Why China’s slowdown in real estate affects US steel investors

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A slowdown in the Chinese real estate market

Until now, we’ve seen China’s dominant role in the global steel market. China consumes half of the global steel, with its construction industry being the largest consumer. The Chinese construction industry consumes a quarter of global steel.

A slowdown in this key industry spelled doom for steelmakers globally. This has led to excess capacities in China and elsewhere. The excess capacity has led to fierce competition among steel companies and is a key reason behind the fall in steel prices. We’ll discuss this in greater detail going forward.

 

Increasing supply and falling demand

Up to May of this year, the residential floor space sold had declined 9%. But the floor space for sale increased 25%. A decline in sales with an increase in supply isn’t positive for the real estate sector.

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The Chinese real estate climate index has been falling. You can see this trend in the chart above. This—along with Chinese PMI (or Purchasing Managers Index), interest rates, and industrial activity—is an indicator investors in companies like ArcelorMittal (MT), United States Steel (X), AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD) and ETFs like the SPDR S&P Metals and Mining ETF (XME) should look at.

While a lot of real estate demand was from end buyers, there was a lot of demand from investors also. The slowdown in markets and the fall in real estate prices has driven away a lot of investors and speculators from the markets.

Investors in emerging markets like China and India have an affinity for real assets like property and gold. As the investment demand slowed, the Chinese real estate market tanked.

In the next part, we’ll look at the factors that led to this slowdown in the Chinese real estate market.

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