NEW CHINESE STIMULUS PACKAGE IS GOOD FOR STEEL SECTOR

The main thrust of the recently announced stimulus package includes several items which will favour the steel industry. There are plans to increase investment in infrastructure projects. Subsidies will be given to the home appliance sector to produce energy efficient products. Moreover, funds are being released to build two new major steel plants in the south of the country.

The concept appears to be to undertake projects which will not create the significant inflationary pressures which occurred in the previous package. Loosening bank lending is not part of this latest plan.

The main plank of the package, to expand investment in infrastructure, will provide a boost to the producers of steel long products – reinforcing bars, wire rod and structural sections. There were fears that a reduction in sales in the real estate sector would lead to a decline in the output of long steel products. So far this year, the concerns have not been proven – with output rising in the first quarter 2012 by 8 percent, year on year. However, we detected the potential for a slowdown in the rate of growth in the medium term. The new announcement should reverse the prior expectations and lead to the continuation of the previous growth pattern for long products.

Subsidies for more efficient home appliances should boost consumption of flat steel products in the future. This sector of the steel industry was reporting steadily rising output and demand, mainly for cold rolled and zinc coated sheet for sale to the automotive sector. Domestic consumption of these products should improve significantly later this year.

Government spending in the construction and home appliance sectors will not be inflationary in the short term. Steel costs for these industries in 2012 will be substantially lower than in the previous year. The MEPS – Construction Sector Steel Purchasing Price Index averaged 145.5 in 2011. This is expected to drop to 131.5 this year – a reduction of almost 10 percent. According to MEPS estimates, the building and construction industry will enjoy savings of at least RMB 110 billion (US$ 16.5 billion) in 2012 from lower steel prices.

A similar picture can be seen for the MEPS – Household Appliance Steel Purchasing Price Index which averaged 95.5 last year and is likely to be near to 85.0 in 2012 - a decrease of close to 11 percent.

Source: MEPS China Steel Insight - Sign up for a free trail

Also See: MEPS - STEEL PURCHASING PRICE INDEXES