Indeed, stock markets in China took a heavy fall this week on news that the world’s most indebted construction firm could fail to repay interest coupons due this week and next.
Evergrande was valued at $41 billion in 2020. However, its market capitalization fell to just $3.7 billion now, as it became apparent the highly leveraged company with total liabilities of some $300 billion was struggling to repay a modest onshore interest debt this week.
Evergrande’s woes are merely the symptom of a much bigger problem.
As the Financial Times notes, China’s vast real estate sector, which contributes some 29% of the country’s gross domestic product, is so overbuilt that rather than leading as China’s prime driver of economic growth, it is fast becoming a drag on it.
According to the Financial Times, there is enough empty property in China to house over 90 million people. To put that in perspective, there are five G7 countries – France, Germany, Italy, the U.K. and Canada — that could fit their entire populations into those empty Chinese apartments, with room to spare.
Oversupply has been a problem for several years. But after much prevarication, President Xi Jinping has formulated three red lines to reduce debt levels in the sector. While by no means the only perpetrator, Evergrande has failed all three red lines. Those lines are the ratio of liabilities to assets, of net debt to equity, and cash to short-term debt.
However, it is simply the first and largest to be thrown to the wolves as an example to the rest.
Evergrande crisis sparks concerns over Chinese economy
Iron ore, copper and other commodities may be further hammered following news of the crisis at Chinese developer Evergrande. Markets across the globe fell sharply Monday as Evergrande, one of the biggest property developers in the country, Evergrande threatened to default on loans worth U.S. $300 billion.
This has sparked off worries about the economy. It could also cause downturns in construction and demand for raw materials.
Iron ore’s fall
Since May, iron ore prices have fallen by more than half. China, the world’s biggest steelmaker, has tightened production curbs. Furthermore, China’s property market is experiencing a sharp downturn.
MetalMiner has previously reported on China’s move to cut down its steel production to curb pollution.
The Chinese government has announced plans to scale down the steel industry, which accounts for between 10-20% of its carbon emissions. The country has also raised tariffs on steel-related exports, effective as of Aug. 1, 2021.
The July rate marked a 0.3% increase from the previous month. Furthermore, the July figure jumped by 9.0% compared with July 2020.
During the first seven months of the year, construction spending totaled $883.2 billion, up 6.2% year over year.
Private construction spending reached a rate of $1,231.0 billion, or up 0.3%. Within private construction, residential construction reached an annual rate of $773.0 billion in July, up 0.5% from June. Nonresidential construction came in at $458.0 billion in July, or down 0.2%.
Meanwhile, public construction reached $337.8 billion, up 0.7%. Educational construction checked in at $79.7 billion, down 0.5%. Highway construction rose by 1.9% to a rate of $94.5 billion.
The Raw Steels Monthly Metals Index (MMI) dropped by 1.4%, as Chinese steel and U.S. scrap prices declined.
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Chinese steel merger to form third-largest steel producer
On Aug. 20, Chinese steelmakers Ansteel Group and Ben Gangformally began the process of merging their operations. If the process is completed, this will create the world’s third-largest steelmaker, behind China Baowu Group and ArcelorMittal.
Since both companies are state-owned, there will be no money changed in the transaction. Instead, the merger will be a government-backed restructuring in an effort to consolidate production in China’s bloated steel sector. Ansteel will be taking a 51% stake in Ben Gang.
The merged entity will keep the Ansteel name. Its annual production capacity will reach 63 million metric tons of crude steel.
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Global crude steel production drops
Global crude steel production totaled 161.7 million metric tons in July, the World Steel Association reported.
The total marked a decline from 168 million metric tons in June. Furthermore, production totaled 175 million metric tons in May.
Meanwhile, July production jumped 3.3% on a year-over-year basis.
Chinese steel production curbs take hold
Beijing’s efforts to curb steel production might not have been particularly successful during the first half of the year, as Chinese steel production surged. Chinese steel production from January through June totaled 563.3 million tons, or up 11.8% year over year.
However, the country’s steel output has declined in each of the last two months.
Global steel production totaled 161.7 million tons in July, down from 168 million tons the previous month. Meanwhile, May production totaled 175 million tons.
Furthermore, Beijing’s efforts to curb steel production appear to be taking hold. China’s steel production also declined for a second straight month, totaling 86.8 million tons in July (down from 93.9 million tons in June.
In the U.S., buyers are vying for limited supply, whether domestically or in the form of steel imports, amid an unprecedented ascent of steel prices over the last year.
Some relief is coming in the form of Steel Dynamics, Inc.’s (SDI) new electric arc furnace (EAF) flat rolled mill in Sinton, Texas. In its Q2 investor report, the steelmaker said it plans to start production at the mill in mid-Q4 2021. The company estimated an investment price tag of $1.9 billion for the new mill.
SDI estimates the mill will add 3 million tons in annual production, bringing its total annual capacity to nearly 14 million tons.