By Gui Xiong Teo, CFA
While weakness in the China’s property sector may hurt the metals and mining market, the impact may vary by commodity.
China’s residential property market is currently experiencing a significant downturn that has far-reaching implications for the global metals market. This stems from the considerable role the sector plays in worldwide metal demand, of which it accounts for about 10 – 20%. A contraction in China’s residential sales over recent years has precipitated a steep decline in housing starts.
Housing starts are crucial to the metals sector because they represent the start of new construction projects that require large quantities of building materials, such as steel and cement. The completion of these projects also requires the use of ancillary goods such as white goods, electrical wiring and fixtures. This leads to the consumption of base metals such as copper, aluminum and zinc.
In our view, the trend of falling starts and sales indicates an impending contraction of construction activity over the next few years. While physical demand for commodities has remained relatively resilient due to the government’s prioritization of sold project deliveries, the risk of a demand cliff is evident as sales continue to be weak.
If there is no offsetting demand to counter the structural decline in demand from residential construction, we expect China’s annual steel demand to contract up to 12% by 2025.
This downward trend could push China to either curtail steel capacity or increase steel exports. The former implies a global decrease in steel supply, while the latter could depress margins for global steel producers due to a surge in Chinese steel exports. Either scenario would have a negative impact on iron ore prices, as China accounts for over 73% of the commodity’s seaborne trade.
That said, we have a more optimistic outlook for base metals, particularly copper and aluminum. Despite the property downturn, we anticipate growth in the demand for these metals, driven by investments in technology and new energy infrastructure. The Chinese government also appears more inclined to stimulate growth in these sectors to counterbalance the economic drag from weak construction activity.
As a result, we project steady growth in demand for copper and relatively flat demand for aluminum. From a supply perspective, structural underinvestment in new copper mines and aluminum smelters could mitigate some of the downside impact of weaker Chinese demand over the next few years.
In conclusion, while the downturn in China’s property market will likely hurt the metals and mining market in the near term, the impact may vary across metals. In our view, investors should consider these factors when making portfolio decisions, potentially favoring base metals over steel and iron ore.
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