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China’s steel demand growth to slow as property policy tightens

Chinese president Xi Jinping’s mantra that “houses should be for living in, not for speculation” has been used to allude to the government’s policy to curb rising property prices for the past couple of years. Despite the cooling measures, steel demand in the property sector has shown resilience.

Construction activity in the property sector continued to be robust in the 2017-18 period. New builds did not decrease as expected, and instead grew by more than 10% year-on-year (yoy) in 2018.

“Steel demand from the property sector grew at 3.9% yoy in 2018 and has been the main contributor to the healthy growth in China’s steel market,” said Dr Ming He, Head of China Bulks, Wood Mackenzie.

At an economic meeting held by the Politburo of the Chinese Communist Party (CPC) on 31 July, China’s top policymakers stated for the first time that the property sector will not be used as a stimulus to boost economic growth.

The latest round of policy tightening restricts all financing sources to property developers, and mortgage loans to households. This will likely affect the resilience of the sector and reduce property market speculation.

He said, “The question is whether property developers can continue to build more homes for pre-sale as they did during the peak of the housing boom in 2017-18 period. We believe they can, but not on the same scale as two years ago.

“This is because housing prices will not increase as quickly as they did between 2016 and 2018, particularly in lower-tier cities.”

Housing prices moderated in July, with the number of cities showing month-on-month increases slowing for a second month in a row. Without price increase expectations, speculative property buying will be reduced.

In addition, the slum redevelopment project will near its end in 2020, and the share of cash paid to relocated residents is decreasing. Consequently, housing prices in third- and fourth-tier cities should stop rising. Wood Mackenzie believes the property market will experience some challenging times in the next couple of years.

Incremental property demand is also slowing. On average, each Chinese household owns about 1.08 homes, indicating the country’s existing housing stock is surplus to demand. And with floor space per capita already at a level comparable with other Asian countries, the need for incremental floor space in China will not increase any further. In fact, demand will start to decline.

He said: “As a result, we forecast steel demand in the property sector to slow to 2.9% yoy growth in 2019, and reaching 1.1% in 2020, before entering negative growth territory after 2020.

“The expected lower urbanisation rate (less than 1%) and demographic changes – larger elderly population and a lower birth rate – will result in property demand – and thus steel demand – slowing after 2020.

“As property steel demand accounts for more than one-third of China’s total steel demand, its slowdown will have a huge impact on crude steel production and iron ore and coking coal demand in the longer term.”
Source: Wood Mackenzie

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