China’s Property Crisis Threatens Its Steel Industry

China’s steel industry is entering a precarious new era as a worsening property crisis imperils demand and Beijing’s construction-led growth model looks increasingly untenable.

Almost a third of China’s steel mills could go into bankruptcy in a squeeze that’s likely to last five years, Li Ganpo, founder and chairman of Hebei Jingye Steel Group, warned at a private company meeting in June. “The whole sector is losing money and I can’t see a turning point for now,” he said, according to a transcript of the gathering seen by Bloomberg News.

Real estate has been in crisis this year. Developers have lost their homes to banks and Beijing is being forced to lower its growth goals. Steel mills that churned out more than a billion tons last year, around half of global output, are highly vulnerable to the slump that’s also hit iron ore prices and miners from Australia to Brazil.

The outlook for property is getting worse after more than one year of pain. However, the government continues to insist on strict debt regulations and big bailouts. Goldman Sachs Group Inc. predicts a drop in steel demand of 5%, as the index of steel purchasing managers for July fell to its lowest point since 2008. At least one third of Chinese steel demand comes from the property industry.

Beyond the current crisis, the industry is facing profound challenges as the growth model that’s sustained China’s economy for decades shows signs of strain. President Xi Jinping appears reluctant to spend the amount of infrastructure investment and financial stimulus which revived the sector following the financial crisis in 2015 and the collapse of the property market in 2016.

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“This time really is different,” said Leland Miller, chief executive officer of China Beige Book International, which monitors the steel industry. “With property having lost its mantle as the preeminent growth driver, key commodities like steel no longer have the benefit of endless credit access.”

The large inventory of unfinished property, which has been highlighted recently by the mortgage boycotts, is the main obstacle to steel’s future. Prices of construction steel have also plunged, with rebar — twisted steel rods that strengthen concrete — falling to a two-year low last week. That’s even as output has dropped to the lowest in Mysteel data that goes back to 2015.

China’s steel market outlook

“Demand is slipping fast,” Xiao Zunhu, chairman of state-owned Hunan Valin Steel Co., told an industry meeting in Beijing last week where speaker after speaker warned of difficult times to come. Markets “will remain complicated and tough” this half and stimulus measures need time to take effect, Chen Shaohui, vice president at Jiangsu Shagang Group, said at the same meeting.

When it comes to trimming production, steelmakers might have little room for maneuver. According to four executives representing producers who requested anonymity because the issue is confidential, local governments have been putting pressure upon mills to keep their activity up to avoid economic weakness.

Steel mills were once seen as champions of China’s economic expansion, with some growing from rural casting workshops to multi-billion dollar conglomerates. While real-estate activity should stop contracting at some point, the chances of it delivering the kind of booms that buoyed Asia’s largest economy over the past few decades seem slim.

“The third quarter will be the most difficult time for the industry,” Zhu Guosen, vice director at Shougang Group’s technology research institute, said at the meeting in Beijing. “We should abandon any illusions about the market and focus on what we can do ourselves.”

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