Weakening steel demand could test China’s commitment to prevent bankruptcies and secure jobs with new stimulus measures, especially as Beijing focuses on economic reforms and fighting pollution.
Industrial demand has slowed for four months, which is typical for this time of the year as construction slows because of cold weather. But signs are emerging that the slide in steel demand has erased a year or more of growth, which cannot be attributed to seasonal factors.
China’s steel output is growing at a modest pace, but inventories of steel products and iron ore are on the rise. And there are concerns about demand from the construction sector as new property prices fall. Steel demand in China fell by 8.6pc in January from a year earlier, the China iron and steel association (Cisa) said.
The Chinese government will have to launch stimulus measures when it becomes apparent that growth is stalling, possibly in April-May, a Singapore iron ore trader said.
Steel feedstocks such as iron ore and coking coal have not felt the full impact of the slowdown in steel demand, as this is initially borne by steel mills that are losing money on all their steel sales, a Europe-based analyst said.
But Beijing may not undertake measures to stimulate the steel sector without adequate reforms. Beijing has repeatedly made commitments to reduce pollution and curb risky lending practices, which target older and unprofitable steel plants. Beijing will introduce more reforms, especially as the current government under President Xi Jinping is more cautious about spending money than the previous administration of Hu Jintao, a Hong Kong iron ore trader said.
China’s leaders are more focused on structural issues than short-term growth, and despite the slowdown are relatively content with growth over the past six months, Citi Research analyst Ivan Szpakowski said.
“Instead they are focusing on clamping down on credit, especially shadow banking, the environmental issues and local government debt,” he said. “There is little chance of a stimulus at the level of 2012 or post-global financial crisis. That said there are probably going to be increasing concerns about growth over the next few months. But it is not going to result in a major stimulus.”
The government has announced new spending, although not on the scope of previous efforts. This has met with a mixed reception from the steel and commodity sectors. Markets shrugged off the approval of five freight and passenger railway projects worth $23bn this month, but reacted positively to Beijing’s plans this week to support population movements into urban areas by removing household registration controls on tier 3 and tier 4 cities – where cooling property demand has been most marked recently – and controlling growth in larger cities of more than 5mn. Local governments will issue municipal bonds to finance the growth, and Beijing will spend 1 trillion yuan ($165bn) to redevelop shanty towns surrounding urban areas. It wants 60pc of China’s population to be in urban areas by 2020, or another 100mn residents, up from 54pc last year.
The more modest targeted spending and improved capital conditions could support the market in place of a huge stimulus package.
Stimulus is not the only tool in Beijing’s policy arsenal to boost steel demand. There is a lack of quantitative easing to loosen credit constraints, and the fiscal approach being followed by other central banks will support a broader segment of the economy, the Hong Kong trader said.
“Despite the broad-based weakness in China’s January-February macro data pack, we see signs of an industrial sector recovery and expect copper and iron ore to rebound,” Morgan Stanley analyst Joel Crane said. Copper’s drop was tied to financing deals unwinding, and the quick collapse in iron ore prices was driven by a “buyer’s strike” caused by high inventory, slower-than-expected steel production growth and tight working capital forcing steel mills to refrain from spot purchases, he said.
cn/kaf
Send comments to feedback@argusmedia.com
If you would like to review other ArgusMedia.com content options, request more information about Argus' energy news, data and analysis services.
Copyright © 2014 Argus Media Ltd - www.ArgusMedia.com - All rights reserved.
