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Analysis: China's infrastructure focus not enough to drive overall steel demand

China's moves to revive its infrastructure sector in response to slower domestic economic growth and rising trade tensions are widely expected to fuel a pick-up in steel demand from September and sustain it into 2020, but could also spur an increase in steel production that results in another winter of oversupply and short-term losses for steel mills.

China approved Yuan 1.65 trillion ($231 billion) of investment in railway, urban rail traffic and airport projects in 2018 -- 75% or Yuan 1.24 trillion of it in the fourth quarter. The steel consumption required by the projects approved in 2018 is estimated by S&P Global Platts at 25.45 million mt, 124% higher than that required by projects approved in 2017, though still 26% lower than for those approved in 2016.


Most of the approved projects in Q4 2018 will start construction in 2019 or 2020.


The country has also stepped up government spending to fund the infrastructure recovery. The issuance of new government bonds in 2019 is planned to increase 42% year on year to Yuan 3.08 trillion. Market chatter has suggested China may further increase the quota of special government bonds issuances in 2019 to support crucial infrastructure projects.


With the speed-up of project approvals and government spending, infrastructure construction is expected to accelerate from September, pushing fixed asset investment growth to 6% on year in full year 2019 from 3.8% on year over January-July, Platts estimates.


The FAI growth rate is expected to increase further to 10%-12% on year in the first half of 2020 as project approvals remained strong over January-August 2019.


However, China's goal is to support infrastructure without adding too much to its local government debt mountain. Indeed, the slowdown in infrastructure project approvals in 2017 and the first three quarters of 2018 was part of a deliberate strategy by the central government to encourage local government deleveraging.


The recovery of the infrastructure sector in 2019 and onwards is aimed at cushioning a slowing economy rather than helping to pull China out of a slowdown.


Similarly, the incremental steel demand generated by infrastructure construction from September will help offset the adverse impact of a slowdown in new home starts, but will likely fall far short of boosting steel demand the way the property sector did in 2018 and the first half of 2019.


Chinese steel demand is expected to remain stable and healthy in 2019 and the first half of 2020 at least, resulting in steel mills averaging decent annual profit margins. However, temporary oversupply and losses might still be inevitable during the low demand season in winter due to rising steel capacity and a loosening in environmental protection constraints.


Platts estimates China's crude steel capacity to increase by 35 million mt/year in 2019 to around 1.2 billion mt/year.


Source: S&P Platts

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