martes, 21 de septiembre de 2021

martes, septiembre 21, 2021

Commodities: the Chinese real estate exposure

What might the fallout from Evergrande mean for demand?

Jamie Powell

© REUTERS


In markets, being right early is the same as being wrong. 

Fortunately for FT Alphaville, the same rule doesn’t apply to journalism.

Back in 2018, FT Alphaville took a look at Evergrande -- China’s largest property developer -- and its ballooning balance sheet, which included 408,000 car parking spaces, a land bank the size of Malta, and a curiously low yield on its rental properties.

Three short years later, Evergrande is facing a liquidity crisis. 

In a normal economy, this wouldn’t be such a big deal. 

But in China, where real estate is estimated to account for up to a quarter of GDP, this is slightly more of a concern. 

It doesn’t help that the property developer also has some $300bn of outstanding obligations to pay. 

And it’s crunch time: two interest payments on its long-suffering bonds are due Thursday.

So the question now is: how contagious would an Evergrande default be for the global economy? 

Chinese property stocks have started the week by already taking a battering, with Hong Kong listing Sinic Holdings crashing 87 per cent during trading on Monday, and the bonds of other developers sinking to distressed levels. 

Via UBS:


European equities this morning are also showing signs of suddern concern, with the FTSE 100 falling 1.6 per cent, and the Stoxx 600 off 1.8 per cent in midday trading. 

The basic materials sector is leading the charge, with the sector in the UK off 4.5 per cent, led by Anglo American’s fall of 8.6 per cent. 

In Europe, it’s a similar story, with steel company ArcelorMittal, as one example, down 6 per cent. (European banks also seem to be taking a battering, we should add.)

But why commodities? 

Well, the obvious answer is that real estate tends to use a lot of them -- whether it’s steel for the structure or copper for wiring.

With that in mind, you might be wondering about just what level of exposure to the business of digging stuff out of the ground we are talking about here. 

Well, not to worry, because Tom Price at Liberum did a quick back-of-the-napkin estimate on what a Chinese real estate crunch might mean for commodities, and . . . it’s not too pretty.

Here’s the key blurb from his note this Monday morning:

bearish commodities? yes. 

looking narrowly at the direct/first-round impact on commodities, this event threatens a slowdown in China’s property sector – 1-of-2 very large, broad-based commodity-consuming sectors of this economy (i.e. the other = infra). 

it’s generally well known (among resources sector investors, at least) that China’s share of global commodities consumption = 40-70%. 

but what share of global consumption is China’s property sector? Of China’s total commodity supply, its property sector consumes: 

40% of steel flow (380Mtpa = 20% of global total); 

20% of copper (2.7Mtpa = 20% of global) 

15% of aluminium (6Mtpa = 9% of global) 

15% zinc (0.7Mtpa = 5% of global) 

10% nickel (0.2Mtpa = 8% of global)

ANSWER: China property = 5-20% of global commodity supply. - so yes, Evergrande’s potentially a big deal to Commodity World.

Yep, Chinese real estate accounts for a fifth of all global and copper steel supply. Blimey.

We don’t have a whole lot to add on top of those eye-opening stats, bar a passing thought that if you were an economy which depended on commodity sales for a large chunk of your output -- say, Australia -- you might be concerned that the fourth quarter is going to be a touch more difficult than expected.

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