In welcome news for mining companies and their investors on Friday, China Evergrande Group (HKG: 3333) revealed that it has managed to avoid default once again. The Global 500 company is one of the largest real estate developers in China as well as the most indebted, with liabilities of over $300 billion. 

With new regulations and a weakening property market in the country, debt repayment is now a major concern when it comes to Evergrande’s future.

Not only that, but the fate of the firm could have serious repercussions for the miners that produce materials used in real estate development.

Investors in this space, then, have plenty of questions when it comes to the Evergrande saga. Here we examine the situation so far and search for answers.

How do things stand now for Evergrande?

Reports from Reuters, the New York Times, and Bloomberg all cite sources with direct knowledge confirming that Evergrande’s $47.5 million dollar bond coupon is paid at last. This comes just after an $83.5 million interest payment from Evergrande the week before.

So far, the source of funds for these interest payments is unconfirmed and the company itself has yet to make an official disclosure. However, Bloomberg News reports that authorities in China have requested that Evergrande founder Hui Ka Yan use his own personal funds to make payments.

It should be noted that both the $47.5 million and $83.5 million payments come at the very last minute. After missing payments back in September, Evergrande is paying the money it owes just before the thirty-day grace periods run out.

In total, the company missed almost $280 million of dollar bond payments between 23 September and 11 October. These each have a thirty-day grace period.

If Evergrande had missed the latest $47.5 million payment, it would have resulted in cross-defaults on an astonishing $19 billion of international bonds. When it comes to emerging market corporate debt defaults, $19 billion would be second only to state-owned Petroleos de Venezuela’s $25 billion default in 2017-2018.

What troubles investors and bondholders even more, however, is that Evergrande has a further $338 million in dollar bond payments overdue, which must be paid in November and December.

Given a lack of commentary from Evergrande itself, however, the debt situation remains somewhat inscrutable to outsiders.

What caused the crisis at Evergrande?

In 2020, China’s government introduced rules aimed at cutting down debt among major real estate companies like Evergrande.

Known as the “three red lines” policy, China’s new rules require a liability-to-asset ratio below 70%; a net gearing ratio below 100%; and a ratio of cash to short-term debt above 1x.

Regulations limiting how much real estate firms can increase debt will be imposed on companies breaching these three rules.

In response to the new rules, Evergrande has attempted to sell off parts of the business – but it is struggling. Plans for the $2.6 billion sale of a stake in one of its units, for example, collapsed in October.

Among China’s top thirty property firms, two-thirds are in breach of at least one rule, which has raised concerns for the real estate industry and companies involved in it.

Adding to woes is a slow-down on the Chinese property market, with demand for new apartments falling. For example, Evergrande’s contracted sales of properties in August 2021 were down 24% from the prior year.

While Evergrande is only one company, the firm’s struggles are symptomatic of a larger problem among real estate developers in China. 

How is the current situation affecting miners?

Just one square metre of property built in China needs around 28 kilograms of steel reinforcement bar, also known as rebar. Rebar is used to strengthen concrete, making it essential for the construction industry. In fact, this single industry uses 20-30% of China’s entire steel production.

It’s unsurprising, then, that the struggles of Evergrande and its fellow property developers are hurting both steel prices and production.

September marked the third month in a row of falling crude steel production in the country. Things are not expected to improve any time soon, either, with the upcoming Beijing Winter Olympics leading China to order a cut to steel mill output for the season.

As iron is the main component of steel, prices for this particular metal are heavily impacted. The iron ore price for delivery in Tianjin is currently $107 per metric tonne, far below May’s high of nearly $230 per tonne.

As iron ore prices continue to suffer, Mount Gibson Iron (ASX: MGX) has opted to initiate staged suspension of its Shine iron ore project in Australia. Indus Mining, another Australian miner, put its Ridges mine into care and maintenance in response to plummeting prices. 

The Evergrande crisis dealt a blow to the share price of iron ore majors like Anglo American (LON: AAL | JSE: AGL), Rio Tinto (ASX: RIO | LON: RIO), and BHP (ASX: BHP | LON: BHP).

Nonetheless, these miners are still in a more positive situation than they were back in mid-September when Evergrande admitted to its debt problem. Shares in Anglo American, for example, fell as much as 20% at the time but have since climbed 14%.

What does the future hold?

Amid all the negatives, it’s important to keep in mind that Evergrande is now making payments – offering some reassurance when it comes to the company’s future.

Nonetheless, the situation remains complex. Whether the company will continue to make payments, and what China’s housing market looks like going forward, are all uncertain at the moment.

For mining investors, it’s important to take the current uncertainty into account when it comes to commodities like iron ore.

As with any situation in the markets, there are ways to use this latest news around Evergrande to gain an advantage. For smart investors, there may be opportunities right now to snap up investments in miners at low prices.

Author: Anna Farley

The Author does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.

MiningMaven Ltd, the owner of MiningMaven.com, does not own a position in the stock(s) and/or financial instrument(s) mentioned in the piece.

MiningMaven Ltd, the owner of MiningMaven.com, has not been paid for the production of this piece by the company or companies mentioned above.

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