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China’s lower fiscal support to weigh on 2021 infrastructure steel demand: sources

China’s infrastructure sector is unlikely to generate much incremental steel demand in 2021, due to tightened fiscal spending and government’s crackdown on shadow banking, market sources told S&P Global Platts.

However, sources added that the slowdown in spending — in part due to the government tightening its purse in a bid to tide over a potential economic slowdown in H2 2021 — indicates a pickup in construction activities in the later part of the year.

China’s infrastructure accounts for over 20% of the country’s total steel consumption.

According to data from Ministry of Finance, or MOF, fiscal spending on transportation over January-April declined 11% on the year versus an 8% on the year drop in the January-March period.

The spending on urban and rural communities over the same period fell 5% on the year, accelerating from a 4% year-on-year drop in January-March. The fiscal spending on the urban and rural sectors were also 25% and 22% lower, respectively, than in the same period of 2019.

Meanwhile, China issued Yuan 232 billion ($36.4 billion) of new local government special bonds over January-April, designed mainly to fund infrastructure projects. The new special bonds issuance in April only accounted for about 6% of the annual quota of Yuan 3.65 trillion, and was much lower than the same period of 2020.

According to MOF, the new special bonds issued in the first quarter of 2020 already reached Yuan 1.08 trillion, accounting for 29% of the annual quota of Yuan 3.75 trillion planned for 2020.

Market sources said the value of new special bonds issued in May was not expected to improve drastically, while other fiscal spending might continue to prioritize the stability of wages, operations at enterprises and people’s livelihood, instead of infrastructure sector, in the first half of 2021.

The tight fiscal spending, combined with a relatively muted season for construction in southern China late-May and June, are likely to further weigh on Chinese steel prices, which have already been on a downtrend since May 10 following government interventions, some of the sources said.

However, the lower fiscal spending on infrastructure so far in 2021 is within market expectations, as China’s economic growth has continued to gain momentum from its strong property investment and exports of manufactured goods.

Market sources said the property investment was likely to slow down in H2 of 2021 due to tightened credit to both property developers and home buyers, while the exports of manufactured goods were also expected to taper in H2 when overseas factories gradually recover to normal operations from the COVID-19 impact.

As a result, the fiscal spending on infrastructure construction is likely to speed up in H2, in a bid to cushion the slowing economy.

However, any improvement in infrastructure construction is expected to be mild, as the crackdown on local government shadow banking through methods such as urban investment bonds, will continue to constrain infrastructure investment.

The shadow banking played a crucial role in funding infrastructure construction until 2018 when central government was determined to rein in local government debts. China’s infrastructure investment growth was 17% on the year in 2017 but slowed drastically to 3.8% in both 2018 and 2019, and to just 0.9% in 2020.

Due to low base in early 2020, the growth rate over January-April 2021 reached 18.4%, but already slowed to 2.6% in April.

Market sources have been cautious about the Chinese steel prices in H2, as any improvement in infrastructure steel demand might be too small to fully offset the slowdown in property or manufacturing sector.
Source: Platts

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