Resource Erectors Q4 2021-2022 Heavy Industry Review Part 1
China is facing soaring raw material costs, weakened manufacturing, a widespread power shortage, and the explosive Evergrande Effect in the real estate sector.
This November the inevitable Evergrande collapse looms large and ripple effects from China are beginning to rumble throughout the global economy. But just how much fallout can one debt-fueled company cause?
The People’s Bank of China (PBoC) issued a statement that the financial fallout from a falling real estate sector would of course be contained and risks were “controllable.” That’s great for banks and financial institutions but the problem is that banking and finance are not the only areas of the economy to be affected by the real estate crisis.
The property market is about 25% of the Chinese economy. But indicators for China’s humongous real estate sector and the CCP economy in general all point to an ongoing downward spiral that will easily extend into 2022.
- Home sales tumbled 16.9% in September from a year earlier, following a troubling 19.7% drop in August.
- China’s corporate sector accounts for almost a third (31%) of all global corporate debt.
- The corporate sector’s debt-to-GDP leverage ratio of 159% is among the world’s highest, well over the current global average of 101%.
- The result of corporate expansion over 3 decades of “debt-fueled breakneck economic growth is a $27 trillion headache for Beijing”.- Terry Chan, senior researcher at S&P Global Ratings,
- Xi Jinping’s tightening of credit cuts off funding for China’s companies operating on the “borrow and build model”.
- China’s official purchasing managers’ index (PMI) for manufacturing dropped to 49.2 in October, the second straight month in which this Key Performance Indicator for factory activity has fallen.
- Widespread power shortages and virus outbreaks have depressed both consumer and production activities.
- China’s third-quarter annual rate of growth fell to 4.9 percent, setting the lowest mark for 2021.
- The CCP economy expanded by just 0.2 percent over the previous quarter
These numbers don’t exactly add up to trading partner confidence when it comes to reliance on China as a pillar of the global economy, green or otherwise. As we wrap up a turbulent 2021, the big question for mining, manufacturing, civil construction and pretty much every other industry in a time of exponentially expanding demand must be:
“Can China deliver in 2022?”
Last month, here at the Resource Erectors industry watch blog we asked whether or not Elon Musk, among other green transition tycoons, could produce in numbers sufficient to sustain the new “sustainable all-electric” economy. Amazon’s Jeff Bezos and Ford Motors are collaborating to put a fleet of 100,000 EV delivery bans on the road by the end of the decade.
Demand is piling up and the lithium-based transportation infrastructure is ready to gobble metals and minerals at a voracious rate unheard of in the “fossil fuel age”.
We mentioned that Elon’s Tesla mega-factory in China gave him a supply chain advantage since China controls an estimated 85%-90% of the world’s supply of more-precious-than-ever battery metals. If China doesn’t mine it themselves they process essential imported resources like cobalt, usually because the countries of origin want to avoid the human hazards involved with those toxic processes. For tasks such as these, China is the “dirty deeds done dirt cheap” solution.
So, in one way or another, Red China’s thumb is in every green pie around the globe, though the CCP is quick to thumb their noses at the world when it comes to conspicuous consumption of coal, concrete, huge carbon footprints, and most recently the LNG binge requiring US liquid natural gas to end their self-inflicted “green energy” crisis.
But the Evergrande debacle, with over $305 billion in debt and 2% of China’s GDP, is turning out to be one sour apple for China’s trading partners to swallow. Many are concerned that erratic Red China, even from their dominant market position, is not a mineral or manufacturing monopoly to be relied upon. So how dominant are they where essential minerals and metals are concerned?
According to Pini Althaus, the chief executive of USA Rare Earth
“China controls the processing of pretty much all the critical minerals, whether it’s rare earth, lithium, cobalt or graphite.”
China’s Domination in the Green Economy Supply Chain
- Of 136 lithium-ion battery plants in the global supply chain, 101 are based in China.
- Chinese chemical companies account for 80% of the world’s total output of raw materials for advanced batteries.- Benchmark Mineral Intelligence,
- China holds about 2/3 of the global supply of scarce metals and minerals like antimony and baryte. – Centre for Strategic and International Studies (CSIS).
But before any discussion about the dubious CCP economy, the perils it’s facing, and the consequences for industry around the world, it’s best to wrap our heads around the scale of consumption involved in an economy supporting a population of 1.4 billion as China now does.
Evergrande: A Supply-Side Surplus in China vs the 2021 US Demand For Single Family Housing
While that population growth rate in China is actually slowing to 5.4%, it seems to have had zero effect on the Chinese housing growth rate. China’s residential/apartment/condo boom makes the US single-family housing rush of 2021 pale in comparison. But our problem in the US deals with filling legitimate demand.
Not that those US demand-side challenges were easily overcome in 2021.
The US civil construction sector was already dealing with double-digit price increases and hyper volatility for construction materials across the board. Then manufacturers prioritized short supplies of raw materials to fill backlogs of residential rush orders while pausing manufacturing of the larger industrial components for civil and infrastructure projects such as PVC pipe and resins for paint.
In the US, the residential development sector is driven by demand for actual occupancy and speculation in starter homes, and the short supply is stretched to scant levels of available homes that we haven’t seen since the days of Richard Nixon.
(At Resource Erectors we are not kidding when we say we bring decades of industrial human resource experience to the table.)
Those are consumer-driven factors that are lacking in the strange growth bubble investment-driven market in China, where excess supply is the problem and entire ghost cities abound. Just the opposite of the US housing crunch.
“The [US] housing supply is now at its lowest level since the 1970s, due to millennial homeownership and other factors such as rising building prices and real estate speculators snapping up starter homes.” Housing Market Forecast 2021 & 2022: Crash or Boom Next?
Below are some bullet points about the economic picture in China from this informative article at Interesting Engineering to help put things into the proper market size scale.
- The amount of concrete used by the US in the entire 20th century is less than what China exhausted in just three years between 2010-2013.
- In China, 90% of the population are homeowners, and real estate is their primary household investment. Only 7% own stocks.
- About 3 million homes are built each year in Europe and the US, but China has been constructing more than 10 million residential units annually. The result is 65 million empty “investment” homes and 50 “ghost cities”.
As the Evergrande $305 billion debt plows the way downhill other debt-fueled corporations will follow. At least 100 other developers in China are facing similar debt problems, and all have networks of investors, contractors, and construction material suppliers who will take significant hits.
“Should Evergrande default, there may be contagion effects for other developers, home prices, and the economy. Evergrande’s cash flow troubles foreshadow what could go wrong for liquidity-challenged Chinese corporates.”
As if all of the above isn’t enough, Chinese Communist Party directives to reduce steel production to meet 2060 net zero climate change targets are already causing harm to Australia’s big miners. Rio Tinto plunged by 1.3% when the spot price of iron ore, Australia’s biggest export, was halved from $US200 a ton in late July to less than $US100 by the end of September. Iron ore group Fortescue Metals Group dropped 0.6 percent to $14.41.
So much for “contained controllable” risks courtesy of Red China going in the red. And Australia is just the first trading domino in line. Will US industry be next?
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