Until recently, we were expecting 2016 to be a year of stability in the Chinese construction market, after the leg down seen in 2015 (we have steel into residential property down 10% YoY in 2015). That is no longer the case. Following recent trips there, we are increasingly of the view new starts and completions will be lower again next year. This has a direct feed through to commodity demand, and is one of the major reasons we have lowered 2016 demand forecasts. Indeed, one of the few areas the government continues to give guidance is in the housing market. In one way this is helpful, as a relaxation of restrictions on the sales side helps release some pent-up demand. In contrast, it is being made very clear to developers, even by President Xi himself, that the current housing overhang needs to be run down before construction activity will recommence.
Compounding recent fundamental weakness has been another leg down in Chinese demand through November – it appears to us that China is now falling in line with the usual patterns of a northern hemisphere industrial economy, amplifying the natural apparent demand cycle. From now forward, it is wise to expect Chinese demand to be weak through November-January. On this flip side, it is also wise to expect a recovery in apparent demand in the immediate period post Chinese New Year, when new bank loans are available and construction and manufacturing are regaining some steam. For 2016, it should also be remembered that the Chinese government has been backing up monetary loosening with fiscal support, which should see modestly improved demand conditions in Q2 next year. So while things seem bad now, this is at the cyclical low point in the demand cycle, albeit one which can last for a couple of months yet.
That’s about right but with residential starts already down 15% on a rolling annual basis this year for them to fall again next year strongly reinforces my view that we are at a structural inflexion point for Chinese steel output. The cycle may rebound but not by much!
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
Until recently, we were expecting 2016 to be a year of stability in the Chinese construction market, after the leg down seen in 2015 (we have steel into residential property down 10% YoY in 2015). That is no longer the case. Following recent trips there, we are increasingly of the view new starts and completions will be lower again next year. This has a direct feed through to commodity demand, and is one of the major reasons we have lowered 2016 demand forecasts. Indeed, one of the few areas the government continues to give guidance is in the housing market. In one way this is helpful, as a relaxation of restrictions on the sales side helps release some pent-up demand. In contrast, it is being made very clear to developers, even by President Xi himself, that the current housing overhang needs to be run down before construction activity will recommence.
