Why Metals Will Shrug Off History’s Greatest Property Crash

It’s not just bondholders impacted. China’s construction sector accounts for nearly 7% of the world’s carbon emissions, and its hunger for material affects renewables, too.

David Fickling

19 Mar 2024, 08:05 AM IST

It’s all boom and bust.

(Bloomberg Opinion) -- A curious thing has been happening in China’s vast real estate market — or rather, not happening.

For two years, a financial crisis has rocked developers China Evergrande Group, Country Garden Holdings Co., and China Vanke Co. along with their roughly $700 billion in assets. Building activity, however, has until recently been holding up remarkably well.

That’s surprising. In the US, home completions — the amount of residential property getting finished off for sale to buyers — fell by about half in the two years after the housing market peaked in 2006. They continued to collapse to roughly a quarter of their maximum level by 2011.

Why Metals Will Shrug Off History’s Greatest Property Crash

Things have been very different in China. Two years after the market started to crack in 2021, completions last year were down less than 1% from their peak. The real estate crash showed up everywhere except the real estate data.

The implications of this don’t just matter for buyers of property-developer bonds. China’s construction sector accounts for nearly 7% of the world’s carbon emissions. Its hunger for metal is so voracious that plans for mining the materials needed for the energy transition stand or fall on whether the current real estate crash will allow millions of metric tons of copper, aluminum and nickel to be diverted from apartment fittings toward solar panels, electric cars and wind farms.

China’s housing data is so contradictory that it confounds even experts, who typically end up choosing which inadequate indicator to rely on and which others to discard. If you’re thinking about commodities and emissions, however, it’s worth considering that a developer can go broke without its laborers downing tools. Construction work may even accelerate if a company or its administrators seek to finish off work so that sales can be completed and cash released.

To understand what’s been happening, it’s worth considering the way housing gets built.

When excavators first break ground on a building site, it’s recorded by China’s National Bureau of Statistics as a housing start. Next cement is poured and steel reinforcement bars and beams are used to build the foundations and structure of an apartment block, a process that takes the better part of a year. Finally copper wiring, glass windows and aluminum framing are added, at which point a housing completion is recorded. Sales can occur at any point of this process, and even before ground-breaking or after a building is finished.

It’s common to assume that housing starts and sales are the best measure of activity in China. But in recent years, it is housing completions that appear to be tracking more closely to commodities demand.

Home sales and starts trace a boom-and-bust pattern that’s far more dramatic than we see in cement output, which has declined modestly since peaking in 2014 and resembles the steady pace of home completions. Production of steel, copper, aluminum and glass, buoyed by manufacturing demand, has increased, even as the real estate market crashed.

This disconnect makes most sense if you look at sales and starts as a measure of speculative froth in the market, and take completions as the better yardstick for construction activity. Very little building work needs to take place to record a housing start, and none to record a sale. For a Chinese household starved of good investment options, buying an unbuilt apartment in a rising market had more in common with opening a long-term deposit account than purchasing a home — one reason that Beijing has spent so long insisting that homes are for living in, not investment. Only when a completion is recorded can we be sure that a house has actually been built.

That would suggest that the current real estate crash might have a much smaller climate impact than you would expect. Measured in terms of sales and starts, China’s real estate sector is grossly overbuilt. Since 2013 alone, the country has sold 14.3 billion square meters of homes, enough to house nearly a third of the population in generous new 90-square meter apartments.(1)It’s hard to believe that house prices would have doubled (as they did over the past decade) if those figures are right. The 7.9 billion square meters of completed homes seem far more plausible.

If that’s the case, building activity might be able to keep going at current levels for some time yet. Cities are still adding people at a rate of about 12 million a year, requiring about 480 million square meters of new buildings annually. Add in the roughly 200 million square meters that’s needed to renovate shanty-like “urban villages” — a major policy push from the central government since last year — and pretty conservative assumptions about China’s ongoing urbanization suggest that fundamental demand may not be much less than the 724 million square meters of floor space completed last year.

Right now, the market is betting the real estate crash can only spread. Iron ore prices in Dalian are down 18% since the start of February, and steel in Shanghai has slumped 10%. Even completions seem shaky, with January-February data released Monday the weakest since 2011, excepting the pandemic year of 2020.

That could be underestimating how the market will pick up when the seasonal industrial upswing kicks in over the next few months. The climate won’t get an easy win this year from subdued Chinese construction activity — and copper miners can’t count on a slump in real estate demand to supply the metal that solar panels and electric vehicles will need this decade. China’s voracious economic machine will keep chomping metal for years to come.