China’s real estate market continues to worsen, which threatens to impact local steel demand as a consequence.
According to Bloomberg, this heralds a new period of instability for China’s steel industry and Chinese authorities will find it difficult to boost construction-led economic growth.
Li Ganpo is the founder and chairman of Hebei Jingye Steel Group. At a company meeting in June, he warned that nearly a third of the steel mills in China could go bankrupt in a crisis that may last five years.
Li said that the whole steel industry is losing money, and he can’t see a turning point.
In the housing market, many developers at present are unable to hand over their houses to buyers because they are short of funds to complete the unfinished projects. A large number of buyers have protested, boycotting of mortgage payments, which in turn affects the banking industry.
The real estate crisis has created a domino effect, engulfing not only housing developers, but also banks, and steel mills, forcing Beijing to soften its economic growth ambitions.
Last year, Chinese steel mills produced more than a billion tons, accounting for around half of the global output. But this year, they are highly vulnerable to the economic downturn that’s also hit iron ore prices and miners from Australia to Brazil.
According to Bloomberg, the real estate industry accounts for at least a third of Chinese steel demand.
The Chinese steel purchasing managers index for July hit its lowest level since 2008. It indicates that the steel industry continues to be sluggish.
Goldman Sachs predicted that China’s steel demand could fall by 5% this year.
Regarding the boycott of mortgage payments, the S&P Global Ratings estimates that if the protest continues to spread, China’s banks could lose $356 billion (2.4 trillion yuan).
The crisis has hit consumer confidence hard, causing property sales to decline. Analysts believe this could put more developers in financial trouble.
The China Iron and Steel Association held an industry conference on July 29. At the event, the association’s executive chairman, He Wenbo said that the industry is facing an unprecedented challenge.
He Wenbo said that the industry’s total profit fell 55.47% year-on-year in the first half of 2022, as demand was significantly lower than expected.
He said that 2021 was the year that China’s steel industry had its best operating performance, but in 2022, the industry’s business situation has turned sharply downward. Many steel companies have begun to launch an emergency response.
At the conference, some business leaders warned that China’s steel industry may face the most difficult period of the year in the third quarter, and steel companies should prepare for a “hard life, a difficult day.”
According to Bloomberg, China’s steel industry also faces deeper challenges, because the growth model that has underpinned China’s economy for decades may decline.
For now, Chinese authorities appear reluctant to increase infrastructure spending and financial stimulus measures that helped China’s housing market emerge from the downturn in 2015-2016.
Leland Miller is the chief executive officer at China Beige Book International, which monitors the steel industry. He said that this time is really different.
He said: “With property having lost its mantle as the pre-eminent growth driver, key commodities like steel no longer have the benefit of endless credit access.”