From China, the biggest shock has come in the form of the property market’s collapse, led by its largest real estate player Evergrande. The real estate sector is a big taker of metals, and with its collapse the shine in metals is bound to go
As the saying goes, when an elephant falls, the earth shakes. Juxtaposing the situation to China’s economic slowdown is shaking of the global commodity markets if its consumption drops further. While the elephant has still not fallen, the wearing steps are telling a tale of what could be a colossal fall if the dragon nation does not gets its strength back.
By virtue of being the second largest global economy and the second most populous country, its economic strength matters to the world. It is one of the top consumers of important commodities, such as crude oil, metals and food items including grains and edible oil, that run not just industries but economies.
To put things in perspective, China is the largest consumer and producer of copper and it accounts for 27 per cent of the global market share. It is followed by Peru which meets 10 per cent of the global demand. This means that its production accounts for more than double of the second largest producer in the world. It is also the largest producer and consumer of aluminium and nickel. The country tops the charts in consumption of precious metals like platinum, gold and silver.
It stands at second spot in consumption of crude oil at 13 per cent behind the USA at 20 per cent and nearly three times that of India. Among food items, it is the largest consumer of wheat and edible oil. Its consumption of edible oil is three times of the USA and India.
China’s slowdown has already dented the demand-supply situation and unsettled the prices too. Its consumption of metals will remain critical to the metal prices in the global markets.
The global industrial activity still remains patchy amid the looming demand concerns in China. However, the silver-lining has been the resilience of the US economy which has refused to buckle down under elevated interest rate pressure.
Last year, China saw one of its slowest growths in decades dragged by the debt crisis in the property sector. A report by International Monetary Fund (IMF) has projected a further decline in its GDP growth to 3.5 per cent by 2028 from its previous forecast of 4.6 per cent for this year. The report said that the uncertainty around the outlook of economy was high amid headwinds from weak productivity and aging population.
China’s economic reforms laid the path for a double-digit growth for decades between 1980s and 2010 which helped it get past all the European economies. In terms of purchasing power parity (PPP), China is already the largest economy.
But China’s economic woes have been of its own making to a large extent. The need for a China+1 strategy has never been so pronounced as it has been since the onset of the pandemic. In addition, the nation is in the need of gaining confidence on its alleged expansionist approach to overcome the perceptual let-downs.
There is a growing belief among nations to become self-reliant or at least look for avenues other than China. That could hurt it across industries.
it seems the country could have managed the Covid-19 far better. While other countries were looking for vaccination of its citizens to reignite their economies, China still tried to prevent the spread of the virus through lockdowns.
But the biggest blow has come in the form of the property market collapse led by its largest real estate player Evergrande. All these factors have collectively triggered a slowdown in the economy.
Evergrande’s problems came to the fore after the company defaulted on payments towards its dollar bond loans nearly two years ago. It was once the largest company by sales in the country and is now saddled with liabilities worth over USD 300 billion.
Last week, a Hong Kong court ordered liquidation of the company which will now open gates for liquidation of all its businesses. Its impact on the local real estate industry has been deep and has unsettled the sector like never before.
China’s metal consumption is closely tied up with the prospects of the real estate and infrastructure sectors.
Taking a leaf out of a report by Reuters which succinctly puts – “When it comes to copper, the thinking usually goes that copper equals property, property equals China”. The copper market is USD 300 billion worth and China imports over 60 per cent of the metal’s globally traded volume. And this is after being the largest producer.
Iron ore is expected to be another big casualty of the crisis.
Impact
China’s real estate sector is huge in terms of its contribution to country’s gross domestic product (GDP) and accounts for a quarter share. The report said that it has an influence over 40 other sectors from construction to home appliances.
The worrying part is that while Evergrande has sinked, the industry has still not encountered its bottom. New construction starts by area have shrunk by another 23 per cent in the year to October from an already battered 2022, this Reuters report said.
The impact is also being felt on the country’s financial system as the Evergrande incident will have a cascading impact on other companies as well.
While the Chinese government has sprung into action, a big unknown remains on the extent of government support to the sector and money recovered from liquidation.
The problem with the real estate sector is that a lot of money of ordinary citizens remain at stake. In this case an average Chinese has big exposure to the property sector and that is a cause of worry for the Xi Jinping government.
Its manufacturing sectors is also facing headwinds and it contracted for the fourth straight month in January.
Chinese Commodity Course
Metals like copper, aluminium and others have utility in sector like automobile, electronics, and energy; and China is giving a lot of thrust to emerging segments like electric vehicles and green energy that could help bridging the gap over time.
While China has a reputation of getting things done at a phenomenal pace, it could still take some years before it comes out of the woods. Till that time, metals could remain volatile and on a weaker side.
