China’s lower-than-expected GDP growth could impact steel demand

China has set a GDP growth target for 2021 of “above 6%,” below the market consensus of 7%-9%, indicating that stable economic growth, deleveraging and decarbonizing of the economy will be priorities for the year, rather than maintaining high GDP growth, which is set to adversely impact infrastructure and property steel demand, as well as steel production, according to S&P Global Platts Analytics.

In line with the lower-than-expectation GDP growth target, the government work report given by Premier Li Keqiang on March 5 over the annual National People’s Congress (NPC) also released its fiscal deficit target at 3.2% of GDP and local government special bonds quota at RMB 3.65 trillion ($563.6 billion) in 2021, down from “above 3.6%” and RMB 3.75 trillion in 2020.

Meanwhile, Premier Li reiterated the commitment to align total social financing and broad money growth with nominal GDP growth, which is in line of China’s monetary normalization process, starting from May 2020.

The decreased fiscal stimulus, in terms of deficit and local government special bonds, means infrastructure construction is unlikely to surpass the level seen in 2020. Platts Analytics said it expects infrastructure steel demand to have zero or low single-digit growth in 2021.

Meanwhile, the stance taken on China’s monetary policy in 2021 indicates China is likely to stay hawkish to the property sector with tightened financing and home purchase restrictions.

Platts Analytics estimates an upper range scenario in the property sector would see the addition of just 6.07 million mt of steel compared with 2020, marking a 1.9% increase to 328.2 million mt. The lower range estimate sees a decrease of 8.68 million mt to 313.4 million mt, marking a 2.7% fall.

Carbon emissions reduction

Moreover, the government work report declared to cut energy consumption per GDP by around 3% by reducing pollution emissions in 2021, while there was no such target made for 2020.

As the iron and steel industry is a major carbon emitter, it will no doubt be targeted for carbon emissions reduction in 2021. China’s Ministry of Industry and Information Technology has cited the plan to cut steel output no less than three times already in 2021 as the most effective way to reduce emissions.

Platts Analytics expects steel output cuts to occur in the second half of 2021, as demand is likely be lower in H2 than in H1. Implementation of emissions quotas could be a way to enforce production cuts if emissions quotas allocated to mills are exceeded.

However, any steel production cuts need be gradual and moderate in order to avoid drastic market fluctuations, according to He Wenbo, executive chairman of the China Iron & Steel Association, speaking March 3.

According to Platts Analytics, steel production cuts too much and too fast will not only hurt downstream steel users, but could also erode the steel industry’s profitability, as 93 million mt/year of brand-new crude steel making capacity and 76 million mt/year of pig iron capacity were just commissioned in 2019-2020 through capacity swaps. Moreover, there are 151 million mt/year of crude steel and 121 million mt/year of pig iron capacity planning to be commissioned in 2021-2022, also through capacity swaps.

New facilities need to reach their full capacity as soon as possible to improve its profitability and pay back its loans, so any government measures that prevent new facilities from ramping up production on a large scale are likely to cause instability to steel mills performance.

Platts Analytics expects as soon as steel output cuts begin to hurt downstream users or the steel industry itself, they could be loosened or lifted.

— Clement Choo