China’s Concrete Bubble

Jul05
by Craig Tindale on July 5, 2012 at 2:10 am

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Chinese construction keeps trending down with Sany the worlds sixth largest heavy machinery maker reporting a rise in profit of 5.4% in the same quarter as a blow out in receivables of USD $1.39  billion  and cash reserves falling by USD $535 million  . Sany is clearly booking profits on 100% financed machinery while providing zero transparency on credit risk  and delinquency . If the GFC has taught the world anything. then 100% 'no money down" vendor finance should ring alarm bells. This all started about about 3 months ago when Zoomlion started to aggressively financing heavy machinery for anyone that wanted to sign up

An ana­lyst told the Inter­na­tional Finance News that Sany’s golden age of devel­op­ment has clearly passed. Recent news of staff cuts, changes to the wage struc­ture and offer­ing zero down pay­ments are per­haps the company’s way of seek­ing a break­through dur­ing this chal­leng­ing period, the ana­lyst said.

After los­ing mar­ket share Sany responded by unlock­ing GPS dis­able­ment that are nor­mally included in ven­dor finance deals and remov­ing the 20% deposit require­ment on new machinery .

As China slows, its con­struc­tion equip­ment mak­ers have been accel­er­at­ing pro­duc­tion – based on the sim­ple idea that long-term sur­vival can be ensured by get­ting big, fast. The amount of gear pro­duced by the indus­try increased by almost 80 per cent between 2008 and last year, when 484,316 units were made, accord­ing to data from Bloomberg. This was 13,256 more units than the indus­try could sell – in spite of a near dou­bling in exports to more than 40,000 units.

Even worse, also accord­ing to Bloomberg: demand for such equip­ment in China dropped 56 per cent in the year to April.

Matthew For­ney and Stella Zhou, writ­ing in Draganomics’ China Eco­nomic Quar­terly for June, look at Sany and its rivals. They note that indus­try exec­u­tives are talk­ing of a “col­lapse” and are look­ing to export their way out of trouble.

All of these com­pa­nies are react­ing to a sub­stan­tial mar­ket slow­down by expand­ing their financ­ing options. XCMG the 3rd largest heavy equip­ment maker in China sales soared by 44% in 2011 by intro­duc­ing ‘no money down’ ven­dor finance ,  open­ing four new fac­to­ries this week .

All of these com­pa­nies are buy­ing over­seas man­u­fac­tur­ers , XCMG is final­is­ing a deal to invest in pri­vately held Ger­man machin­ery man­u­fac­turer Schwing . Sany has just bought  Putzmeis­ter Hold­ing GmbH for nearly $500 mil­lion . Mean­while, Zoo­lion the com­pany we men­tioned in The Loot­ing of China has  investors increas­ingly con­cerned about the machin­ery manufacturer’s plan of rais­ing huge bank loans of up to 140 bil­lion yuan (US$22.2 bil­lion) , this seems an extra­or­di­nary amount of debt to raise for as yet an unstated pur­pose.  Zoom­lion, Sany and XCMG (as well as 30 oth­ers are head­quar­tered in Chang­sha, Hunan where by 2015 the city’s con­struc­tion machin­ery prod­ucts will account for almost a third of those sold glob­ally, ris­ing from its cur­rent 9 per­cent share. Whose Mayer Zhang Jian­fei, a for­mer direc­tor of high­ways at the Min­istry of Trans­port and World Bank adviser on trans­porta­tion, said that by the end of the 12th Five-Year Plan (2011–15), total sales in the city’s con­struc­tion equip­ment sec­tor will have hit 300 bil­lion yuan ($47 bil­lion) . who with that heavy machin­ery avail­able built one of those ghost cities you keep hear­ing about (if you fol­low this Google map link you can explore the scale of these cities for yourself) 

This is eco­nomic mad­ness on a scale never before seen in his­tory and it wont end well for anyone.