More downtrends expected for steel as the effects of the Evergrande liquidity crisis persist

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Evergrande Piazza in Chengdu, China. The negative sentiment in China’s real estate market, exemplified by China Evergrande’s troubles, is expected to impact steel markets in 2022.
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Missed debt payments by real estate development giant China Evergrande Group are likely to start a tough 2022 for the steel industry.

The Chinese government’s efforts to discharge its heavily indebted real estate sector in 2021 have propelled Evergrande, its second largest developer, into a bankruptcy spiral, and many of its competitors could soon face similar challenges. That means tough times for steel manufacturers: Reinforcing steel, which is mainly used for construction projects, was traded on the Shanghai Futures Exchange at 4,554 Chinese yuan per ton on December 22nd – 28.1% below its all-time high on May 12th. China accounts for 55.9% of global steel demand, and property development accounts for nearly 40% of that demand, making the sector one of the largest steel buyers in the world.

Beijing has changed its mind in recent months to offer political support to real estate developers like Evergrande, but analysts fear the moves are insufficient and more defaults are yet to come.

Evergrande’s crisis is “just the tip of the iceberg,” according to Stuart Burns, Founder and Editor-in-Chief of MetalMiner.

“Companies like Evergrande sell stocks to make interest payments, depress prices and the resulting drop in residential property prices discourages new construction,” Burns said in an interview. “A depressed construction sector [in China] will weigh on iron ore, steel and aluminum prices in 2022 and intensify the dampening effect that was already in place in the fourth quarter. ”

Growth in China, the world’s second largest economy, has been slowing for two quarters amid concerns over deflation from the housing bubble and Evergrande’s debt crisis. The real estate downturn is expected to continue through 2022. S&P Global Ratings assumes that further defaults will occur in 2022 and that up to a third of Chinese developers will be under liquidity pressure. It also predicts that residential real estate sales in China will fall 10% in 2022 and another 5 to 10% in 2023, with house prices falling as much as 3%.

None of this is good news for steelmakers. China’s steel demand is expected to decline 0.7% to 947 million tons in 2022, after a 4.7% decline in 2021 curbed by the weakening real estate sector and COVID-19 uncertainties, reported Reuters on December 15, citing the government-sponsored think tank China Metallurgical Industrial Planning and Research Institute, or MPI.

Investor outlook for 2022 remains pessimistic as steel rebar futures for November and December 2022 traded below 4,250 Chinese yuan / t on December 17, below the spot rate on the same day.

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Bigger picture

But the steel industry has more problems than the financial hardships of its biggest customers. There is a “much bigger picture” affecting China’s market, said Justin Smirk, senior economist at Westpac, including decarbonization efforts and government attempts to grow as part of its commitment to net zero emissions by 2060 to reduce, to moderate.

In April, the government cracked down on the factories in the country’s largest steelmakers, ordering cuts in almost all factories to reduce smog and CO2 emissions. The government is pushing their factories to switch to more expensive, lower carbon equipment and processes, and it is closing down smaller, inefficient steel mills in favor of larger, more efficient ones.

Production changes combined with the shifts in real estate development wiThis will lead to a “flattening of steel production in China,” said Smirk.

China’s steel production decline this year has already pushed iron ore prices from a record high in May to an 18-month low in November. In order to achieve the decarbonisation goal, MPI expected China’s crude steel production is falling by 2.3% year-on-year to 1.04 billion tons in 2021 and a further 2.2% to 1.02 billion tons in 2022.

The steel sector has also been under stress since September due to the electricity shortage, Helen Qiao, Head of Asia Economics and Chief Economist for China Bank of America Global Research said at a market outlook webinar on December 9th.

Energy cuts pushed China’s daily steel production to a 44-month low of 2.3Mt in October, although it began to rebound in November with a monthly increase of 1.2%. S&P Global Platts expects the uptrend to continue in December as China boosts coal production to alleviate power shortages. Steelmakers last month met the 2021 production cut requirements.

Meanwhile, slowing manufacturing growth is also expected to weigh on steel demand in 2022, Bruce Pang, head of macro-strategy research at China Renaissance Securities, said in an interview.

Market Intelligence predicts that Chinese steel production will remain subdued until after the Beijing Winter Olympics in February 2022. The government is expected to prioritize winter heating needs over industrial energy consumption in the coming months.

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Hope after the darkest of times

The Chinese government appears to be aware of the threat to its real estate development sector and was ready to offer modest political aid that could boost steel.

At the Central Economic Work Conference in Beijing, the government pledged to “promote a positive cycle and healthy development in the real estate industry,” according to a December 10th report by the official Xinhua News Agency. China also cut its reserve requirement ratio in early December, which has been a boon for developers seeking credit.

Given these political levers, analysts at CITIC Futures believe that steel demand from the real estate sector has “started to leave its darkest period” and is expected to see a “marginal recovery” in the first half of 2022, they said on Dec. 1 . Notice. S&P Global Market information expects the credit boost in the first half of 2022 to stimulate steel demand in construction and manufacturing, although prices are expected to continue to fall.

However, there hasn’t been a major turnaround in real estate policy, Pang said. The real estate market has slowly moved away from the highly indebted, high-growth model that China is used to, he said.

of Bank of America Qiao expects policymakers, given their importance to China’s GDP, to do more to sustain real estate demand and stabilize overall developer financing.

The current stimulus is “nowhere near sufficient,” said Qiao.

As of December 31, US $ 1 was the equivalent of 6.35 Chinese yuan.


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