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How property giant Evergrande's fallout can hit metal prices, explained

market | IST

How property giant Evergrande's fallout can hit metal prices, explained


Shares of Evergrande on Monday plunged as much as 19 percent to their lowest in over 11 years, extending losses as investors take a dim view of its business prospects with a fast-approaching deadline for payment obligations this week.

Shares of Evergrande on Monday plunged to over 11-year lows, extending losses as executives try to salvage its business prospects and as default fears grow over a looming deadline for payment obligations this week.

Evergrande has been scrambling to raise funds to pay its many lenders, suppliers and investors, with regulators warning that it's $305 billion of liabilities could spark broader risks to the country's financial system if not stabilised.
Last week Chinese authorities told banks to not expect interest payments due this week on their loans to Evergrande. With Evergrande being the second-largest property developer in China, the question is whether a default could lead to contagion.

Impact on global markets so far
There has been no worldwide contagion due to Evergrande; equities and high yields in the US are reacting slightly in the anticipating of the Federal Reserve's meeting this week. Even Chinese assets have been quite steady. On the macro front, the Chinese yuan has been stable as well.
Can Evergrande hit China's property market?
China's real estate market (including home furnishings) is about 30 percent of its GDP. The sector makes 27 percent of total currency loans, yuan loans in China. Land sales make around 40 percent of revenues as per local Chinese government authorities. So it is pretty big stuff.
The assets of the Evergrande are nearly equal to about 2 percent of China's GDP, loans are about $300 billion, there are 200 offshore and 2,000 onshore subsidiaries. And Evergrande's property sales make up for around 4 percent of China's total property sales. It also employs over 1.2 lakh people and some 38 lakh contractors. Chinese property markets have already been slowing down.

If the slowdown in the China construction and property market is sustained, it's here to stay for a while. And it will most definitely hit demand for metals. The property construction space in China is a huge consumer of metals.
However, it is a big ‘if’.
“Yes, there could be a contagion, there could certainly be a slowdown as far as to demand picture across many of the metals. So there really is the concern,” Peter McGuire, CEO of XM Australia said.
And if the government bails the company then that is not a big feat either. Evergrande's business model (consisting of everything from electric cars to theme parks) is a very big one, McGuire said.
He added, “Yes, I wouldn't be surprised to take a little bit of heat out of markets. That really creates I think, a lot of fear into the markets and that is the issue, investor sentiment. So that is got to be contained or you are going to see further sell-offs and I think the fragility across a lot of the emerging markets and it could certainly roll into India.”
Watch the accompanying video to understand the impact on metals
Text inputs from Reuters

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