January 20, 2012 / 8:28 AM / in 7 years

Analysis - China metal demand strong despite housing slump

BEIJING (Reuters) - A third straight monthly fall in Chinese house prices in December could add to the jitters in several key metals markets, but the world can still bank on sustained and long-term demand growth from its second-biggest economy.

China’s steel sector, buoyed since late 2008 by a stimulus-driven building boom, will be worst hit, but analysts predict copper and aluminium will also feel the impact of a burst housing bubble that might shave more than two percentage points off GDP growth over the course of this year.

This slackening demand in the world’s biggest consumer of iron ore, copper and aluminium will hit global prices.

In a research note, Goldman Sachs cut its average forecasts for 2012 copper prices to $8,567 (5,533.52 pounds) per tonne down from $9,200, and for aluminium to $2,321/tonne from $2,500.

Iron ore prices over the year are expected to reach around $150 per tonne, a Reuters poll predicted, lower than the $166 average in the first 11 months of 2011 but still higher than the current rate of around $140.

Real estate investment rose 28 percent in 2011 to 6.17 trillion yuan ($977.50 billion), but December prices dropped for the third straight month and a Reuters poll predicted a price decline of 10 to 20 percent over this year.

But the drop in property growth is just part of the story.

Infrastructure continues to grow at a frenetic pace. Cranes still dominate coastal skylines and western regions are still in the midst of a building boom and certain to book massive quantities of metal.

“The housing market is important for steel and for commodity demand generally in China, but it is only one cog, and it’s a total urbanisation story so it requires steel used in extensive infrastructure usage not just housing,” said Mark Pervan, global head of commodity research at Australia and New Zealand Bank.

Last year was still an outlier, with output and capacity still expanding as a result of China’s post-2008 stimulus measures. With stimulus replaced by retrenchment, the next few years are likely to see steadier and less spectacular growth.

Steel may take the brunt of the housing slowdown with apparent crude steel demand expected to rise 4 percent this year to 700 million tonnes, slower than an 11 percent rise in 2011, according to estimates by the China Iron and Steel Association.

Copper will also take a hit. State-backed research firm Antaike predicted refined copper consumption, already around 40 percent of the global total, would increase 6.4 percent in 2012 to 7.85 million tonnes, less than an 8.5 percent rise in 2011.

Consumption of primary aluminium is expected to rise 9 percent to about 21.7 million tonnes in 2012, slowing from 13.8 percent in 2011.

STEEL

Any decline in real estate is bad news for struggling steel mills. Commercial property accounts for around a third of Chinese steel demand. Real estate alone accounted for more than 200 million tonnes of iron ore imports last year.

It was the building boom and a flood of cheap credit that rescued China’s steel mills after the global financial crisis of 2008, when a brutal downturn in export demand was quickly offset by a surge in domestic construction.

Many of the construction projects financed during the stimulus years were completed last year, bumping up floor space growth and swelling housing supply.

“More inventory means developers will not be keen to build new houses, suggesting that newly added floor space will decline,” said Du Hui, analyst with Qilu Securities in Shanghai.

“At the same time, slower house buying also suggests slowdowns in the machinery and home appliance sectors, which are also big steel consumers,” he added.

The construction boom drove Chinese steel mills into a frenzy of capacity expansion and pushed daily output up to more than 1.9 million tonnes from February to September 2011, from an average of 1.7 million tonnes in 2010. Crude steel output for the whole year rose 8.9 percent to 683 million tonnes.

Du said China’s social housing programme — expected to create 7 million starts this year and 4 million in 2013 — would not entirely replace declining commercial real estate demand.

CISA has already urged mills to address ebbing demand by slashing output.

Foreign markets are unlikely to offer respite, said Sebastian Lewis, Asia head of data and analytics with Steel Business Briefing.

China’s exports of high value-added products are not expected to return to pre-2008 rates, and there is little chance of selling low-end steel overseas.

“I can’t really see there being much demand outside of China for construction steel products like rebar or the narrow strip used in welded pipes, and there are a number of non-tariff barriers elsewhere that will stop them exporting more,” Lewis said.

Any downturn could at least force the bloated Chinese steel sector to make output cuts and some of the least efficient mills could be winnowed out of the market, he added.

FALLING OFF A CLIFF?

China’s building boom has not just driven steel demand growth. Property construction accounts for around 20 percent of total copper demand, with another 40 percent used in power infrastructure.

“In previous years, the housing sector contributed to economic growth and to base metal consumption in China. Now it is sliding and that will affect the economy and metal demand,”

said Jing Chuan, chief researcher at CITIC Futures.

Jing said he expected the property sector to remain weak throughout 2012, trimming overall demand for construction metals such as copper and aluminium.

Beijing’s affordable housing plan would not offset the fall in high-end property projects because those houses would use cheaper fittings such as plastic pipes, and fewer new homes will also mean fewer sales of home appliances and cars, Jing added.

Judy Zhu, analyst with Standard Chartered Bank in Shanghai, said as far as base metals are concerned, much of the impact would be felt in the first quarter.

“But I don’t think it will fall off the cliff because infrastructure demand and construction of commercial property will give fairly good support. It will be weak in the first quarter but things will pick up in Q2.

“The residential sector is going to be a drag on steel demand this year, but overall we still expect positive contribution from the whole property sector because office building is very hot right now,” said Zhu.

Reporting by David Stanway in BEIJING; Ruby Lian, Fayen Wong and Melanie Burton in SHANGHAI; Polly Yam in HONG KONG; Manolo Serapio Jr. in SINGAPORE; Editing by Sugita Katyal

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