With China’s second largest realtor Evergrande likely to default on a $83.5 million interest on Wednesday, there are rising fears that the housing sector slowdown may hit commodity demand in the world’s largest consumer of metals.
The price of spot iron ore for delivery to north China slumped 22.2 per cent last week to $100.45 a tonne, Reuters reported. The steel-making ingredient has now fallen 57.4 per cent from the record high of $235.55 a tonne, reached on May 12, the report added.
On Monday, shares of Tata Steel plunged 6.21 per cent to hit a low of Rs 1,299.20 on BSE. The scrip is off 15 per cent from its 52-week high of Rs 1,534.60 hit on August 16. PSU SAIL fell 7.24 per cent to hit a low of Rs 106.90. This scrip is down 29 per cent from its 52-week high of Rs 151.10 hit on May 10.
Shares of Evergrande plunged 19 per cent in Hong Kong trading today to a 11-year low on default concerns.
Independent market expert Sandip Sabharwal said investors playing the commodity theme were looking only at the fact that the Chinese were cutting down on production.
“But what most of them do not realise is that 60-70 per cent of commodity consumption comes out of China and that the economy may slow down, given the Evergrande crisis and its repercussions on the housing market. Some predictions suggest that the Chinese housing market could be on a decline for many years to come. So all of that is not very good for steel demand in the largest metals consumer,” Sabharwal said.
He said while there is noise around the US infrastructure pipeline, it will take a long time for all that demand to come in and that China is the biggest demand driver as of now.
“To that extent, commodities could soften more and on top of that we have the rally in the dollar index, which is typically negative for commodities. Although iron ore prices are 50 per cent off the top, they could fall more and so could many other commodities,” he said.
Dollar index, which has an inverse relationship with commodity prices, is rising amid fears the US Federal Reserve may announce the timeline for tapering in its two-day policy meeting starting Tuesday. This week will see central banks across Japan, the UK, Switzerland, Sweden, Norway, Indonesia, the Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary reviewing their policies.
IFA Global in a note said Evergrande’s debt woes are extremely concerning and are threatening to snowball into a contagion. It noted that Evergrande has a total debt of around $300 billion and that its bonds are trading at a 70 per cent discount to their face value.
“Property market accounts for a huge share of China’s GDP and a protracted period of deleveraging there can have major global spillovers. There would be a huge setback as far as demand for commodities is concerned. China’s August retail sales data in particular was extremely disappointing pointing towards signs of a slowdown. How the Chinese authorities respond to the crisis and whether they succeed in containing the contagion will be interesting to see,” it said.
Danske Bank in its weekly note said home sales in China dropped 20 per cent YoY in August, which have added to the challenges for developers already feeling the heat from tighter regulations last year.
Danske said while the Chinese stock market has been hit hard, the financial stress in China has not spread to developed markets.
“This may change if things turn worse. A lot of focus on whether China announces new stimulus measures soon to offset the rising headwinds to the economy,” it said. Goldman Sachs and JPMorgan have also recently warned of spillover risks due to Evergrande’s debt.
Meanwhile, Evergrande Group kicked off a process on Saturday to repay investors in its overdue investment products with discounted properties. That could not allay investors in Hong Kong, where the stock market plunged 4 per cent to a 11-month low earlier today. Domestic stocks also made a gap-down start but recovered smartly as the session progressed. China market is shut for the day on account of a public holiday.
