Steel and the real estate crisis in China

Steel and the real estate crisis in China are closely related. The real estate crisis threatens to pull down a third of China’s steel industry. The steel mills that produced over a billion tons last year.

In China, steel is mainly used in the construction sector. The real estate market (especially the segment of industrial buildings and office spaces) generates the highest consumption of steel.

STEEL AND THE REAL ESTATE CRISIS IN CHINA – WHAT FINANCIAL STRATEGIES SAY

Goldman Sachs, one of the most influential financial institutions in the world, sees a crisis enveloping the real estate sector in China.

The problems in the Chinese real estate sector began in 2020, when Beijing began to ban loans obtained easily by real estate companies. This fact led to a financial crisis for the big developers.

The strategists explained that the government’s efforts to reduce excessive indebtedness in the sector turned into a full-blown crisis. Mortgage owners refusing to pay installments for unfinished homes.

In China, real estate companies can sell houses before they are completed. And the clients must start repaying the loans before taking possession of the new properties. These funds are used to finance the construction by the developers.

STEEL PURCHASE DEMAND DECREASES ON THE REAL ESTATE MARKET

Goldman Sachs Group Inc. sees the demand for steel decreasing by 5% this year.

And Bloomberg analysts say that the boycott on the Chinese market will primarily hit steel demand this quarter. Then aluminum and copper would follow. It remains to be seen the reaction of the Beijing government and whether this will influence the market.

If effective political intervention, in due time, does not materialize, the difficulties on the real estate market will be prolonged. And the effects will appear on various sectors in China, beyond the immediate value chain of the real estate sector.

The slowdown in the real estate sector has already affected some economic indicators, such as investments in fixed assets and the furniture sales component of retail sales.

Construction accounts for 55% of China’s steel demand. The official data shows that the sales of residential houses fell by 32% in the first half of this year compared to a year ago. Industry research indicates that the top 100 developers likely saw even poorer performance, with sales down 50%.