A $5 trillion property bust in China has huge implications for commodities

Please consider Beyond Evergrande, China’s Property Market Faces a $5 Trillion Reckoning.

As China enters what many economists say is the final stage of one of the largest real-estate booms in history, it is confronting a staggering bill: More than $5 trillion in debt that developers took on when times were good, according to economists at Nomura Holdings Inc.

That debt is nearly double what it was at the end of 2016 and is more than the entire economic output of Japan, the world’s third-largest economy, last year.

Asia’s junk-bond markets suffered a wave of selling last week. On Friday, bonds from 24 of the 59 Chinese development companies in an ICE BofA index of Asian corporate dollar bonds were trading at yields of above 20%, levels that indicate high risk of default.

Total sales among China’s 100 largest developers were down by 36% in September from a year earlier, according to data from CRIC, a research unit of property services firm e-House (China) Enterprise Holdings Ltd. It showed that the 10 biggest developers, including China Evergrande, Country Garden Holdings Co. and China Vanke Co. , saw sales down 44% from a year ago.

“There is no return to the previous growth model for China’s real-estate market,” said Houze Song, a research fellow at the Paulson Institute, a Chicago think tank focused on U.S.-China relations. He said China is likely to keep in place a set of limits on corporate borrowing it imposed last year, known as the “three red lines,” which helped trigger the recent distress at some developers, though he said China might ease some other curbs.

Goldman Sachs Group Inc. analysts recently estimated Evergrande had the equivalent of $156 billion of off-balance-sheet debt and contingent liabilities, including mortgage guarantees to help home buyers get loans.

What About Commodities? Australia?

Think of the implications a property bust of this magnitude will have on steel, copper, concrete, and Chinese GDP targets.

China had largely been dependent on Australia for raw commodities,

That tidal wave of Chinese Debt is About to Sink Australia’s Economic Recovery.

Australia’s economic growth continued year after year, with no sign of a recession, and money sloshed around all sectors of the economy until the pandemic hit and almost everything slowed to a crawl. I say almost everything because iron kept being dug up at a rapid pace, along with copper ore and coal, to meet strong demand from the Chinese property sector and railway expansion, which also drove a strong upward trend in prices. In 2020, iron ore alone made up 41 per cent of all exports from Australia by value, at about A$149 billion.

Unfortunately, 2021 has proved to be the year that the merry-go-round stopped and Australia’s mining industry, and indeed its economy, reached a turning point. The era in which China could be trusted to buy an abundance of Australian dirt, and pay good money for it too, has come to an end – and probably for good. Three things have happened recently that dashed hopes that mining would drive the economic recovery.

China’s demand for iron, coal and copper ore and concentrates are now in a very sharp decline as a pending tidal wave of debt threatens to destroy three property developers – Evergrande, Sinic and Fantasia – and signal the end of China’s building boom. China’s infamous ghost cities are now starting to be demolished, releasing large quantities of scrap iron and copper. The Financial Times estimates there is an abundance of idle property that could house 90 million people, though most likely it never will. This inventory of steel and copper will be recycled, as recycling is cheaper and more energy efficient than smelting from ores. This reduces the need for imported Australian coal.

 China is in no great rush to buy iron ore. Or copper, aluminium, or lead. And if it was, it would rather not pay hard currency for it. Restocking of new steel supplies is not likely to happen this year, and I have no faith in analyst predictions that iron ore prices will jump again by the end of the year. By the time the scrap is used up, abundant supplies will be available from Central and West Africa.

In 2012, China imported about 70 per cent of all the world’s iron ore transported by sea, or about 680 million metric tons, in addition to its domestic production of about 280 million metric tons. About 60 per cent of the imported ore came from Australia. These days, the estimated total output from fully developed mines in West Africa’s Guinea and the Central African republics of Congo and Cameroon is between 400 million and 600 million tons annually – or almost the entire amount China was importing by sea in 2012.

Given that Cameroon and Congo see 70 percent of their financing requirements covered by the Chinese, new alliances were forged, and the Australians saw their licences revoked and stripped from them. It’s now all over, except for the shouting. Large lawsuits are incoming, seeking damages through international arbitration against the African governments for several Australian and British interests totalling some US$40 billion.

This suggests that the Australian government is going to have to think long and hard about what it can do domestically to replace the significant revenue streams that are disappearing as exports falter.