Real estate slowdown may hit Chinese steel demand

A slowdown in the real estate sector may pressure China’s steel demand next year, according to analyst forecasts.

Steel demand from the construction, automobile and shipbuilding sectors will decline in 2020, state-controlled Chinese think-tank the Metallurgical Planning and Research Institute said. It expects demand from the machinery industry to stay mostly unchanged but said consumption in the energy and home appliances sectors will continue to grow.

Construction, including both real estate and infrastructure, accounts for over 60pc of China’s total steel demand. Real estate investment and new project starts have increased by around 10pc this year, fuelling 7pc growth in steel output to 904.18mn t in January-November.

“Demand will be supported by higher infrastructure investment by government, as well as a single-digit recovery in auto sales, despite the slowdown in housing construction,” said ratings agency Fitch.

Any slowdown in the real estate sector is unlikely to be drastic, as demand for property remains robust and the government looks to support economic growth.

“Our 2020 outlook for China’s property sector is stable. But credit risks are mounting as sales growth slows and funding conditions remain tight,” said fellow ratings agency Moody’s. “Weaker demand in lower-tier cities and a high base of comparison (with) last year will weigh on sales growth. Central government will maintain current tight measures over the sector with an objective to maintain stable property and land prices.”

Beijing will continue to restrain liquidity in the real estate sector, with banks maintaining higher interest rates on loans to property developers. But it may allow prices of selected property projects to increase mildly if the economy slows sharply next year, said Singapore-based DBS Bank.

Fitch is forecasting that housing prices in tier 1 and 2 cities will be flat in 2020 while prices in tier 3 cities may fall by around 3pc because of oversupply and weaker demand. But prices are likely to find some support from new regulations that encourage rural populations to move to lower-tier cities.

“The government may opt to relax regulatory restrictions on mortgages and home purchases should economic conditions weaken more sharply than we expect in 2020 in an effort to stabilize house prices, particularly in Tier 3 markets,” said Fitch.

By Prasenjit Bhattacharya