The saga of Chinese developer Evergrande continues and its consequences can affect sectors and companies far away. At dawn this Tuesday (4), the company, the second largest in its sector in the country, requested the suspension of transactions with its shares on the Hong Kong Stock Exchange.
That hurt equities in Asia, which closed flat despite record highs in US indices that should have cheered investors across the Pacific. In Shanghai, the SSE index dropped 0.2%, while in Hong Kong and Seoul the indices ended the session stable.
Evergrande is the second largest Chinese developer and the most indebted company in the world in its sector, with liabilities slightly above US$300 billion. Since September, the company has been having problems paying its debts. On Monday (3), the rating agency Standard & Poor’s (S&P) considered Evergrande as a defaulter.
The Evergrande case is not an isolated one. The company has been having problems since the beginning of last year. In May, the Chinese government changed rules to reduce the sector’s financial leverage in order to lower property prices and curb property speculation. “Houses are for living and not for speculation”, was the official statement at that time.
The Evergrande crisis is the tip of the iceberg, experts say. Giants like Evergrande have large amounts of real estate in stock and are dumping that stock on the market to pay off debt. This reduces the price per square meter of the industry as a whole, potentially dragging smaller companies down the same path.
S&P said it expected more defaults in 2022, with up to a third of Chinese developers experiencing cash problems. The agency also said it expects home sales in China to fall 10% this year and another 5% to 10% in 2023.
Although the international financial market is little exposed to the Chinese real estate sector, the problems of developers will likely start a difficult period for the global steel industry in 2022. A crisis construction sector in China will affect iron ore prices, steel and aluminum in 2022, making the fall seen in the fourth quarter of last year extend longer.
At the end of 2021, construction steel rebar was quoted on the Shanghai Stock Exchange at 4,500 renminbi per tonne, down 28.1% from the historic high of May 12, ahead of the Beijing statements. In November, iron ore with 63.5% hematite traded at the port of Tianjin dropped to US$78 per tonne. It was the lowest price in 16 months and a drop of 66% compared to the historic record of US$ 229 per ton, registered in May 2021.
China’s steel demand is projected to fall 0.7% to 947 million tonnes in 2022, after a 4.7% drop in 2021. According to S&P, China accounts for 55.9% of global demand of steel, and real estate development consumes around 40% of this demand, making the sector one of the largest steel buyers in the world. With this sector in crisis, Vale’s exports to China will be seriously compromised.
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