reversal of luck
Steelmakers were among the best performing businesses of the entire Chinese economy in the first three quarters of 2021, with China’s 28 major listed mills raking in more than 106 billion yuan (16). .61 billion USD) net profit, up 174% year-on-year and 129%. higher than before the 2019 pandemic.
Profits of China’s major listed steel mills skyrocketed in the first nine months of 2021.
But the boom times in the steel sector are over. The paralysis that once befell China’s massive construction industry is causing a rare decline in construction activity across the country.
New construction began on contracted floor space from a year earlier in July – the longest period of decline since 2015.
China’s growth in real estate investment and new construction by floor space has slowed in recent months amid a crisis of developer defaults and government controls.
The downturn in the real estate sector has reduced China’s monthly crude steel output by more than 20% since September.
Closely watched steel equity instruments and commodity futures have captured the reversal of fortunes.
After gaining about 90% through mid-September, the CSI steel stock index has dropped 27% since, while rebar and coil futures prices are down 24% and 31%, respectively. historical highs to erase almost all of their profits. five.
As steelmakers tumbled, key inputs used in steelmaking also fell, with Dalian Commodity Exchange iron ore futures down more than 45 percent from a record hit. May.
Gross profit for rebar has started to trend down from the peak at the end of September.
China’s rebar output has declined in recent months due to easing demand in the real estate market.
Uncertain outlook
Real estate-related sectors are the biggest contributors to the Chinese economy, accounting for 28% of GDP in 2021, down from a recent peak of 35% in 2016.
According to Moody’s, the share of GDP is broken down into 7% direct contribution from real estate and 21% indirect contribution from construction and through sectors along the supply chain such as machinery and equipment.
China’s house prices show rare weakness as construction debt rips through
A government industry consulting firm forecasts China’s steel demand will fall 0.7% in 2022, after projecting a 4.7% drop this year.
Fitch Solutions analysts wrote in a recent note to future clients that any extended credit constraints could reduce demand for metals used in construction because of the developers insolvent for raw materials at high prices.
If the contraction in construction spending continues, it will affect manufacturers of home appliances and white goods, which are a key part of China’s key manufacturing base.
China’s production of steel, cement and key equipment by season
Frederic Neumann, Co-Head of Asian Economic Research at HSBC, said: “Real estate construction has been a driving force of the Chinese economy for more than two decades now.
“With construction activity likely to continue to decline for a while, growth is bound to shift to a single or double digit.”
