Missed debt payments by property development giant China Evergrande Group will likely kick off a rough 2022 for the steel industry.
Efforts by the Chinese government to deleverage its highly indebted property sector in 2021 sent Evergrande, its second-largest developer, into a spiral of default, and many of its peers may soon face similar challenges. That means hard times for steelmakers: On the Shanghai Futures Exchange, steel rebar, mainly used for construction projects, traded at 4,554 Chinese yuan per tonne on Dec. 22 — 28.1% lower than its historic high on May 12. China accounts for 55.9% of global steel demand, and property development consumes nearly 40% of that demand, making the sector one of the largest buyers of steel in the world.
Beijing has had a change of heart in recent months, offering policy supports to property developers such as Evergrande, but analysts fear the moves are inadequate and more defaults are still to come.
Evergrande's crisis is "just the tip of the iceberg," according to Stuart Burns, founder and editor-at-large of MetalMiner.
"Firms like Evergrande are off-loading stock to meet interest payments, depressing prices, and the resulting fall in residential property prices is dissuading new construction," Burns said in an interview. "A depressed construction sector [in China] will weigh on iron ore, steel and aluminum prices in 2022, extending the depressing effect it has already had in the fourth quarter."
Growth in China, the world's second-largest economy, has been slowing for two quarters amid concerns about a deflating property bubble and Evergrande's debt crisis. The property downturn is projected to continue through 2022. S&P Global Ratings expects to see more defaults in 2022 and as much as one-third of Chinese developers to be under liquidity pressure. It also forecasts that China residential sales will fall by 10% in 2022 and further decline by 5% to 10% in 2023, with property prices to fall by up to 3%.
None of that is good news for steel producers. China's steel demand is expected to fall 0.7% to 947 million tons in 2022, following a 4.7% decline in 2021, dragged down by weakening property sector and COVID-19 uncertainties, Reuters reported Dec. 15, citing government-backed think tank China Metallurgical Industry Planning and Research Institute, or MPI.
Investors' 2022 outlook remains bearish, as the steel rebar futures for November and December 2022 were trading below 4,250 Chinese yuan/t on Dec. 17, below the spot price that same day.