The Ghost Cities Finally Died: For China's Steel Industry "The Outlook Is The Worst Ever Amid Unprecedented Losses"

Tyler Durden's picture

It's almost difficult to believe, but just 8 years ago, in 2007 and right before the world was swept in the worst financial crisis in history, China had only $7.4 trillion in debt, or 158% in consolidated debt/GDP. Since then this debt has risen to over $30 trillion (specifically $28.2 trillion as of Q2, 2014) representing a staggering 300% debt/GDP.

Here is the summary breakdown from McKinsey.

This means that China was responsible for more than a third of all the $57 trillion debt created since 2007, making a mockery of the QE unleashed by all the DM central banks - something we first noted about two years before the famous McKinsey report went to print.

However, it was precisely this credit expansion that not only allowed China to completely ignore the global depression of 2008/2009 but to build lots and lots of ghost cities such as these.

 

 

To be sure, many noticed but everyone kept quiet: after all, to build these cities China not only had to create trillions in debt, it had to import a hundreds of billions worth of commodities form places such as Brazil and Australia.

Then, in the late summer and fall of 2014 something happened: for whatever reason, as we noticed one year ago, the most unregulated aspect of China's financial system, its shadow banks, not only stopped lending money but actually went into reverse, thus putting a lid on China's Total Social Financing expansion, which had been the world's "under the radar" growth dynamo for so many years.

At that moment not only did China's ghost cities officially die, but it meant an imminent collapse for China's feeder commodity economies such as the abovementioned China and Brazil.

In the US this phenomenon was given a very simpler name by the brilliant economists: "snow."

And since China's domestic demand, not only from "ghost cities" but all other fixed investment was a function of pervasive credit, suddenly China's commodity industry in general, and steel industry in particular, entered a state of shocked stasis.

To get a sense of how bad it is, look no further than China's steel industry. It is here that, as Bloomberg reports, "demand is collapsing along with prices," and "banks are tightening lending and losses are stacking up, the deputy head of the China Iron & Steel Association said on Wednesday."

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”

Meet the deflationary commodity cycle in all its glory:

China’s mills -- which produce about half of worldwide output -- are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.

 

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Actually no, it has nothing to do with China's fabricated economic growth and it was everything to do with the unbridled credit expansion that amounted to over $3 trillion per year. That credit expansion, which has not yet been halted, is no longer making its way to the sectors in the economy, such as the abovementioned steel mills, that need it most.

As we reported a month ago, at current commodity prices, over half the debtors in China's commodity space are generating so little cash, they can't even cover their interest payment. They are, therefore, utterly insolvent, and the broader Chinese bond market is well aware of this - this is the reason why suddenly credit funding has collapsed.

But wait, it gets worse: because if the PBOC had made interest rates not artificially low (yesterday China's 10 Year bond was yielding just about 3%), eventually demand would appear, however nobody wants to lend these companies at rates approaching those suggested by the market.

"Financing remains an acute problem as banks strictly restricted lending to the steel sector,” Zhu Jimin said. “Many mills found their loans difficult to extend or were asked to pay higher interest."

And yet in an environment of plunging interest, nobody wants to be seen as paying a huge premium above market: such an admission of defeat would be quickly perceived as a signal of an imminent default.

And this is how China's steel (and commodity in general) sector has suddenly found itself paralyzed without access to funding, and with collapsing end demand. As a result its only option is to do more of what got it there in the first place: produce ever more in hopes of offsetting tumbling prices with surging volume, thus accelerating the deflationary spiral that much more until ultimatly steel may be literally handed away for free.

For now, however, China's steel mills are praying this inevitably outcome can be somehow avoided.

Medium- and large-sized mills incurred losses of 28.1 billion yuan ($4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent in September on-year, it said.

 

Signs of corporate difficulties are mounting. Producer Angang Steel Co. warned this month it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. The company’s Hong Kong stock has lost more than half its value this year. Last week, Sinosteel Co., a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.

 

Crude steel output in the country fell 2.1 percent to 608.9 million tons in the first nine months of this year, while exports jumped 27 percent to 83.1 million tons, official data show. Steel rebar futures in Shanghai sank to a record on Wednesday as local iron ore prices fell to a three-month low.

The conclusion, even though from Bloomberg, is quite terrifying: "China’s mills face some of their worst conditions ever and the vast majority are losing money, Citigroup Inc. said in September. The outlook is the worst ever amid unprecedented losses, Macquarie Group Ltd. said this month."

China’s steel production may contract by a fifth should the country’s path follow the Europe, the U.S. and Japan, Shanghai Baosteel Group Chairman Xu Lejiang told reporters in Shanghai last week. The company is China’s second-largest mill by output."

Considering China's version of Glencore "Sinosteel" effectively went insolvent one week ago (followed by what may or may not have been a government bailout), the fallout is just starting.

The cherry on top is that China itself is now trapped: it simply can't afford to let anyone default, as one bankruptcy would cascade across the entire bond market and wipe out countless corporations leaving millions of angry Chinese workers unemployed, and is therefore forced to keep bailing out insolvent companies over and over. By doing so, it is adding even more deflationary capacity and even more production into the market, which leads to even lower prices, and even greater bailouts!

In short: this is a deflationary toxic spiral, because while that $30 trillion in inflationary debt led to easy growth and much wealth and prosperity on the way up when prices were soaring and monetary transmission mechanisms were not clogged up, now that China has hit hit a 300% debt/GDP and the direction of the arrow is in reverse, all the growth and all the expansion of the past 7 years will be promptly unwound as mean reversion demands payment.

But perhaps most importantly, as we first reported last week citing BofA's David Cui, we now have an ETA when this whole Chinese debt house of cards, some $30 trillion of it, bursts with consequences that will be so devastating not only China but the entire world, as the one catalyst that pulled the Developed Markets out of depression will be, poetically enough, the same one that pushed it right back in.

On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default.

Finally for those who would rather frontrun this runaway train when it slides off the tracks, here - again - is a list of the Chinese bonds that will almost surely default first.

 

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lazysunday's picture

But China is playing the loooooong game. Those cities were suppose to fill up and all those condo's were going to make the purchasers rich.

Funny how there most important asset now is the UST! and we all know that is worthless too...

Boris Alatovkrap's picture

There is alway a risk for central planning. Sometime centralized authority is get it right, but most time, is get wrong.

http://twitter.com/BorisAlatovkrap

NoDebt's picture

And yet the US aspires to China's "miracle" of centralized control while simultaneously copying Europe's socialist welfare state.  The best of both worlds.

TBT or not TBT's picture

Bernie enthusiasts want that.  The "US" is hopefully going to laugh him off.  

NoDebt's picture

Bernie isn't going to win but the seeds of socialism have clearly taken root.  It will only grow from here out.

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) NoDebt Oct 29, 2015 9:24 PM

I down voted you because I hope against hope you are wrong and I am willing to fight.

Motasaurus's picture

Let me get this straight. For all their debt, China got several thousand turn-key, state of the art, settlement ready cities all around their country, and indeed the world, and for all our debt we got Detroit.

And I'm supposed to believe that they're the idiots? 

Four chan's picture

all made with chineese steel and dry wall. so yeah idiots. all to keep the slave hands moving.

Fish Gone Bad's picture

Unprecedented seems like such a harsh word.  Yet "fucking huge" seems even harsher.  Unprecedented it is then.

Dubaibanker's picture

The largest steel company in the world which was Arcelor Mittal has shut plants around the world and it's stock price has plunged from USD 100 to USD 5.00. 

https://www.google.com/finance?q=NYSE%3AMT&ei=NfsyVuCnEojPUaDXtogE

In addition, other largest ones being Tata Steel, POSCO, Capara etc have been closing plants or shedding staff or restructuring debt which is runing into billions of dollars for the better of the last decade but nothing on ZH except China.....Don't largest plants matter?

China steel companies too are suffering amid a global steel glut but their bond sizes are USD 158m each which is peanuts compared to the largest steel giants on the planet.

US Steel share price has plunged frm USD 182 to USD 11.00, a drop of only 94%....https://www.google.com/finance?q=NYSE%3AX&ei=OfsyVoHHEtfCU-v3nvAC

To know how many Steel plants closed or job cuts in steel plants have happened OUTSIDE of China, do see this: list steel plants closed

Steel is a global problem due to massive demand destruction whose collapse is done because of this:

Job cuts in ALL sectors --> Demand destruction of basic goods and services --> Lack of demand of housing and malls and roads and bad debts for Govts --> Low demand for all commodities including steel.

Rusty Shorts's picture
The story of EbolaArcelorMittal in Liberia 

 

https://www.youtube.com/watch?v=9rjsAiPPZfc

 

LAMCO MINING in Liberia 1969 - 1974

 

https://www.youtube.com/watch?v=9rjsAiPPZfc

CheapBastard's picture

DB is correct. It shows in retial also which is taking a bloodbath right now all over the world. As demand plunges the flood of inventories pile up in the aisles and in the back rooms. Stores have put out their holiday decorations long ago since they have no place to store them until Christmas plus each store wants to get the jump on those few consumer dollars out there.

Theosebes Goodfellow's picture

~"In addition, other largest ones being Tata Steel, POSCO, Capara etc have been closing plants or shedding staff or restructuring debt which is runing into billions of dollars for the better of the last decade but nothing on ZH except China.....Don't largest plants matter?"~

Of course they matter. But they are not in countries with a $28.2 TRILLION dollar deficit. Personally I didn't realize that Chinese debt was that high. Screw, I thought we here in the USA were spendthifts at $18 TRILLION.  We're pikers at this. Of course, we aren't cooking the books in the valuation of our currecy department like the Chinese. If the yuan were freely traded, just how bad would their debt really be?

Breaker, breaker, that's a big ten-YIKES!!!, good buddy.

laomei's picture

not drywall, no. concrete and steel. but the concrete is generally rather shit quality and they cheat on the steel usage.  it's built well enough for them to stand, but most of it has a life of 30 years tops.

NoPension's picture

A pretty building does not make a city.

Cities need the hidden infrastructure to work, or they are USELESS !

Water. Wastewater. Electricity generation. Schools. Roads and maintenance.
I don't see it. And.......it fails if it sits idle. Entropy. All systems, and a building or a city is a system, require input of energy and maintenance to survive.
These buildings, just because they are new and vacant, do not remain in a state of new, or preservation, awaiting occupants. They deteriorate. They rust. They mold and mildew, especially if not heated or cooled. Lube in motors drips away. Shafts get rusty and seize. Gaskets deteriorate. A/C and heating systems are not designed to be installed and sit idle for years.

Want an analogy?
Park a car in the garage, without prep for long term storage, and then pull it out in five or seven years and attempt to drive it. If it starts, ( it won't) it would be a death trap until the the tires, bearings, engine, etc., are serviced.

And my question has always been.... Did they even build the infrastructure ( water, wastewater, power generation) required for these cities? I doubt it. Those systems definitely are not made to sit idle or underutilized.

These are piles of potential recyclable materials. Pretty piles, but that's it.

EddieLomax's picture

Yep, the ghost cities illustrate a classic example of socialist thinking, one that just cannot see the costs because everything is an "investment".

Every investment in a new road, bridge, hospital, school, apartment block adds a burden of maintenance to the system, without any real use all these "investments" have a guaranteed negative return each and every year, and on top of that you can kiss your capital goodbye.

Our political systems are riven with this sort of thinking and our media are so packed full of wannabee politicians, eager to influence the electorate and desperate to push their political agenda they don't question it, perfect fodder for the sheeple who are apparently unable to think for themselves.  In the UK it was Teflon Tony who first started mis-using the whole "investment" phrase, followed by crash Gordon that lead the world in QE madness to try and keep the farce going.

tarsubil's picture

"Lube in motors drips away. Shafts get rusty and seize. Gaskets deteriorate."

That's what she said.

tarsubil's picture

Those aren't seeds. Those are phage plaques.

pods's picture

"This Twinkie represents the normal amount of fuckedupness in an economy. From this morning's sample, the amount of fuckedupness in China's economy is a Twinkie approximately 35 feet long and weighing 600 lbs."

"That's a big Twinkie."

Fish Gone Bad's picture

That Twinkie would be Unprecedented.

ILoveDebt's picture

Honestly, if you think about it... a civil minded genious that was a savant at central planning would almost certainly be a boon to the USA... at least with the current legislative structure.  The problem is those people don't run and no one likes them.  Long term, they are bad, but freedom requires anarchy and we aren't ready for that either.  so we get mediocre control freaks instead.  

ZerOhead's picture

Now here's a situation where Donald Trump would simply negotiate a deal where Europe pays the Chinese to take the Syrian refugee nightmare off their hands and stuff them into their ghost cities until things settle down and ISIS clears out to Tajikistan (border of China... don't worry you'll be hearing about it soon).

Of course The Donald would also be wise enough to negotiate extremely favorable lease options on all of the empty buildings first...

Freddie's picture

This shit really is mind boggling.  This giant condos and other buildings have to start to decay after a few years.  Are they running any A/C to keep the moisture out o fthe interior?

Big condos like that require a lot of maint.

new game's picture

kept black haired sheeple busy with hope and change, whilst the masses got tidbits. but now the piper cometh, but not before the iron fist strikes(again)...

DisasterCapitalist's picture

I was in China recently...this buildings do not appear to be powered up. In many cases there are no windows on these buildings either. My gf was amazed by the empty buildings everywhere. Gotta say though, they have bullet trains, and the US likely never will.

california chrome's picture

Chinese not Americans are buildng a bullet train from San Diego through the OC and LA to Las Vegas.

Was thinking the same as another poster above that the muslim rapists in Europe should be sent to these Chinese ghost towns.

laomei's picture

I was on the same side of the fence as you on the bullet trains issue, but here's reality.

HSR made *some* sense in China.  The rail is nationalized, passenger is subsidized by frieght and by getting passenger onto its own tracks they were able to increase frieght capacity.  HSR development provided a lot of jobs when jobs were needed and it's a fixture of national pride.

 

You have high rail volume anyways, might as well speed it up and modernize it.  The highway system is not mature enough, airports are overcrowded.  Population densities ensure that trains won't be empty.  They could definitely make it more efficient if they followed a EU model of competing companies and variable ticket prices, but whatever.

 

In the US... our highway system is rather good, we like to drive.  You basically MUST have a car in the US or you are proper fucked anyways.  The make HSR work it would either have to be very expensive or all rail would have to be nationalized... or it would be a giant money hole constantly attacked.  The population densities don't support it either.  By the time you create a network of points A and B, to get the land rights you'll have to make deals to detour to C, D, E, F, G, H, I, J, K, L, and M.  None of those points will add value, but you'll be forced to build those stations for the 50 people a year who will take the train from there anyways.

 

And in the end, it costs an amount that makes flying cheaper.  Flying in the US is indeed a fucking pain in the ass, but look at the figures.

Assume a 200mph average speed system.   Anything over ~4 hours is better to fly from personal experience.  So, we're talking a train range of ~800 miles.

The stations must be located in the heart of the city or have mass transit options to link them.  It's a HUGE investment, one that probably wouldn't pay off, and in the end, americans have cars, like driving and we enjoy roadtrips.  

China isn't a "roadtrip" nation.  You dont have interesting shit along the way.  It's just overcrowded farmland, corrupt cops, scammers and roads that should exist by don't.  It's not quaint, it's not fun, it's rather hellish and generally your traveling will be when the rest of the nation is doing it as well.  The road fees are also expensive, as is the gas.

 

Would HSR in the US be nice? Sure, but it'll never get done, not where it could be useful.  At best you end up with an open square going chicago to new york to miami to houston.  west coast is cut off entirely and your point AB distances are rather bad.  To fill in the network and make it competitive you end up building lines where there is not enough demand.

 

Furthermore, the city-boom is going to go bust soon enough.  Millennials are putting off having kids due to the economy, but that won't last forever.  They are rushing to the cities now, but once they have kids, they realize it's not the place to raise them.  Densities drop more, and it makes things like HSR less feasible.

 

HSR works in china because china is all about high density blobs of humanity living in high-rise prisons with poor planning.  It works in the EU because of great services.  It works in Japan because Japan is rather small and it allows for long distance commutes into city centers.  For it to work in the US, there would have to be a massive infrastructure overhaul and regulations suspended to speed up completion times.

CapnJackDaniel's picture

Genuine question Boris, Materially, what would happen if China declared all these debts, everywhere in the system, null, void, gone? All of them?

NoDebt's picture

The Oligarch class in China would be shooting themselves in the head, financially speaking.  Shortly thereafter it would happen literally.  Don't hold your breath.

ZerOhead's picture

The Chinese Oligarch and leaders have over $4T stashed in the Caribbean at last count.

They are deeply invested in our financial system in more ways than one...

 

divingengineer's picture

What happened the last time they did it?

They repudiated their debt once, why not again?

algol_dog's picture

Why not fill up those ghost cities with mid-east refugees? A win win for all ....

Abbie Normal's picture

Yes, put them all in a country where the main source of protein is pork.

Urban Redneck's picture

China is playing a long game.  But dethrowning the USD hegemon requires a yuuuuuuuuuuuuuuuge toxic crap paper debt supply to compete with the warchest/cesspool that Greenspan & Bernanke spent two decades building.

elephant's picture

Therefore, the One Child Policy is no more.

Noplebian's picture
Noplebian (not verified) lazysunday Oct 30, 2015 7:13 AM

The 'Ghost Cities' are for future use, the 'themes' that they are built around may give some clue regarding the expected occupants!

More here......

http://beforeitsnews.com/conspiracy-theories/2015/10/time-travel-is-no-l...

ali-ali-al-qomfri's picture

2 child policy might fill them up...

bookofenoch's picture

If nobody else will say it, allow me: Sum Ting Wong

Boris Alatovkrap's picture

Sum ting be li be li wong! Mei bi to tau li su ku lu da pu!

Aussie Battler's picture

This isn't looking good for me fortescue metals shares mate

Dre4dwolf's picture

You can put the man in a mansion, but you cant put the mansion in the man.

NoDebt's picture

This is one of the reasons I've said before that China is the greatest fraud of the 21st century.

Philo Beddoe's picture

That little Paris looks kinda cool. I wonder where they put the mosque? 

lazysunday's picture

+1

They doctor each number that comes out of their country. They have built all these ghost cities with cheap cement which useful life will be half of what it is suppose to be....the great urbanzation of there rural folk, is going to into reverse, when those people have no means to live even in the shanty cities beside the ghost ones. Also don't forget 28% of the people who will be 65 in 2040 in the entire world, will be residing in China. 

 

 

 

 

NoDebt's picture

Agreed, Sunday.  Do you know what one of the fastest growing economies in the world was in the 1950s and 1960s?  The Soviet Union.

 

lazysunday's picture

Shhh.....Vlad's grandparents never did anything wrong....if it is Russian at ZH these days, they poop gold nuggets. 

 

 

Itsthetiming's picture
Itsthetiming (not verified) NoDebt Oct 30, 2015 12:01 AM

Jesus we would have 7% growth too if we were stupid enough to print THAT MUCH money but even the USA government and fed isn't that stupid despite what we say.

China's credit card is unreal. I want one!!!

Money Boo Boo's picture

This is one of the reasons I've said before that China is the greatest fraud of the 21st century.

 

makes a nice bookend to the USSA being the greatest fraud of the 20th century, ying and yang in a kinda fucked up kinda way

Give up. Reality is not scientific nor even mathematical.'s picture
Give up. Reality is not scientific nor even mathematical. (not verified) NoDebt Oct 30, 2015 3:09 AM

Great fraud, yes.  But the Grammy has to go to Vladimir Putin for his pantomimed Chinese Love Song, which is all about helping bring down the great fraud.  Our man in Moscow deserves a much bigger role in world affairs.  Maybe Vlad has a good use for the refugees flooding into Europe.  Siberian miners?  I'm willing to bet these young men flooding into Europe could be decent hole diggers and sack luggers if they were regularly shown how a whip works.

Putin is a problem solver.