Economic policies support Indian, Chinese steel sectors

Supportive monetary and fiscal policies are likely to boost steel output and demand over the next year in India and China, the world's two largest producers, following rapid gains in 2018.

Apparent steel consumption in China rose to 870mn t in 2018, driven by a sharp increase in the real estate sector. This was up by at least 15pc from 730mn-760mn t/yr in 2013-17, according to the China iron and steel association (Cisa). Cisa provided a wide range for the figures, because previous estimates failed to fully account for steel sales from small, often illegally run induction furnace-based mills that were eliminated in 2018.

India's finished steel consumption rose by 7.5pc to 97.51mn t in the 2018-19 fiscal year that ended 31 March.

Real estate investments and new project start-ups in China rose by more than 10pc during January-May, supporting steel sales and output. Beijing has also stepped up fiscal and monetary policy measures to boost infrastructure development and private-sector investment to offset the negative impact on economy from the US-China trade conflict.

Beijing has allowed provincial governments to issue over 2.15 trillion yuan ($311bn) in special bonds in 2019 to financing infrastructure projects. Major infrastructure projects can include these bonds as part of their project capital, which can then be leveraged to secure bank loans.

Construction activity, including real estate, accounts for over 60pc of China's total steel use.

A reduction in China's value-added tax rate to 13pc from 16pc, cuts in other taxes and social-sector contributions for companies, and a reduction in cash reserve ratios for banks earlier this year have boosted liquidity and freed up more cash for companies to invest.

India's steel demand rose by 7.4pc/yr in 2000-18, on the back of infrastructure investments and automobile production, according to the government's latest Economic Survey released last week. Demand is expected to continue to grow at a similar pace, pushing crude steel output to around 255mn t by 2030 from 106.56mn t in 2018-19. India displaced Japan as the world's second-largest steel producer in 2018-19.

China's crude steel output grew by 6.6pc at 928mn t in 2018.

India's federal budget last week laid out a roadmap for $1.25 trillion in infrastructure investments over the next five years. Spending will cover sectors such as roads and highway development, railway construction, power generation and transmission, air and inland waterways, water conservation and supply, along with various projects to build corridors connecting major business hubs and ports. The government will rely heavily on external borrowing, public-private partnerships and loans from development finance institutions.

India has also cut its policy lending rates three times in the past few months to encourage borrowing, and has promised a $10bn capital injection into banks to encourage the sector to lend more. Bad loans have cut liquidity in the Indian economy.

China has resisted rate cuts over the last four years, but market participants say a cut may be imminent as part of measures to offset the trade friction.

But both China and India face significant challenges to maintaining growth, which could cap gains in steel demand. Beijing and Washington reached a temporary trade truce earlier this month. But the US could still follow through on a threat to tax almost all remaining imports from China — around $300bn/yr — if a deal is not reached, with damaging effects for the Chinese manufacturing sector.

India's failure to boost private-sector investment, including from overseas, and a sluggish real estate sector continues to hobble economic growth and could curb steel demand.