The soft bailout of Evergrande has begun:
Regulators in Beijing have signed off on a China Evergrande Group proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve as the cash-strapped developer struggles to come to grips with more than $300 billion of liabilities.
China’s Financial Stability and Development Committee, the nation’s top financial regulator, gave its blessing to Evergrande’s plan last month after the property giant missed interest and principal payments on some loans, a person familiar with the matter said, asking not to be identified discussing private information.
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This changes little for the base case of a Chinese hard landing in property segments but it does offer some hope that tail risks of wider economic freeze can be avoided.
That said, Evergrande is in liquidation. We are only debating the speed at which it happens. So, the impact on property starts remains the same, very negative.
The PBoC is still trying to offset that elsewhere:
The People’s Bank of China is turning to its relending program, providing loans to commercial banks for lending to customers. The funds are usually targeted for specific uses by the central bank, such as loans to farmers, small businesses and projects that help alleviate poverty, or pandemic relief. The loans have a lower interest rate than the medium-term lending facility funds offered by the PBOC, and are usually accessible to more banks.
“Relending is a more targeted tool with greater accessibility and lower cost, and the heavy use of such targeted tools can help solve the structural problems in the economy and financial sector,” said Wang Yifeng, chief banking analyst at Everbright Securities Co. Ltd. “The size of the relending program is set to expand.”
The use of the relending tool fits with China’s shift to a cross-cyclical policy approach, a strategy that analysts say implies more targeted and moderate action.
Amusing stuff. More power to the PBoC for trying but this kind of stuff is not new. It’s the same incremental easing we see every cycle as the economy sinks into a property quagmire, before crashing growth triggers a broad credit easing panic. There is no “cross-cyclical policy approach”.
I still expect the same result this time, eventually. Property is just too big. For now, the most important message is that Chinese policymakers still don’t think so, so growth is going to keep on falling.
This is what happened to iron ore overnight as spot hit new lows, paper is desperately trying to hold the lows:
There is discussion about the slowness of the supply ramp-up, via UBS:
Shipments of majors still falling short of guidance…
In Jul-21, RIO updated guidance and confirmed 2021 Pilbara iron ore shipments will be at the low end of its previous range of 325-340Mt; to achieve this, RIO needs to ship ~85Mt/q in 2H21. Based on UBS Evidence Lab shipping data, RIO is currently on track to ship ~81Mt in 3Q and as a result we see 5-10Mt downside risk to 2021 guidance. Vale has guided 2021 production at 315-335Mt; to achieve this, Vale needs to produce ~91Mt/q in 2H21 or ship ~83Mt/q (adj for domestic sales). Based on UBS Evidence Lab data, Vale is on track to ship ~77Mt in 3Q and as a result we also see 5-10Mt downside risk to Vale’s guidance. Vale will update investors on 9-Dec. BHP is also tracking ~3Mt lower y/y in Sept-Q 2021. We believe Covid restrictions are impacting production.
…but demand is the key concern with China property falling sharply
However, in our opinion, the key concern at the moment is China pig iron production (ie iron ore demand) which remains weak in Aug based on the CISA 10-day data (Figure 6). Our China property team last week cut their forecast for new starts in 2021 to -9% (2H21 -20%) and expect -7% in 2022; they do however expect deteriorating property data to result in less policy tightening in 2021-23E.
Meh. RIO has been playing this pretend game of bottlenecks ever since 2016. It consistently find ways to limit supply by 15-20% of its capacity. That’s fine while the market is hot. But, if I were a shareholder (I’m not) I’d be getting pretty pissed as constantly taking it in the team to save much higher cost producers from pain in the down cycle.
As UBS says, all that matters now is Chinese property. It’s going bust and so is iron ore, followed by all base metals.
$100 this year. $60 in 2022.