Daily Update: July 29, 2022

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The Deeper Meaning Behind China’s Steel Numbers

In the first half of 2022, China’s steel exports fell 8.7% on the year, according to S&P Global Commodity Insights. Meanwhile, steel imports into China are down 65.2% on the year and Chinese steel production is believed to be down 2-3% for the year. In other words, China is making less steel, selling less steel, and buying less steel. These numbers begin to take on a deeper meaning when considering that China is the world’s leading producer and consumer of steel. 

The most straightforward explanation for the dip in steel production and consumption is the lockdowns and supply disruptions that resulted from China’s zero-COVID policy in the face of the new, more-contagious variants. S&P Global Commodity Insights reports that domestic demand in China remains sluggish and consumer confidence has fallen. Chinese government authorities have responded with increased fiscal support in the form of tax rebates and new infrastructure spending. Certainly, this has played a part. Steel demand is down because all demand is down.

China’s massive appetite for steel has historically been driven by the property sector. New property development in China has been on a downward trend for the past few years and is expected to remain so in 2022. Unquestionably, there were warning signals about the problems in the Chinese property sector. 

According to S&P Global Ratings, there has been a liquidity crunch for over-leveraged property developers in China this year. A liquidity crunch in the property sector has knock-on effects elsewhere in the Chinese economy, for example in asset-backed securities (ABS).

“Over the past few years, property developers have been among the companies that have acted as sponsors for transactions such as supply chain-related deals (e.g., exchange-listed ABS and asset-backed notes) to better manage their working capital,” S&P Global Ratings wrote in a recent outlook. “This broad corporate risk-related ABS sector has been hindered by strained property developers since last year.”

Another warning sign is the mortgage strike spreading across China. Homebuyers have withheld payments on their mortgages across hundreds of residential projects in China. Because property developers in China tend to sell residential properties before development has been completed, the mortgage strike has meant that some developers don't have the funds to complete the homes.

The main driver of China’s property development and steel consumption over the past 20 years has been urbanization. The rapid urbanization and industrialization of China was responsible for much of the global GDP growth over that period. According to S&P Global Commodity Insights, 64% of the Chinese population moved to urban areas by 2020. But urbanization typically slows down and becomes less steel intensive after the rate reaches 60%.

China’s falling steel consumption and production may have profound implications for regional and global growth in the years ahead. It’s never just about steel.

Today is Friday, July 29, 2022, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

Updated U.S. Transportation Infrastructure Activity Estimates Show Air Travel Normalizing And It’s A Long Road Back For Transit Operators

The U.S. enjoyed its party last year, but now it's feeling the pain. After GDP expanded at an average rate of 5.7% in the past year—its highest in 37 years—economic activity has slowed considerably. A disturbing 1.6% drop in first-quarter GDP stemmed from weakness in trade and inventories, though domestic activity was healthy. However, high prices and interest rates have hurt affordability and since slowed domestic activity through June.

—Read the report from S&P Global Ratings

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Capital Markets

Glencore's Share Price Outperforms Peers As It Bucks Coal Divestment Trend

Glencore PLC's decision to add coal assets even as other large miners ditched the emissions-intensive fuel has been paying off. The diversified mining company's stock price rose 128.3% over the two-year period ended July 27, in part thanks to renewed global demand for coal. Meanwhile, two of the other large diversified miners recorded decreased share prices, with BHP Group Ltd. slipping by 0.5% and Rio Tinto Group decreasing by 7.7%.

—Read the article from S&P Global Market Intelligence

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Global Trade

Once An OPEC Quota Buster, Iraq Struggles To Raise Oil Output Due To Port Limitations

Iraq's crude oil production has stagnated in recent months, despite a rising quota under the OPEC+ accord, largely constrained by its inability to export more volumes through its southern port on the Persian Gulf. Near-term prospects for increasing loading volumes at its aging Gulf terminal facilities at Basrah are dim, Iraqi officials acknowledge, preventing any meaningful gains in production that would allow the cash-strapped country to benefit from high oil prices. And the degraded pipelines connecting the terminal to loading jetties are a major risk for a catastrophic environmental disaster.

—Read the article from S&P Global Commodity Insights

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ESG

The Number Challenge: Quantifying Material Climate Risk In TCFD Reporting

The Task Force on Climate-related Financial Disclosures has been a game changer for corporations. The task force, created in 2015 at the behest of the G-20 countries, sets clear guidelines on climate risk disclosure for companies. It also helps to steer financial markets in pricing assets’ value and thus allocate capital accordingly.

—Read the article from S&P Global Sustainable1

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Energy & Commodities

Middle East May Become Leader In Global Carbon Capture

The Middle East could become the world's leading region to capture carbon dioxide for future use in enhanced oil recovery or for storage, with Mitsubishi Heavy Industries Ltd. (MHI) forecasting the market in the region at 50 million mt/year in a decade, led by steps now being taken by the UAE and Saudi Arabia, along with an unusual project now starting in Bahrain.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Listen: Next In Tech | Episode 75: Decentralized Finance: Managing Risk As Markets Mature

With the upheaval taking place in the cryptocurrency markets, there’s a lot of confusion about the realities of DeFi. Charles Jansen, head of DeFi Transformation for S&P Global Ratings, joins host Eric Hanselman to focus on the distance between the two and look at innovations aiming to manage risk as the industry matures. DeFi capabilities can speed transactions while reducing cost and are already finding their way into payments channels.

—Listen and subscribe to Next in Tech, a podcast from S&P Global Market Intelligence

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