Will metal demand become a prisoner of China’s tighter property policy?

While some analysts warn that China’s attempts to clip property prices by 30% threatens the demand outlook for metals, underscoring the oversupply of steel and, as a consequence, vulnerability in the iron ore and coking coal sectors, others believe there is little cause for concern.

Josephine Ho, a metals and mining analyst at Nomura Securities in Hong Kong, writes in a recent research note to clients that demand for raw materials such as cement and steel “remains solid,” even though she expects property prices in China will fall by 10-20% over the next 12 to 18 months before stabilizing and recovering in the second half of 2011.

That’s because the government plans to build more public housing, she explains. Government officials in Beijing have vowed to build 3 million public housing units in 2010, up from 2 million in 2009, while local governments are urging developers to speed up construction with deadlines for project development and completion. They are also threatening to confiscate land that developers haven’t developed for two years.

This year the Ministry of Land and Resources expanded land supply available for housing by 142% year-on-year (from actual 2009 levels). Of that, Ho explains, land earmarked for public housing (13% of the total), jumped by 123% over the previous year.

Gross floor area under construction in China rose 30% year-on-year to 2.85 billion square metres in the Jan.-May period, while new housing starts advanced 73% year on year during the same period to 615 million square metres, she says.

“The government’s target is to control property prices by creating an oversupply situation, which is actually positive for raw material consumption,” she explains, arguing that concern over slowing demand is “unfounded.”

“Property investment should remain sound in 2010 and even 2011.”