BEIJING — Debt problems at a major Chinese property developer have now spilled over into a vital artery of the nation’s industrial engine – the steel sector – and started to ripple through to other critical parts of the world’s second-largest economy.
The spreading balance-sheet crisis at real estate firms is a warning for policymakers as a swing in the fortunes of the steel industry would have significant repercussions for China’s economy, with cement, glass, and household appliances all vulnerable to demand drops.
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Already, steel prices are down from their record highs seen earlier this year due to easing demand from construction activities, which account for over half of the metal’s consumption, while steelmakers’ share prices have also been hurt.
Steel’s acute sensitivity to the ebbs and flows in construction and manufacturing makes it a closely-tracked bellwether for China’s economy, which has started to slow down from the second quarter https://www.reuters.com/world/china/china-q3-gdp-growth-hits-1-year-low-raising-heat-policymakers-2021-10-17. Steel firms are also massive employers that support a vast supply chain.
Hitting steel operations, real estate developers have dialed back investment in projects to conserve cash in a sector squeezed by tighter borrowing regulations that have engulfed indebted companies, most notably China Evergrande Group https://www.reuters.com/business/chinas-kaisa-kicks-off-12-bln-debt-restructuring-after-missing-pay-date-source-2021-12-09 .
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“We normally stockpile steel products in winter at relatively lower prices and sell them after the new year holidays when consumption resumes. But we are holding off this year,” said Qi Xiaoliang, a Beijing-based steel trader.
“There’s still uncertainty in the real estate market for 2022 and the situation is not expected to be fully reversed for another six to 12 months,” he added.
In the final quarter of 2021, the property market took a further hit as the unease in the sector shook already weak buyer sentiment, with unsold housing stock in China’s 100 biggest cities reaching a five-year high in November.
Demand for homes is expected to ease further in 2022, hitting downstream manufacturers of household products.
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Cement production, another construction material, was down around 16% for September-November year-on-year, and was lower versus the same period between 2017 and 2019. Demand for earth excavators has also dropped off in recent months.
The broadening spillover impact of the property downturn was also seen elsewhere. In the appliances industry, for example, monthly refrigerator output has been falling since May through to November on an annual basis.
REVERSAL IN FORTUNES
Steel producers were among the best performers of the entire Chinese economy over the first three quarters of 2021, with China’s 28 major listed mills pocketing over 106 billion yuan ($16.61 billion) in net profits, up 174% year-on-year and 129% higher than in pre-pandemic 2019.
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But the boom times in the steel sector are over. The paralysis that has struck China’s mammoth construction industry is triggering a rare contraction in building activity across the country.
New construction starts by floor area have contracted from a year earlier since July – their longest stretch of declines since 2015.
The slowdown in the real estate sector has dented China’s monthly crude steel output by more than 20% since September.
The closely-tracked steel equity instruments and commodities futures have captured the reversal of fortunes.
After gaining roughly 90% through mid-September, the CSI steel equities index has plunged 27% since, while futures prices for construction materials rebar and wire rod have tumbled 24% and 31% respectively from their historical highs to erase almost all their gains this year.
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As steel producers hit the brakes, the key inputs used in steelmaking have also taken a shellacking, with Dalian Commodity Exchange iron ore futures down more than 45% from their record in May.
Gross profits for steel rebar have started to trend down from the peak seen in late September.
UNCERTAIN OUTLOOK
Property-related sectors are the single biggest contributor to China’s economy, accounting for 28% of GDP in 2021, down from a recent peak of 35% in 2016.
The GDP share is broken down into a 7% direct contribution from property and a 21% indirect contribution from construction and through sectors along the supply chain such as machinery and equipment, according to Moody’s.
A government industry consultancy forecast China’s steel demand will slip 0.7% in 2022, following an expected 4.7% decline this year.
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Looking ahead, any extended credit constraints “could reduce demand for metals used in construction as developers lose the ability to pay for raw materials at high prices,” analysts with Fitch Solutions wrote in a recent note to clients.
If the contraction in construction spending endures, it will then affect the producers of appliances and white goods that constitute a key part of China’s critical manufacturing base.
“Property construction has been the engine of China’s economy for over two decades now,” said Frederic Neumann, Co-Head of Asian Economics Research at HSBC.
“With building activity likely to remain depressed for quite some time, growth will inevitably shift down a gear or two.” ($1 = 6.3813 Chinese yuan renminbi)
(Reporting by Min Zhang and Ryan Woo; Editing by Gavin Maguire& Shri Navaratnam)
OTTAWA – Statistics Canada says retail sales rose 0.4 per cent to $66.6 billion in August, helped by higher new car sales.
The agency says sales were up in four of nine subsectors as sales at motor vehicle and parts dealers rose 3.5 per cent, boosted by a 4.3 per cent increase at new car dealers and a 2.1 per cent gain at used car dealers.
Core retail sales — which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers — fell 0.4 per cent in August.
Sales at food and beverage retailers dropped 1.5 per cent, while furniture, home furnishings, electronics and appliances retailers fell 1.4 per cent.
In volume terms, retail sales increased 0.7 per cent in August.
Looking ahead, Statistics Canada says its advance estimate of retail sales for September points to a gain of 0.4 per cent for the month, though it cautioned the figure would be revised.
This report by The Canadian Press was first published Oct. 25, 2024.
OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.
Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.
The change is scheduled to come into force on Nov. 8.
As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.
The program has also come under fire for allegations of mistreatment of workers.
A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.
In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.
The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.
According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.
The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.
Temporary foreign workers in the agriculture sector are not affected by past rule changes.
This report by The Canadian Press was first published Oct. 21, 2024.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
