Despite government easing, China’s construction levels still weak

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Nov. 27 2019, Updated 5:09 p.m. ET

Why tracking construction is important 

About 98% of all iron ore mined finds its way into steel production. And, construction accounts for 50% of all steel consumed. So, to understand iron ore demand trends, it’s important to track construction activity, particularly China’s construction activity.

Real estate sales

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Ninth consecutive fall in building sales

The above chart shows that year-over-year sales of buildings in China fell for nine months in a row. Meanwhile, the rate of the decline slowed considerably compared to last month. Sales fell by 0.83% in October as compared to 8.9% in September.

These data are released on a monthly basis by the National Bureau of Statistics.

Housing prices down for the sixth consecutive month

Housing prices are an important gauge for understanding the direction of residential real estate activity in an economy. In China, housing prices fell for the sixth consecutive month in October as they declined 2.6% year-over-year. This is despite easing government restrictions in the property market.

The China Real Estate Index System survey provides these data on a monthly basis, based on a survey of 100 Chinese cities.

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Home sales slide moderated

In October, housing sales totaled 585.9 million Chinese yuan, down 3.1% from a year earlier, but better than the 10.3% decline recorded in September. For the first ten months of the year, housing sales fell 9.9% to 4.64 trillion Chinese yuan, according to the data released by National Bureau of Statistics. Sales were 4.05 trillion Chinese yuan in first nine months of the year, down 10.8% from a year earlier.

Construction indicators and steel and iron ore demand

Building, home sales, and housing prices indicate that construction activity in China remains weak, despite government easing efforts. But government efforts may still show results, after a time. As a result, a few more months’ worth of data are needed to get a clear sense of the trend.

Analysts suggest that property market weakness remains the single biggest risk facing the Chinese economy. The fallout is seen in the construction and steel industries. Similarly, it’s reflected in the price of iron ore and iron ore stocks including those of Rio Tinto plc (RIO), BHP Billiton Limited (BHP), Vale SA (VALE), and Cliffs Natural Resources Inc. (CLF), as well as funds investing in iron ore stocks such as the SPDR S&P Metals and Mining ETF (XME).

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