China’s real estate crisis threatens its steel industry

VSChina’s steel industry is entering a precarious new era as a deepening housing crisis jeopardizes demand and Beijing’s construction-led growth model looks increasingly unsustainable.

Nearly a third of China’s steel mills could go bankrupt in a crisis expected to last five years, Li Ganpo, founder and chairman of Hebei Jingye Steel Group, warned at a private business meeting in June. “The whole industry is losing money and I don’t see a turnaround right now,” he said, according to a transcript of the meeting seen by Bloomberg News.

The real estate crisis has exploded this year, swallowing up developers towards the banks, and forcing Beijing to soften its growth ambitions. Steel mills which produced more than a billion tonnes last year, roughly half of global output, are highly vulnerable to the plunge which has also affected iron ore prices and miners from Australia to the Brazil.

After more than a year of housing woes, the outlook is deteriorating as the government balks at big bailouts and keeps strict debt rules in place. A Steel Purchasing Managers’ Index for July fell to its lowest level since 2008, and Goldman Sachs Group Inc. sees demand fall 5% this year. The real estate sector accounts for at least a third of China’s steel demand.

Beyond the current crisis, the industry faces profound challenges as the growth model that has sustained the Chinese economy for decades shows signs of strain. President Xi Jinping appears reluctant to roll out the levels of infrastructure spending and financial stimulus that revived the sector after the Great Financial Crisis and housing market downturn in 2015-2016.

Read more: Mortgage boycotts in China are spreading and could get worse

“This time it’s really different,” said Leland Miller, managing director of China Beige Book International, which monitors the steel industry. “As real estate has lost its role as the main engine of growth, key commodities like steel no longer enjoy unrestricted access to credit.”

In the short term, the major headwind for steel is the large inventory of unfinished properties, highlighted by a recent wave of mortgage boycotts. Structural steel prices also fell, with rebar – twisted steel rods that reinforce concrete – falling to a two-year low last week. That’s even when production fell to a low in Mysteel data that dates back to 2015.

Outlook for steel in China

“Demand is falling rapidly,” Xiao Zunhu, chairman of state-owned Hunan Valin Steel Co., said at an industry meeting in Beijing last week where speaker after speaker warned of hard to come. Markets “will remain complicated and difficult” this semester and stimulus measures need time to take effect, said Chen Shaohui, vice president of Jiangsu Shagang Group, at the same meeting.

Steelmakers may have limited flexibility when it comes to cutting production. Local governments are pressuring factories to stay in business to avoid weak economic data, according to executives of four producers, who asked not to be identified because the issue is sensitive.

Steel mills were once seen as the champions of China’s economic expansion, with some growing from rural foundry workshops to multi-billion dollar conglomerates. While real estate activity is expected to stop contracting at some point, the chances of it producing the kind of boom that has sustained Asia’s largest economy for decades seem slim.

“The third quarter will be the most difficult period for the industry,” Zhu Guosen, vice director of the Shougang Group’s technology research institute, said at the meeting in Beijing. “We should abandon any illusions in the market and focus on what we can do ourselves.”

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