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China’s Real Estate Debt Crisis Spills Over Into Steel Sector

The property crisis has started to ripple through to other critical parts of the world’s second-largest economy

A labourer works on coils of steel wire at a steel wholesale market in Beijing. Photo: Reuters


Debt problems at Chinese property developers have now spilled over into a vital artery of the nation’s industrial engine – steel – and started to ripple through to other critical parts of the world’s second-largest economy.

The spreading balance-sheet crisis at real estate firms is a warning for policymakers as a swing in the fortunes of the steel industry would have significant repercussions for China’s economy.

Cement, glass, and household appliances are all vulnerable to demand drops.

Already, steel prices are down from their record highs seen earlier this year due to easing demand from construction activities, which account for over half of the metal’s consumption, while steelmakers’ share prices have also been hurt.

“Beyond the concern over a debt crisis however, lies a longer-term trend and policy goals which pose serious problems for steel demand,” Tomas Gutierrez, head of data at Kallanish Commodities, said.


Acute Sensitivity

Steel’s acute sensitivity to the ebbs and flows in construction and manufacturing makes it a closely-tracked bellwether for China’s economy, which has started to slow down from the second quarter.

Steelmakers are also massive employers that support a vast supply chain.

“Many steel companies have continued to increase their debt stock in recent years, with high interest costs and capital expenditure eating up earnings accretion,” said Jenny Huang, senior director of corporates at Fitch Ratings in Hong Kong.

Hitting steel operations, real estate developers have dialled back investment in projects to conserve cash in a sector squeezed by tighter borrowing regulations that have engulfed indebted companies, most notably China Evergrande Group.

“We normally stockpile steel products in winter at relatively lower prices and sell them after the new year holidays when consumption resumes,” said Qi Xiaoliang, a Beijing-based steel trader. “But we are holding off this year.”


Once the Best Performers

Steel producers were among the best performers of the entire Chinese economy over the first three quarters of 2021.

China’s 28 major listed mills pocketed more than 106 billion yuan ($16.61 billion) in net profits, up 174% year-on-year and 129% higher than in pre-pandemic 2019.

But the boom times are over. The slowdown in the real estate sector has dented China’s monthly crude steel output by more than 20% since September.

New construction starts by floor area have contracted from a year earlier since July – their longest stretch of declines since 2015.


  • Reuters, with George Russell



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George Russell

George Russell is a freelance writer and editor based in Hong Kong who has lived in Asia since 1996. His work has been published in the Financial Times, The Wall Street Journal, Bloomberg, New York Post, Variety, Forbes and the South China Morning Post.


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