Posted on 28 Sep 2021
Despite the heated discussion in the overseas market about the financial matter of Evergrande Group, China’s second largest property developer, and the concerns about the ripple effect on China’s property market and steel demand, China’s domestic steel market sources appeared rather calm, anticipating whatever adverse impact on this individual case will be contained and managed.
Evergrande’s explanation to its status
In a release on September 14, the Hongkong-listed property developer warned its shareholders of the possibility that it cannot “guarantee that the Group will be able to meet its financial obligations” and “it may lead to cross-default under the Group’s existing financing agreements and relevant creditors demanding acceleration of repayment”.
Besides, the company anticipates its contract value to fall further from August after a steady fall to Yuan 38.1 billion ($5.9 billion) in August from Yuan 43.8 billion in July and Yuan 71.6 billionin June, partly as “the ongoing negative media reports concerning the Group have dampened confidence among the potential property purchasers,” it stated in the release.
To counter the financial difficulties, it is mulling selling off stakes in its subsidiaries as well as its corporate building in Hong Kong, though no agreements have been reached, it added.
Headquartered in South China’s Guangdong, Evergrande has developed 1,300 propertyprojects in China’s 280 cities, and other than the real estate, it also deals in seven other business sectors including property management, wealth management and electric cars manufacturing with over 200,000 employees, according to its website.
Chinese steel market chill at the Evergrande news
Despite the overseas ferrous community concern that the news on Evergrande may lead to reduction in steel demand from the property market as Beijing may tighten the control over the sector, China’s steel prices both in the physical and futures markets have reacted little.
China’s national average price of HRB400E 20mm rebar price, for example, was assessed by Mysteel at Yuan 5,778/tonne including the 13% VAT as of September 23, or up Yuan 203/t from September 14, and the most-traded January 2022rebar contract on Shanghai Futures Exchange (SHFE) remained steady too over the period, or up Yuan 7/t from the settlement price of September 14 to Yuan 5,605/t as of September 23.
“Chinese government has been tightening the surveillance over the property market from last year in particular, so we have kind of expected that some of the developers may go into financial difficulties,” Xu Xiangchun, Mysteel’s senior ferrous analyst commented.
“The negative impact of Evergrande on demand, even there is any, will have been partially offset by the definite declines in supply,” he added, noting that meanwhile, China’s steel market is more concern about supply than demand, as the steel industry has been facing a large-scale power rationing and output cuts across the country.
Even in COVID-19 years over 2020-2021, Beijing has reiterated that “house is for living, not for speculation”, and both the central and local governments have been introducing certain measures to limit speculative buying, and Evergrande is more an individual case due to its too great exposure to debts, and this will not lead to a systematic risk, Mysteel Global understood from the market sources.
“Many property developers are operating healthily, I do not think there will be many that are in a similar financial situation as Evergrande that may face possible bankruptcy or restructuring,” a Shanghai-based steel analyst observed.
“Beijing’s measures including tighter control over the the property market is to ascertain the orderly and healthy development with a soft landing, not to cause a slump, so such cases may emerge but occasionally and as a separate case instead of one that will threaten the whole sector,” he added.
Chinese market sources do not expect Beijing to bail Evergrande out of the trouble, or it may set a bad precedence, which Xu echoed.
“Beijing is very adamant on cracking down highly-leveraged and highly-indebted industries, and the case will eventually be left to the market to solve,” Xu maintained, adding, though, that Beijing will definitely closely watch the development of the Evergrande case, making sure that all the purchased houses be delivered and wealth management products be paid with repayment schemes.
Construction steel demand to soften even without Evergrande
Even without the latest happening with Evergrande, steel market participants have already expected softening demand for construction steel, though in the near term, steel demand will not waver much with the property projects already under construction, but the slow-down will be inevitable with the slower pace in the launch of new projects in the future.
Over January-August, China’s property projects under construction totaled 9.1 billion sq m, up 8.4% on year, but the newly-launched property projects declined 3.2% on year to 1.4 billion sq m, according to the data from the National Bureau of Statistics.
There may have already been some signs, according to a futures analyst based in East China’s Shandong, as “steel demand has been persistently slack over June-September, which have been much longer than the usual off-season in summer months. It could be partially because of the property market,” he said.
Besides, “finished steel inventories have been falling, but not as sharply even with the serious reduction in steel production, also an indicator that the demand has remained subdued,” he added.
Over September 16-22, Mysteel’s latest survey on the output of the five major steel products among China’s 184 surveyed mills showed that the volume hit the lowest since April 2020, or down for the third week to 9.2 million tonnes, and these five steel products at the commercial warehouses in China’s 132 cities just fell to its three-month low of 21.7 million tonnes after eight weeks of declines over September 17-23.
Source:Mysteel Global
