China steel rally an 'overreaction' as infrastructure spend 3% lower than last year

Posted on 04 March 2020
 

Source: S&P Global Platts

Chinese steel market participants remain phlegmatic about the impact of the government's infrastructure push on steel demand and believe the futures price rally this week was an overreaction.

In the wake of media reports that China's six provinces and Chongqing municipality have approved key projects over January-February worth Yuan 24.4 trillion ($3,503 billion), the most actively traded May rebar futures contract on the Shanghai Futures Exchange increased 2.6% on the day on Monday.

But the projects had already been planned before the coronavirus outbreak, and compared with projects approved in the same Chinese regions in 2019, total investment value approved this year was in fact down 3% year on year. Investment in projects planned to be completed by 2020 is up just 2% from a year ago to Yuan 3,467 billion ($498 billion).

Chinese local governments typically announce their infrastructure spending plans at the start of each year.

China's infrastructure investment

One steel market analyst said China had been planning to boost infrastructure since late 2019 to help the country achieve targets set out in its 13th five-year plan (2016-2020). Progressing infrastructure projects long in the pipeline and speeding up issuance of local government special bonds was already the plan, even before the virus outbreak.

"China will put in extra efforts to boost infrastructure to offset the impact of the coronavirus outbreak on the economy, but there are no stimulus measures that were not anticipated back in late 2019," the analyst said.

The short-lived improvement in market sentiment at the start of the week was based on expectations of further infrastructure stimulus. But market sources warned that a steel oversupply will persist in the short term, which could dent any improved demand.

In the Beijing retail market on Tuesday, spot rebar prices fell Yuan 30/mt from a day ago to Yuan 3,390/mt ($488/mt) due mainly to high inventories.

Market sources also pointed out that while local governments could raise their debt levels to support infrastructure, overall local government funding would remain constrained as fiscal revenues would be weaker due to the virus outbreak. This would especially be the case for land sales, which are a major generator of funds for local governments.

Moreover, even if China could effectively boost infrastructure construction, any stimulus may not be felt until mid-2020 as a lack of labor and protective gear, along with the risk of new infections, would slow any construction recovery in the first half of this year.

Zhong Nanshan, head of China's official coronavirus expert team, has suggested that the government continues to carry out strict protection and prevention protocols until the end of April, due to concerns of new infections after businesses restart and people return from overseas.

Traders and mill sources contacted by S&P Global Platts said soaring finished steel inventories and tight cash flows were the biggest concerns in the steel market, noting the situation was unlikely to ease in the short-term.

Some sources said the steel inventories held at mills and traders had reached around 40 million mt. Including material in transit, China's overall steel inventories have likely breached 60 million mt, which would be three times higher than normal.

Industry sources said steel demand would eventually recover, and current steel margins were strong enough to deter any big cuts to steel production for the time being. Chinese domestic rebar and hot-rolled coil sales margins were $32.90/mt and $27.40/mt on Tuesday, Platts data showed.

But sources said it was almost certain that end-user demand would remain subdued until at least March or April, due to developments regarding the coronavirus inside and outside of China. Some traders said unless steel mills cut output and drew down inventories to release cash, an oversupply was inevitable. 



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