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Bull Market Excesses Hit the Chinese Copper Industry

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China’s copper industry

We explored a key reason behind the growth in the Chinese economy—government support. Because housing and infrastructure sectors are key drivers of economic growth, China made significant investments in this space. To support economic growth, the Chinese government built massive cities, now known as ghost cities.

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What are these ghost cities?

The images above illustrate China’s ghost cities. There are buildings and roads—but no people, a surprising phenomenon in a country of 1.4 billion people. Many of these cities were created to boost the local economies.

The real estate sector has a trickle-down effect on a country’s economy, benefiting the metals, cement, and construction industries. Because these industries have intensive employment needs, China was able to provide employment opportunities to its citizens through these infrastructure investments. A strong housing market benefits companies like Freeport-McMoRan (FCX), Glencore (GLNCY), Teck Resources (TCK), and Southern Copper (SCCO). Freeport currently forms 3.1% of the Materials Select Sector SPDR ETF (XLB).

Ghostly cause of concern

China’s ghost cities are covered with unoccupied buildings, which represents a kind of excess inventory in its main cities. The excess housing inventory puts pressure on the real estate market, and real estate prices in China have dropped over the last several quarters. The huge unsold inventory could be a possible reason behind this.

The Chinese real estate industry has slowed down considerably over the last few quarters. This slowdown has negatively impacted the demand for steel and copper. In the next article, we will discuss the latest indicators of the Chinese real estate industry.

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