The ferrous complex was pretty wild on November 10, 2021 as spot tumbled but steel surged and paper gained overnight:
Here it is in black and white from Wall Street’s Goldman Sachs:
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- 2021 has been a year of change in China, with policymakers continuing normalizing macro policies and introducing regulatory measures in numerous sectors. While we expect macro policies to ease somewhat to support growth next year, much of the structural tightening that intensified this year – especially in the property market – is here to stay, in our view. Therefore, we forecast real GDP to grow 4.8% in 2022 and expect average annual growth of only 4.5% during 2022-25, significantly below market consensus.
- Although we think the odds of a housing-driven financial crisis are low in China,we believe the Chinese property market is in a multi-year slowdown. Recognizing the waning fundamental demand for housing in the coming decades, we believe policymakers are acting now to deleverage the sector and to stave off risks of a disorderly correction down the road. By our estimates, housing’s contribution to GDP growth may turn from +1pp in 2019 to -1pp in 2022-25. This is the key reason behind our below-consensus growth forecast over the next few years.
- While “new infra” and “green capex” are areas where we expect strong growth for years to come, their scale is simply too small at the moment to fill the void left by slowing property investment. In addition, traditional infrastructure investment is unlikely to rebound sharply as policymakers’ deleveraging and de-risking mentality also applies to local government officials. Taken together, we expect the investment contribution to GDP growth to decline, leading gradually to a less investment-driven economy over time.
- Given the upcoming Beijing Winter Olympics and the 20th Party Congress next year, we expect the Chinese government to continue its “zero Covid” policy despite a high vaccination rate and medical improvements. This suggests a continued, but gradual, recovery in household consumption next year. On the other hand, we think Chinese exports are likely to grow further in 2022, although not as fast as this year, supporting Chinese current account surplus and CNY appreciation.
- The experience of the US-China trade war and the Covid pandemic have likely convinced Chinese policymakers that resilience is more important than speed whenit comes to growth. As President Xi aims to secure a third term next year, the leadership seems to be taking an even longer-term view on development than before. With this backdrop, we believe the Chinese economy is settling into a new regime where policymakers accept slower growth in the near term for a more resilient economy in the long run.
That is a very good base case. The problem is that it underestimates the impact of falling construction, so growth will be lower but not much more resilient. China will therefore still be forced to periodically lurch from stimulus to tightening with lower amplitudes as it weans itself off property.
Research yesterday confirmed that a Chinese property “hard landing” is imminent:
The Development Research Center, a think tank under the State Council, China’s cabinet, held a meeting with mainland property developers and financial institutions in Shenzhen amid market concerns over a deepening cash crunch in the real estate sector.
Representatives from leading developers such as China Vanke and Kaisa Group, real estate industry associations, as well as financial institutions including Ping An Bank, China Citic Bank, China Construction Bank and CR Trust attended the meeting on Monday, reported Chinese news outlet The Paper and Reuters.
At the meeting, embattled Kaisa Group urged state companies to help private firms improve their liquidity through project acquisitions and strategic buyouts, The Paper added. Other issues about the state of the real estate sector, the risks and views on the upcoming property tax were also discussed, it reported.
Kaisa admitted that its home sales in the past two months tumbled and that, combined with credit rating downgrading by several rating agencies and banks suspending or withdrawing loans, has brought huge difficulties, it said.
Kaisa has been selling assets to raise capital for liabilities including a missed payment on a wealth product and $11 billion of bonds. Trading of its shares were halted in Hong Kong on Friday.
Fitch Ratings cut Kaisa’s rating further to CCC- from CCC+ on Tuesday, two weeks after it was downgraded by two notches from B+. “It reflects our view that Kaisa’s liquidity has further deteriorated. We believe Kaisa’s credit risk is high due to tight liquidity, undisclosed debt from wealth-management products, potential pressure to address non-capital market debt, declining contracted sales and limited progress on asset disposals,” Fitch said in a statement.
The developer has put 18 property projects with 1.45 million square metres (15.6 million square feet) in Shenzhen on the auction block, with a combined value estimated at 81.82 billion yuan ($12.8 billion), according to a catalogue seen by Yuan Talks.
In a statement on Monday, Kaisa said it was taking measures to resolve its issues, and was consulting with investors in its wealth management products about feasible payment solutions. Kaisa also cancelled an investor representative meeting originally scheduled for Wednesday because of public safety concerns surrounding the coronavirus outbreak situation.
China’s highly leveraged real estate industry is facing a sector-wide liquidity crunch, after the authority introduced restrictions on developers’ borrowing and banks’ lending to the sector.
China’s real estate sector has faced unprecedented pressure since the second half of the year and signs of a hard landing are emerging, according to a research from China Finance 40 forum (CF40), a economic and finance think tank with members from regulators, academia and financial institutions.
To prevent a real estate hard landing, the most important is to prevent liquidity crisis at property developers, it said.
The authority should relax restrictions on banks’ quota of home mortgage loans, provide credit support to developers for them to renew maturing debt, providing rescue loans to developers with sound fundamentals but facing temporary liquidity difficulties, it said.
Meanwhile, the authority needs to accelerate the growth of total social financing, prevent the spillover effects of the liquidity issue in the real estate sector on other sectors and postpone other policies that could have major negative impact on the sector, it said.
On Tuesday, the National Association of Financial Market Institutional Investors held a meeting with representatives of some property developers, according to Chinese news outlet Cailianshe.
Several developers including Country Garden have plans to issue debt instruments in the interbank market recently to ease the ongoing cash crunch, said the report, citing people who attended the meeting.
The old playbook, in other words.
However, the “common prosperity” doctrine has now advanced so far that any such change of direction will have to be relatively limited in scope and timeframe. Just enough to prevent an acute crisis but not so much that a new boom cycle develops.
As such, this is the end of the line of any notion of a commodity supercycle. This is especially the case for iron ore and coking coal which will now see demand fall away much faster than previously thought as the structural adjustment in growth combines with rising scrap production.
The following chart sees Chinese steel output falling 10% in 2022 and then 3% per annum thereafter plus a ramp-up to 270mt of scrap output by 2030, well below the forecast of the last Five Year Plan. I can think of much worse scenarios and not many better:
It won’t be this smooth but the amount of iron ore demand that China is going to suck out of the seaborne market over the next decade is a staggering 600mt.
That means that only RIO is assured of survival. BHP will struggle a great deal to sustain its Pilbara production. A dramatically smaller Vale will persist via its other markets. Every other global iron ore producer shipping into China will be out of business.
I know it is hard to imagine but some version of it is coming.