Heavily Stockpiled, China’s Housing Bubble is Poised to Hurt Metals
In China there is something deeply perplexing about this year’s housing figures. Compared to the first quarter of last year, China’s real estate investment has seen a 23.5 percent increase. And as we encroach upon the release of new monthly data, that trend gives us little reason to show surprise at further jumps. With that being said, we really have little cause for optimism. In truth, the figures are marred by a worrisome contrast. Whilst investment has risen, real estate sales have actually dropped by 14.6 percent when compared to the same quarter in the year prior. Sales are down, but investment has never been stronger. As we learn more about growing economic concerns in the world’s fastest growing economy, it seems more than probable that the contradiction is riddled in a panic, the frenzy before the storm. The Chinese housing bubble is quickly unraveling, and as developers partake in a frantic bid to cash out, everywhere are the marks of a race to completion.
Song Yu and Michael Buchanan, Goldman economists, wrote, “there is no doubt that the level of activity growth in April is significantly below the government’s comfort zone”. Such sentiments have been echoed far and wide. Susan Wachter, a real estate professor at the University of Pennsylvania, argued, “this is a classic real estate bubble…it will take time for absorption”. In fact, when the Chinese government tracked home prices in April, it found strong price declines in 46 of the 70 cities targeted. The eastern city of Wenzhou led the pack, posting a 12.3 percent housing price fall, whilst Beijing and Shanghai posted a decline of 1 and 1.3 percent respectively. Dariusz Kowalczyk, an economist at Credit Agricole-CIB in Hong Kong, suggested that the figures “increase[d] the pressure for policy stimulus, both fiscal and monetary”. He added, “we believe that there is room for, and need for, such policy easing”. But the proponents of stimulus are not without their opposition. Many analysts believe policy stimulus will only add fuel to the fire. Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, argued, “if they lift the restrictions and the market keeps falling, which it will, they’ve lost the fig leaf that enables them to say they’ve got everything under control”.
For many it is a matter of how much damage. The figures don’t bode well for the global economy and will likely have a detrimental effect on the demand for core metals, particularly those used in construction. This has only been exacerbated by China’s grossly miscalculated decision to heavily stockpile on metals towards the end of last year. The country expected the traditional demand boom that normally follows the end of the lunar year, and as a result, had imported vast quantities of copper, steel and iron, amongst other commodities. But contrary to forecasts, most of the anticipated buying never really materialized. As a result, China is currently sitting on an estimated 1.4 million tonnes of copper. In fact, warehouses are so full that workers have begun to stockpile in car parks. Iron ore stocks are almost a third higher than their 74 million tonnes average. Zhang, a manager at a bonded warehouse at Shanghai’s Yangshan port, noted, “the turnaround time for copper stocks used to be only one or two months, but now it’s averaging six months or more…The destocking is happening very, very slowly”.
With the slowdown expected to accelerate, more and more production is being halted worldwide. China seems unable to consume its own stockpiles, and with that being the case, the road ahead will likely prove very trying for metal producers.