Axiom Analyst Considers Steel Demand Headwinds As Chinese Home Prices Flatline

Home price growth in China is now declining, and this is an industry-wide headwind for the steel sector.

Gordon Johnson of Axiom, a research firm that specializes in metals, mining and mining equipment, commented in a note on Tuesday that the declining home price growth in China "should give pause to commodity bulls."

Johnson added that while China's home price data is important to follow, the more important metric in terms of commodity demand is new housing starts. The analyst added that China's June data indicates a "strong" year-to-date growth in housing starts at 7.3 percent year-over-year. However, this could be attributed to the "culmination of a record first quarter 2016 credit deluge" and should revert back into negative territory this year.

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At this point, many investors are likely asking why this data set is vital to the steel sector. As explained by Johnson, China's residential real estate sector accounts for 36 percent of the country's steel demand. The analyst expanded that if China's new home figures start to fall 5 percent year-over-year throughout the entire 2016, then total steel demand in the country will fall by approximately 12 million mt of steel, or approximately 20 million mt of displaced iron ore demand.

Bottom line, the analyst cautioned that the housing data out of China is a "bad omen" for steel demand.

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