Due to its potential impact on several basic materials, I've been following China's (FXI) residential real estate market for a while (the previous update can be found here). Today the National Bureau of Statistics of China published a report titled "National Real Estate Development and Sales in the First Four Months," which will form the basis of this update.
My basic thesis is that China's residential construction market is now undergoing a significant reduction in activity, and will thus consume a lot less construction materials, leading to volume stagnation/reduction and price plunges for those materials around the world. This thesis was initially predicated on the fact that real estate prices in China were already falling, and thus it is expected that activity would soon follow, as is our experience from past real estate booms around the world showed. Right now, not only are prices still falling, but sales are also quickly retrenching and even starts are already going down.
What we're seeing in the data
At this point, January-April sales of residential real estate are falling 14.9% year-on-year. This is a slight improvement from -15.5% the month before, although it's probably helped by seasonality (the same absolute level of decrease in activity will show up as a smaller drop in percentage terms when compared to the greater sales volume that occurs in seasonally favorable periods).
Starts are now showing a deeper contraction, down -7.9% year-on-year for the January-April period, versus -5.2% on January-March. This is a significant acceleration, given that three of the four months were already considered in the previous period. This is also within expectations, as starts finally contract, soon construction activity itself will show contraction.
Finally, also significant is the plunge in land being bought for construction. This is now falling at a -19.3% rate year-on-year versus -3.9% in the previous observation period. This clearly shows that the construction industry itself is already retrenching and expecting lowered activity.
The main thesis that residential construction will see reduced activity remains on track. The main development was the accelerated drop in starts, as well as the plunge in land being bought for construction. The reduced construction activity will lead to a lower need for a number of basic materials in China. Some of these materials have worldwide markets, which will thus see lower demand and significantly lower prices and margins - such is the case of copper, iron ore, steel and aluminum and probably other construction materials (some of them, like cement, are mostly traded locally).
The stagnated/lower volumes and lower pricing will impact margins of many basic materials' suppliers. Some sectors and stocks that might continue to be affected are:
Rio Tinto (RIO), around 45% of RIO's 2011 revenues and 70% of its EBITDA was attributed to iron ore. Aluminum and copper are also significant.
VALE S.A. (VALE), around 72.5% of VALE's 2011 revenues came from iron ore.
BHP Billiton (BHP), almost 50% of BHP's EBIT is from iron ore (at a 65% EBIT margin - higher than any other product including petroleum).
Freeport-McMoran (FCX), 78% of FCX's 2011 revenues came from copper.
The impact should be substantial on cement producers. However cement is mostly a local market so only local producers should be affected. I am unaware of any U.S. quoted Chinese cement producers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.