Analysts are pointing to a recovery in the Chinese housing sector as an early indicator that demand for commodities, including coking coal, will start to pick up. What happens with housing is critical to a view on coking coal demand because real estate directly and indirectly accounts for 35%-40% of Chinese steel demand, as Commonwealth Bank of Australia (CBA) points out.
Recent data shows housing prices are heading back toward more sustainable levels and property developers are starting to buy land again. This will eventually flow through to a return to housing construction which will see an increase in steel demand, but not until the stock of unsold properties drops.
“While land sales are volatile, averaging July and August numbers reflect that land sales growth is similar to the same period in 2011,” CBA said in a client note.
“Two consecutive months of y-o-y growth in new floor space sales is the strongest indicator that Chinese property construction volumes have bottomed,” CBA added.
CBA says data showing ongoing weakness in economic activity, such as the Purchasing Managers’ Index dropping to a nine-month low, is indicative of destocking, a point also made about the coking coal, iron ore and steel sectors.
At the same time, as reported before, steelmakers have little incentive to cut production, underlined by new data showing exports of 5Mt of Chinese steel products for September were up 22% y-o-y and up the same percentage m-o-m.
CBA sees the biggest risk to China is slow demand growth from developed economies which could continue to drag down manufacturing and cut into the labour market. In such a scenario stimulus might be injected but only in 2Q 2013.
Given China remains a centrally planned economy, the government policy response to the economy is much watched and commented on. CBA said since last December China’s central bank has cut the required reserve ratio (RRR) three times from 21.5% to 18-20%, reflecting the need to stimulate growth. (The RRR defines the minimum reserves each commercial bank must hold of customer deposits and notes.)
CBA highlights a historic link between changes in RRR and crude steel output, that is, a drop in RRR predicts an increase in crude steel output. If past trends repeat, the figures point to an uptick in steel output. Some analysts are predicting further intervention in the reserve ratio towards year-end.
From a bigger perspective, multiple analysts emphasise that China is a compelling growth story as it continues to industrialise and urbanise. As numerous commentators have said: China is not yet built.
The most recent data quoted by CBA is a 4% month-on-month lift in China’s iron ore imports (up 7.3% y-o-y) to 65Mt in September. CBA said lower import prices and expectations of higher steel consumption in autumn along with expectations of extra infrastructure spending were likely to have boosted iron ore import demand. The same dynamics appear to be flowing through to coking coal.
But in considering China, it is also clear that the government has recognised that the unchecked growth of recent years is not sustainable and if not moderated, could cause all kinds of economic mayhem such as hyper-inflation, property bubbles and social unrest.
This does not mean China will stop importing commodities. As one investment analyst put it: "With 1-1.1 billion people still wanting to urbanise, China isn't about to move to a ‘commodities lite’ development story anytime soon”.
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