Must-know: Why China’s real estate drives global steel markets

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China’s real estate market

We’ve seen previously how the Chinese government lent its support to the domestic steel industry. The Chinese real estate market also played its part in the steel consumption growth. China has historically enjoyed high savings rates, this—coupled with rising disposable incomes—made real estate a sought after asset class in China.

 

We’ll now look at various factors behind this growth in the Chinese real estate market.

Urbanization

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China has a population that’s almost four times the U.S. population. The population was largely based in villages until China opened up its economy in late the 1970s. China soon became an export powerhouse, manufacturing everything from toys to trains. This made a lot of people move away from villages to seek employment in upcoming industries.

The net result is that today, more than half of China’s population live in cities, compared to around 10% in 1949. There was a huge population that wanted to upgrade from substandard living, which they’d been living for ages. The rapid urbanization gave them this opportunity.

The per capita steel consumption in China soared as a result. You can verify this from the chart above.

Increase in per capita income

China has seen a rise in its per capita income over the years. The growth in the Chinese economy has meant more wealth to the Chinese people. The Chinese government has also developed private property laws over the past two decades. This created a lot of end user demand for real estate.

Please note that the construction sector is the biggest steel consumer globally. Almost half of the steel production goes into construction activity. This makes the construction sector a key segment for steel 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).

Along with this demand from end users, a lot of speculative money also found its way into real estate markets. The Chinese government has tightened the screws on speculation. We’ll now analyze the factors behind the current slowdown in the Chinese steel industry.

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