LITTLETON, Colorado, Sept 19 (Reuters) – The deepening debt crisis in China’s construction sector – a key engine of economic growth, investment and employment – may trigger an unexpected climate benefit in the form of reduced emissions from the cement industry.
Cement output and construction are closely correlated, and as China is by far the world’s largest construction market it is also the top cement producer, churning out roughly 2 billion tonnes a year, or over half the world’s total, data from the World Cement Association shows.
The heavy use of coal-fired kilns during manufacturing makes the production of cement a dirty business. China’s cement sector discharged 853 million tonnes of carbon dioxide in 2021, according to the Global Carbon Atlas, nearly six times more than the next largest cement producer, India.
The cement sector accounts for roughly 12% of China’s total carbon emissions, according to Fidelity International, and along with steel is one of the largest greenhouse gas emitters.
But with the property sector grinding to a halt due to spiralling debt worries among major developers, the output and use of cement are likely to contract over the next few months, with commensurate implications for emissions.
HOUSING SLUMP
The property markets account for roughly a quarter of China’s economy, and for years Beijing has used the sector’s substantial heft to influence the direction of the rest of the economy by spurring lending to would-be home buyers and fostering large scale construction projects.
But the big property developers racked up record debt loads in recent years that have forced borrowing levels to slow, stoked concerns among investors, and slowed spending across the economy.
China Evergrande Group, once the second largest developer, defaulted on its debt in late 2021, while top developer Country Garden has drained cash reserves to meet a series of debt payment deadlines in recent months.
Fears of contagion throughout the property industry has spurred households to rein in consumer spending, which has in turn led to deteriorating retail sales and further economic headwinds.
Beijing has stepped in with a slew of measures designed to right the ship, including easing borrowing rules for banks and lowering loan standards for potential home buyers.
But property prices in key markets remain under pressure, which has served to stifle interest among buyers and add to the pressure on investors and owners.
CEMENT CUTS
With construction activity across China slowing, and several major building sites stopped completely while tussles over debt payments among developers continue, cement output is likely to shrink to multi-year lows by the end of 2023.
During the March to August period, the latest data available, total cement output was 11.36 million short tons, down 2 percent from the same period in 2022 and the lowest for that period in at least 10 years, China National Bureau of Statistics data shows.
In addition to curtailing output in response to the bleak domestic demand outlook in the property sector, cement plants may be forced to curb output rates over the winter months as part of annual efforts to cap emissions from industrial zones during the peak season for coal heating.
Some cement producers will likely look to boost exports in an effort to offset lower domestic sales, and in July China’s total cement exports hit their highest since late 2019.
But Chinese firms will face stiff competition from lower-cost counterparts in Vietnam, which are by far the top overall cement exporters and already lifted overall cement shipments by close to 3% in the first half of 2023, data from the Vietnam National Cement Association (VNCA) shows.
Some Chinese firms may be prepared to sell exports at a loss for a spell while they await greater clarity over the domestic demand outlook.
But given the weak state of global construction activity amid high interest rates in most countries, as well as the high level of cement exports from other key producers such as India, Turkey, United Arab Emirates and Indonesia, high-cost Chinese firms may be forced to quickly contract output to match the subdued construction sector.
And if that’s the case, the sector’s emissions will come down too, yielding a rare climate benefit to the ongoing property market disruption.
The opinions expressed here are those of the author, a columnist for Reuters.
Reporting By Gavin Maguire; Editing by Miral Fahmy
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
LAUNCESTON, Australia, June 1 (Reuters) – A run of weak economic data in China is likely to show up in softer imports of key commodities, albeit with a lag given the time taken to physically ship resources from around the globe.
The manufacturing indicator, the official Purchasing Managers’ Index (PMI), dropped to a five-month low of 48.8 points in May, the National Bureau of Statistics (NBS) said on Wednesday.
This was the second month the measure was below the 50-level that separates expansion from contraction, and it was also weaker than the median forecast for a rise in May to 49.4 from April’s 49.2.
Weakness in China’s manufacturing sector has been matched by soft outcomes in other important parts of the world’s second-biggest economy.
Property investment fell 16.2% year-on-year in April, the fastest since November 2022, according to Reuters calculations based on official data.
Property sales measured by floor area slumped 11.8% on year in April, the most this year, versus a 3.5% fall in March.
Industrial profits fell 20.6% in the first four months of the year from the same period in 2022, according to NBS data.
The major bright spot for the Chinese economy is retail sales, which jumped 18.4% in April from the same month a year earlier, but even this performance was short of market expectations for a 21% leap.
But retail spending isn’t the top driver of demand for commodities, although it does act to boost demand for refined fuels such as gasoline and jet kerosene as people increase travel.
Rather it is construction and manufacturing that propel commodity demand, especially for steel raw material iron ore and for copper.
Construction and infrastructure account for about 55% of China’s steel consumption, with manufacturing, including vehicles and machinery, taking about 30%.
The softness in those sectors is likely to show up in commodity imports in coming months, but not yet.
IMPORT STRENGTH TO FADE?
In fact, imports of major commodities in May are likely to be robust, but it is worth remembering that these are lagging indicators.
Seaborne iron ore imports are expected at about 93.29 million tonnes, according to Refinitiv data, which would be stronger than the 90.44 million tonnes recorded by customs in April.
Crude oil imports are expected by Refinitiv Oil Research to come in at 11.22 million barrels per day (bpd), which would be up from the 10.36 million bpd in April and down from the 34-month high of 12.37 million bpd in March.
Imports of all grades of seaborne coal are forecast by commodity analysts Kpler to be 34.33 million tonnes in May, up from 33.61 million in April, but down from March’s 34.42 million.
However, it is worth noting that coal imports in the March to May period are the highest in Kpler records going back to January 2017.
The May import performance is likely a reflection of expectations by Chinese refiners and steel mills that the economic rebound would be stronger than it has actually been.
If this is the case, it’s likely that they may consider trimming imports in coming months, especially if the run of soft economic data continues.
It can take several months between the arranging of a crude oil cargo and its delivery and processing in a Chinese refinery, and iron ore cargoes also tend to be secured several weeks ahead of shipment and delivery.
The X-factor is price. If crude oil, iron ore, coal and copper prices all continue to drop, it’s possible that Chinese buyers will import more than they need, choosing to build inventories for when prices start rising again.
Global benchmark Brent crude futures ended at $72.66 a barrel on Wednesday, the lowest close in four weeks.
Iron ore futures traded in Singapore finished at $105.07 a tonne, down 10 cents from the previous close and some 20% below the peak this year of $131.19 from March 15.
London copper futures ended at $8,089 a tonne on Wednesday, down 0.4% from the prior close and 13.5% below the closing peak this year of $9,356 on Jan. 23.
While lower prices may encourage some Chinese buying, it’s also likely that importers may wait for further price falls, especially if the economic performance continues to sputter.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Robert Birsel
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
LAUNCESTON, Australia, April 24 (Reuters) – The spot price of iron ore tumbled to a four-month low as Beijing once again talked down the key steel raw material, but as usual the question is whether the intervention will lead to sustained lower prices.
The spot price for benchmark 62% iron ore for delivery to north China , as assessed by commodity price reporting agency Argus, dropped to $110.25 a tonne on April 21, the lowest since Dec. 20.
The price gave up 7.9% from the close of $119.75 a tonne on April 19, the day China’s state economic planner, the National Development and Reform Commission, said it would monitor the iron ore market closely and limit what it termed irrational price increases.
China produces just over half of the world’s steel and buys more than 70% of seaborne iron ore, with the main exporters being Australia, Brazil and South Africa.
It’s not immediately clear why Beijing picked last week to warn the iron ore market, given that the spot price has been trending down since hitting a nine-month high of $133.40 a tonne on March 15.
In the past such interventions have tended to come during price rallies, especially if the movement has been rapid.
They have also tended to have met with limited success, especially if strong demand was the main reason behind the rally, as opposed to supply issues as happens occasionally during Australia’s cyclone season and Brazil’s wet period.
It’s also the case the outlook for iron ore demand in China is not particularly clear cut, with some positive macro drivers but also areas of concern.
On the bullish front there is ongoing optimism over China’s economic re-opening after Beijing scrapped its strict zero-COVID policy at the end of last year.
Gross domestic product rose 4.5% in the first quarter, beating market expectations for a 4.0% gain, but much of the outperformance was driven by retail spending, which isn’t especially supportive of steel demand.
On the more important construction and infrastructure indicators, the performance was mixed with China’s infrastructure investment rising 8.8% year-on-year in the first quarter, outpacing a 5.1 rise in overall fixed-asset investment, while property investment fell 5.8%.
INVENTORIES SLIP
Another potentially bullish indicator is China’s port iron ore inventories , with data from consultancy SteelHome showing these dropped to 131.7 million tonnes in the week to April 21 from 133.3 million the prior week.
Inventories usually decline after the northern winter as steel output ramps up for the summer construction peak, but it’s worth noting that inventories are now 11.9% below the 148.6 million tonnes in the same week in 2022.
This implies that steel mills may be looking to increase iron ore imports, especially if they plan to keep production at relatively high levels.
Steel output hit a nine-month high of 95.73 million tonnes in March, rising 6.9% from the same month in 2022 amid rising demand and improved profitability among mills.
First quarter production was up 6.1% on year to 261.56 million tonnes, but this may not actually be a positive if Beijing does implement a proposed 2.5% steel output cut for 2023 from 2022’s 1.018 billion tonnes.
If lower production is mandated, it implies that steel mills will have to trim output over the rest of the year given the relatively strong start to 2023.
Overall, the outlook for China’s iron ore and steel demand is less assured than it was at the start of the year, when optimism over the economic re-opening abounded.
For now, iron ore imports appear to be holding up, with commodity analysts Kpler estimating April arrivals at 96.27 million tonnes, which would be down from March’s custom figures of 100.23 million, but relatively stable on a per day basis given April is one day shorter than March.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jacqueline Wong
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.