The world market is experiencing a “shock” due to Evergrande. Not only the stock market plunged, the USD soared, but the price of raw materials also fluctuated strongly. Why can Evergrande be so influential?
Back in 2018, Evergrande – China’s largest real estate developer, headquartered in Shenzhen – owned a “huge” property with 408,000 car parking spaces, a land bank the size of an archipelago. Malta and countless properties with very attractively low rental rates.
After only 3 short years, Evergrande is facing a liquidity crisis, becoming the most indebted real estate developer in the world. On September 13, about 100 investors surrounded Evergrande’s headquarters to collect debt. What is the scale of the “debt bomb” that Evergrande is suffering from? As of June 30, the figure is 1.970 billion yuan, equivalent to South Africa’s 2020 GDP, or nearly 2% of China’s GDP. Information from Bloomberg said that China’s Ministry of Housing and Construction has informed major banks that Evergrande could not pay the credit interest due on September 20.
According to international analysts, in a normal economy, this is not a big problem. But in China, where real estate is estimated to account for a quarter of GDP, this becomes extremely worrying.
Some have called the Evergrande affair China’s “Lehman moment” – referring to the bankruptcy of the global financial services company that contributed to the 2008 financial crisis, although it still remains to this day. It’s too early to call this a major crisis.
One question is: How will Evergrande’s default affect the global economy?
China’s real estate shares have started the week off sharply, with Hong Kong-listed Sinic Holdings shares falling 87% in Monday trading, and bonds of many Other companies also plummeted.
The European stock market on Tuesday morning (September 21) also fell, with shares of basic materials companies dropping the most, in the UK down 4.5%, of which the biggest drop was stocks. of Anglo American, lost 8.6%.
Evergrande Group Headquarters
But why GOODS?
It is clear that the real estate sector uses a lot of goods, from steel to copper….
Take a look at the rough estimates below for a quick understanding of what a real estate crisis in China means for the commodity market (to the negative), and you’ll find that commodity prices plummeting. steep because Evergrande is inevitable.
In terms of the first round / direct impact on commodities, the Evergrande event (if default) will have a great risk of leading to a recession in China’s real estate sector – which accounts for 1 /2 total consumption of many important items.
Everyone knows that China is the largest producer/consumer/importer of goods in the world. This country consumes about 40-70% of the total goods consumed globally, of which a large part is devoted to the infrastructure sector.
What is China’s real estate consumption share of the country’s total merchandise consumption?
Here are the huge numbers:
• 40% of China’s total STEEL consumption (380 million tons/year, equivalent to 20% of total global production)
• 20% of total national copper consumption (2.7 million tons = 20% of the world)
• 15% of national aluminum (6 million tons = 9% of the world)
• 15% of the country (0.7 million tons = 5% of the world)
• 10% of national NICKEL (0.2 million tons = 8% of global)
In total, China’s real estate sector accounts for about 5-20% of the total global supply of goods. Thus, Evergrande is clearly a “giant contract” of the world commodity market.
Metal prices simultaneously plunged on September 20 due to fears that China’s real estate and construction sectors would be contagionally affected, leading to more defaults, and possibly causing real estate prices to fall. in mainland China there is a strong adjustment. If that happens, it will lead to a sharp decline in overall construction activities, including the number of newly completed homes in China, adversely affecting demand for steel and other building materials across the world. Global.
Copper prices fell to a one-month low on the back of a sell-off as China’s real estate sector consumes one-fifth of the global copper supply. Accordingly, three-month copper futures on the London floor this session ended the session down 3.2% to $9,010 per tonne, sometimes down to only $9,005 per ton, the lowest since August 20.
Nickel this session also fell 1.7% to $ 19,030 a tonne, despite concerns that Indonesia will restrict exports of this mineral.
Aluminum fell 0.8% to $2,862 a tonne, zinc fell 2.4% to $3,014 a tonne, lead fell 1.3% to $2,153 and tin fell 1% to $33,780.
As the group of goods most affected, the price of iron ore 62% imported to China on September 20 decreased by 2.52% to 91.75 USD/ton. Compared to the record high in May, iron ore prices have now lost about 60%. Since the beginning of September alone, iron ore prices have lost 23%. China’s real estate sector consumes one-fifth of the total global steel supply.
How far will the impact of the Evergrande case on the commodity market go?
The Price’s senior market analyst, Phil Flynn, said it was certain that investors would continue to panic because the risk of a larger economic crisis in China could put downward pressure on many investors. goods that China consumes, not only metals. The worst that could happen is that China’s inability to contain the aftermath of this one-company debt crisis – referring to the bankruptcy of the global financial services company – Lehman – sparked buoyed by the 2008 financial crisis.
However, Mr. Flynn reassured that it is “too early to call this a major crisis” right now and that markets may be overestimating the risk to commodity demand. “Only time will tell the current questions.”
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