Will the fall of Evergrande impact China’s steel sector? There is ground to believe it will since China’s property sector consumes around 32% of steel produced in the country. China consumes half the world’s steel and its property sector alone accounts for about a fifth of global steel demand. Real estate and infrastructure are the most important downstream users of steel in China, accounting for more than 50% of steel consumption. Rebar accounts for 25% of the construction and installation costs and 32% of material costs.
Steel demand has been historically fuelled by real estate and infrastructure construction. Both these downstream, sectors, in turn, are financed by debt.
But a serious slowdown is emerging in new property project developments in China. This means demand can be a serious problem.
New project constructions in China fell 3.2% in Jan-Aug’21. Against the expected growth of 1.2%, there has been a decline of 3.2% and going forward, experts feel this trend will only deepen, especially with the fall of Evergrande.
Fall of Evergrande
Evergrande is China’s biggest real estate developer and a Fortune 500 company, which is now staring at bankruptcy with a debt burden of more than $300 billion. Evergrande builds 600,000 properties annually, a business that is almost entirely funded out of borrowings. As per a report, in the last decade, the company’s debt level has gone up almost 60 times. As its debt burden grew, so did its interest payments on that debt. To meet its ever growing obligations, Evergrande began tapping into “creative financing strategies” in the form of short-term loans from its employees, but missed out on repayments. With over $7.4 billion of bond payments due in 2022, and large interest payouts looming as close as this week, the crisis is imminent.
The only one option left is a government bailout. If that does not happen, Evergrande’s fall will have far-reaching impact. Banks will stand to lose money and eventually the common man, whose hard-earned life savings will be lost.
Investment in construction is highly linked to steel consumption. The growth rate of apparent steel consumption in China is highly consistent with the growth rate of completed real estate construction and installation investment. Generally, the increase in construction and installation investment is often accompanied by the strengthening of apparent steel consumption. Rebar prices are significantly related to the cumulative y-o-y growth of newly started projects, construction areas and completed areas.
Outlook
The land market has cooled down. The land acquisition area of real estate enterprises has continued to weaken since Sept’20, and as a core industry driving steel consumption, with the continuous tightening of real estate financing policies, real estate steel has certain downside risks, a source said. Chinese corporates owe $1.3 trillion in next 12 months. In 2020, over 200,000 companies declared bankruptcy. More companies could be added to this list. But China is looking to pay off its debt with more debt. In 2020, Chinese banks extended a record $3 trillion in new loans.
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