China’s steel market was expected to see stronger demand growth by mid-year if expectations the country’s infrastructure fixed asset investment or FAI growth rate was boosted to around 10% year on year in 2020 from 3.8% in 2019 were realized, market sources said Tuesday.
The Chinese government has indicated it plans to increase stimulus in the infrastructure sector after the FAI growth rate turned negative in the first quarter. The country’s infrastructure FAI growth rate plunged 19.7% on year in Q1, but was being forecast at around 15% for the remaining nine months of the year, which would generate decent incremental steel demand, market sources said.
An increase in demand for infrastructure development would also help offset a likely reduction in demand from property new starts, they noted.
The demand generated by infrastructure construction was expected to emerge in May or June after more details of the stimulus measures were announced during the National Congress and political consultative conference, market sources said. Both key planning events are expected to be held in late April or May.
China’s Political Bureau (Politburo) during its meeting last Friday pledged to introduce greater fiscal and monetary stimulus to offset the “unprecedented adverse impact” of the coronavirus pandemic on the country’s economy.
Infrastructure was singled out as a key sector to be boosted in a bid to stimulate employment, while property was earmarked as “for living not for speculation” to prevent further overheating.
In the wake of the Politburo meeting, the People’s Bank of China on Monday announced a reduction in loan prime rates – a proxy for loan interest rates in China – from 4.05% to 3.85% for one-year loans and from 4.75% to 4.65% for five-year loans.
The same day, the country’s Ministry of Finance said it would soon approve another batch of local government special bonds quotas totaling Yuan 1 trillion ($141.4 billion), taking the total quota for 2020 to Yuan 2.29 trillion, which would all be issued by the end of May. The special bonds are designed to boost infrastructure construction in 2020 and cannot be used for property-related projects.
Some market sources expect China’s loan interest rates will be cut further later in the year and the local government special bonds quota to be increased to Yuan 3.5 trillion, which would boost infrastructure’s FAI growth rate to around 10% for the year.
When the FAI growth rate was 3.8% in 2019, 64% of the Yuan 2.15 trillion in special bonds issued flowed into property, leaving around Yuan 774 billion to be spent on infrastructure construction.
Some sources said that construction-related steel demand would be stronger in the third and fourth quarters than in Q2, but cautioned strong steel production, stemming from capacity expansion over 2019 and the first half of 2020, would continue to keep steel prices in check.