China’s Baowu Steel Group, the world’s largest steel producer, cautioned that the current downturn in China's steel industry would likely be longer and more severe than previously anticipated.
A year ago, Doric's Weekly Insight underscored growing concerns in China's property sector, highlighting a sharp decline in real estate investment and sales. The figures were alarming, with a year-on-year decrease of 8.5 percent in real estate development investment from January to July, and commercial building sales down by 1.5 percent. The marginal 0.7 percent increase in residential building sales did little to offset the overall negative trend. Fast forward to today, and the situation has only worsened, painting a bleak picture for the property sector of world's second-largest economy. From January to July of this year, investment in real estate development plunged further, dropping by 10.2 percent year-on-year to 6,087.7 billion yuan. The downturn in residential investment was even more pronounced, with a 10.6 percent decrease, bringing the total to 4,623.0 billion yuan. This decline reflects broader challenges within the sector, as developers struggle with a tightening credit environment, dwindling demand, and ongoing financial instability.
The downturn is evident in several key indicators. The floor space of real estate projects under construction decreased by 12.1 percent, totaling 7,032.86 million square meters. Residential buildings, which make up the bulk of this sector, saw a 12.7 percent reduction in floor space under construction, down to 4,915.32 million square meters. Even more concerning is the steep decline in new construction starts, with the total floor space of newly started buildings falling by 23.2 percent. Residential projects were hit particularly hard, with a 23.7 percent drop in new starts, highlighting the industry's deepening crisis. Sales figures paint an equally grim picture. The floor space of newly built commercial buildings sold from January to July was 541.49 million square meters, marking an 18.6 percent year-on-year decrease. The residential sector fared worse, with sales volume dropping by 21.1 percent. This decline is reflected in the revenue figures, with the total sales of newly built commercial buildings plummeting by 24.3 percent to 5,333.0 billion yuan. Residential sales saw an even sharper decline, down by 25.9 percent.
In this context, China's Real Estate Climate Index, a key measure of industry health, registered a slight increase to 92.220 points, up from the previous month. However, this figure remains significantly low, signaling continued distress in the market. The index, which reached an all-time high of 102.030 in September 2018, has been on a downward trajectory, reflecting the ongoing challenges facing China's property sector. The recent reading remains only marginally above the record low of 92.000 recorded in May 2024, underscoring the severity of the situation.
The real estate sector's woes have had a ripple effect on related industries, particularly steel and iron ore. Last week, iron ore prices fell to their lowest levels in over a year, driven by weakening demand from China's steel industry. The market for steel products has been hit hard, with prices for some items falling to multi-year lows. This decline has been exacerbated by new regulations requiring the adoption of updated steel standards, further depressing prices in a market already reeling from the property sector's prolonged downturn. Iron ore prices for delivery to Qingdao have fallen below the critical $100 per tonne threshold, a level at which high-cost production becomes unprofitable, according to Argus data. Prices have struggled to maintain any significant upward momentum, despite the approaching peak construction season, which typically boosts demand. On Friday, iron ore futures experienced a slight weekly increase, with the most-traded January contract on China's Dalian Commodity Exchange rising by 1.8 percent week-on-week. However, these gains are set against a backdrop of a 23.2 percent decline since the start of the year.
The sharp drop in iron ore prices has had significant implications for the world's major mining companies. Since the beginning of the year, the combined market capitalization of the "big four" iron ore miners – BHP, Rio Tinto, Vale, and Fortescue – has shrunk by approximately $100 billion. This decline has prompted warnings from key industry figures and government officials alike. Australian Treasurer Jim Chalmers, for instance, has warned that reduced demand for iron ore from China could result in a $3 billion shortfall in tax revenue over the next four years, highlighting the broader economic impact of the downturn.
Sentiment in the steel market has been further dampened by a stark warning from China’s Baowu Steel Group, the world’s largest steel producer. Baowu's chairman, Hu Wangming, cautioned that the current downturn in China's steel industry would likely be longer and more severe than previously anticipated. He described the ongoing crisis as a "winter" for the industry, one that is "longer, colder, and more difficult" than earlier downturns. Unlike previous economic slowdowns, which were often mitigated by government stimulus measures, the current challenges in China's property market have proven more resistant to such interventions.
Despite the concerning trends in the iron ore and steel markets, the Capesize segment has oddly managed to remain resilient and build positive momentum. The largest bulk carriers saw a weekly gain of $2,608, pushing the Capesize index to a one-month high of $23,645 per day. This uptick was largely fueled by increased activity in the Pacific, where stronger demand provided a crucial boost amidst an otherwise difficult market landscape.
Data source: Doric