The tail was coming and finally it materialized. This Thursday the pound of copper fell 2.97% on the London Metal Exchange, reaching US $ 4.2758 compared to the previous close, as a result of the serious crisis experienced by Evergrande Group, the second largest real estate developer in China. Last week the group said it could default on its debts, which caused a near-earthquake in the markets and led to the closure of its shares on the Shenzhen and Shanghai stock exchanges.
The group, among other things, builds mid-range and high-end apartments, the owners of which pay in advance. It currently has 778 developments in 233 cities. Founded in 1997 by the Chinese tycoon Hui Ka Yan, the third richest man in China in 2020 according to Forbes – his fortune was estimated at US $ 21,800 million – the company, in addition to the real estate arm, has business in the food sector, electric vehicles and even a football team, Guangzhou FC.
From its foundation until mid-2020, the company had grown enormously, due to the real estate boom caused by the Asian giant. That was until the third quarter of last year, the Chinese government announced new rules to regulate the debt level of real estate developers. The measure had a hard impact on a company that had based its growth on loans from the financial system. Subsequently, the credit rating agencies lowered their rating and the company’s bonds began to depreciate and the company was forced to sell properties at deep discounts. Last week the company warned that due to its liquidity problems, it had to suspend the construction of projects. The estimates speak of a total debt of US $ 300. million, equivalent to Chile’s GDP.
Faced with news that the construction giant was on the verge of bankruptcy, global markets reacted. “Evergrande is one of the main real estate developers in China and this country consumes more than half of the world’s copper. In turn, construction accounts for 22% of China’s copper demand. Hence the company’s crisis have global repercussions at the metal price level “, explains Juan Carlos Guajardo, executive director of Plusmining.
The question is how serious that impact can be. “The fall of 2.97% of the pound this Thursday is within the normal variations that copper can have. I would say that we are in a technical zone of indecision and that the next few days are key for projections”, explains Diego Mora, senior analyst X TB Latam. “In any case, it must be taken into account that, although in the last four months copper fell 13%, in the last year it had a growth of 140%,” he adds.
For Luis Alberto Reyes, head of the markets department of Mercados G, the situation should be temporary. “It is an overreaction, a market scare that could last one or two weeks. It must be taken into account that China has the Silk Road underway, a project that will demand great infrastructure and with it, collect. The G7 and the United States also they are embarking on similar projects, “he details.
The key issue is whether the Evergrande crash will generate a domino effect and a systemic crisis that affects other companies and the financial system. “The companies that develop real estate projects work with loans from the financial sector, so when one of them falls, the banks that financed their projects get into trouble and a chain is generated,” says Guajardo. The name that hangs around the crisis is Lehman Brothers, the bank that, when it failed in 2008, unleashed the Subprime crisis.
The big difference, according to Guajardo, is in the governments of each country. “If you look at the situation from a theoretical perspective, Lehman and Evergrande could be similar, because both are large entities closely linked to the financial system and have many ramifications in the market. However, the Chinese government has a very different way of acting. and a much higher level of intervention on the economy. I have the suspicion that they will intervene and stop the possible ramifications. ”