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Possible Bankruptcy of Chinese Giant Could Impact Brazilian Commodity Companies and Others Around the World. The Impact Is Such That Even Vale Reduced Its Annual Production by 370,000 Tons
The new signs of bankruptcy from the Chinese developer Evergrande put the Brazilian market at risk, mainly for commodity companies. The Chinese company saw its shares drop to 3.42% on Friday (17) after falling more than 6% on Thursday (16). The potential bankruptcy came accompanied by the decline of shares from other developers and influenced the price of iron ore, which is heavily consumed by construction companies.
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The real estate market is one of the main drivers of the Chinese economy. Evergrande is the second largest company and is accumulating debts of at least US$ 300 billion.
The liquidity problems of the company that may face bankruptcy hide the fear of a deeper slowdown in the sector in China and that the growth rate may be losing its strength, impacting major commodity companies worldwide.
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According to the strategy director at Belo Investment Research, Rafael Foscarini, the price of iron ore is more tied to the political situation in China, and if Evergrande cannot pay its debt next week, the price of this, as well as other commodities, will rise again.
With Likely Bankruptcy, Iron Ore Prices May Fall
For the head of the derivatives desk at Genial, Roberto Motta, the situation is worsening, and the main impact on Brazilian commodity companies comes from the decline in the price of iron ore.
The main issue is that the real estate sector in China has a vital weight in the GDP. It is no longer just an isolated problem for Evergrande. The longer it takes China to find a viable solution, the greater the deterioration in one of the most important Chinese sectors. According to Motta, a potential bankruptcy of Evergrande could impact not just Commodity companies but also the flow of foreign investment to emerging countries.
The new signs of difficulties faced by the company also raised doubts about the existence of the risk that a possible collapse could have the same impact as the collapse of Lehman Brothers in 2008. Most analysts dismiss the risk, as they believe the country’s government will intervene.
Vale Reduces Its Production
Foscarini states that Vale, one of the largest mining companies in the world, has reduced its annual production to 370,000 tons, down from 400,000, and will also adjust the price of the commodity.
The miner’s shares fell more than 4% last Thursday. According to Foscarini, Australia has companies that produce more than those in Brazil, but Vale remains an important player in the sector. There are several factors that raise and lower prices, so it is important to monitor short-term conditions along with medium and long-term perspectives.
According to Mirae Asset analyst Pedro Galdi, the drop in iron ore prices is more related to the shutdown of some Chinese steel mills to reduce pollution and, especially, the fact that the global economy is showing signs of weakness with the resurgence of the coronavirus.
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