China's steel production likely to grow by 4-5% this year: analyst

Posted on 09 January 2020
 

Source: S&P Global Platts

Official forecasts for China's steel production in 2020 vary between a contraction of almost 1% and growth of 1.2%, but Alfa Bank's Boris Krasnozhenov says the country's investment in infrastructure would back less conservative predictions, pegging growth of up to 4%-5%. 

The China Metallurgical Industry Planning and Research Institute estimates that Chinese steel production could come off by 0.7% this year from 2019 to around 981 million mt. Last year, the think-tank estimated the country's output at 988 million mt, up 6.5% year on year.

Consultancy group Wood Mackenzie is slightly more optimistic, predicting a 1.2% uptick in Chinese output.

However, Krasnozhenov sees both estimates as being unduly cautious.

China's steel output may well gain 4%-5% and exceed 1 billion mt this year, the Moscow-based metals industry analyst said, basing his forecast on the country's investment in fixed assets (FAI).

"FAI dynamics does not have 100% correlation with changes in steel production but the two oftencoincide," he said.

In January-November 2019, the country's FAI rose by 5.2% year on year to Yuan 53.37 trillion ($7.7 trillion), largely maintaining the same growth rate throughout the year, according to National Bureau of Statistics of China.

"I understand that a portion of FAI is made up of land sales [steel-neutral compound] and so should be disregarded. And although up to 85% of China's GDP growth is owed to fast-developing service economy and personal consumption, the share of FAI in the gross product is still significant," said Krasnozhenov.

Last year's FAI would annualize to $8.38 trillion, or around 60% of China's GDP. The latter, worth $13.6 trillion in 2018, in World Bank estimates, could top $14 trillion in 2019.

SPENDING ON INFRASTRUCTURE

The Asian Development Bank estimates that development in the region costs $1.7 trillion annually, including climate change mitigation and adaptation costs. Of the total $26 trillion investment spread across a decade and a half until 2030, some $14.7 trillion is allocated for power, $8.4 trillion for transport and $2.3 trillion for telecommunications infrastructure, according to thebank.

China absorbs at least half of this budget.

Alfa Bank's Krasnozhenov argued that, while spending on infrastructure remains so heavy, expecting Chinese steelmaking to slow down to 1% would be inaccurate.

 

"Look at multiple bottlenecks in Chinese infrastructure: they transport 1.2 billion mt of coal by trucks, do not have enough airports and yet implement colossal defense order. At last, there is that steel-intensive One Belt One Road project, where everything -- from a nail to a transformer -- is Chinese," he said.



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