02/01/2013
IronOreTeam Analysis: China steel industry forecast based on government work report in 2012
China sets its GDP growth target at 7.5 percent this year, the first time for the government to lower its economic growth target since 2005, according to a government work report delivered by Premier Wen Jiabao at the Fifth Session of the 11th National People's Congress (NPC) on March 5th. Instead of anti-inflation, the government gives top priority to steady growth in 2012.
How will Chinese macroeconomic policy function and steel industry be influenced under current circumstances that main developed economies lack growth momentum and unemployment rate stays high, Chinese economy growth slows down while price grows up, and real estate market regulation is in key stage?
GDP growth rate object drops for the first time in 8 years. What attracts attention in government work report in 2012 is that GDP growth rate object was trimmed to 7.5% from 8% since 2005. Based on historic data, real GDP growth always exceeds object set at the beginning of the year, so we anticipate that GDP growth in 2012 may still maintain 8.5% or so.
But the cut of GDP growth target signals that economic growth model will emphasis on quality and efficiency of economic growth rather than only rely on scale expansion and resources consumption. What’s more, Chinese macroeconomic policy of 2012 is to maintain steady so there is little likelihood that the government will release stimulating policy.
Consumer price index (CPI) object is higher than market anticipation and imported inflation pressure still exists. The inflation object is maintained at 4%, same as last year (lower than the real inflation of 5.4%) and higher than market anticipation of 3.5% or so. Although recent price trend shows a seasonal bounce for CPI in January, price in the next few months may continue descending since the 2nd half of 2011 given the lately price drop of pork and vegetables and 8 years of growth in a row of domestic grain production, so CPI object of 2012 is not hard to fulfill. But that does not mean inflation pressure disappears completely, as recent crude oil price keeps hovering at high level and imported inflation still exists in the medium term. The report also claims to rein this year's consumer price growth at around 4% after comprehensively considering factors of imported inflation, production factors cost growth and resident consumption capacity, and also reserves room for price reform. The national policy in 2012 shows that the government still remains cautious over inflation.
China will continue to carry out anticipatory adjustments and fine-tuning in terms of monetary policy. China targets a 14% growth in broad money supply, or M2, for 2012, slightly higher than actual increase of 2011 but at record low in recent years. So the possibility of comprehensively easing monetary policy in 2012 is little and anticipatory adjustments and fine-tuning will be the main task. It is anticipated that China central bank will choose open market operation as the main monetary policy and the frequency of decrease of RRR (Reserve Requirement Ratio) will be lower than market expected, and with gradual fall of inflation, interest cut may start in the middle of the year and will happen once or twice in small range through the whole year.
Financial deficit in 2012 is set at CNY800 billion, CNY100 billion less than last year, and budget deficit falls to 1.5% of GDP. Based on historical data, fiscal deficit to GDP ratio is usually maintained at 2% or so when economy growth is predicted to slow down, but the cut of fiscal deficit to GDP ratio this year under the circumstances that economy growth is slowing down shows that fiscal stimulus may be weaker than expected. Interestingly, the report said the focus is to improve structure of financial expenditure, stress the key points, and emphasize more on the livelihood of the people, so there will be “increase and decrease” for financial expenditure in 2012, and financial support to people’s livelihood fields will be strengthened in the near future; and the planned growth of investment in water conservancy project and housing project for low-income urban residents is higher than the other sectors, according to the Ministry of Finance’s 2012 Fiscal Budget Report (draft).
Influence analysis on steel industry and its main downstream industries
Real estate industry
As to real estate market, the report emphasizes to firmly implement and gradually improve policies and measures for discouraging speculative or investment-driven housing demand, build on progress made in regulating the real estate market and reduce housing price back to normal level. But the wording is less harsh than that in government work report of 2011. And at the same time, the report requires to take measures to increase ordinary commercial housing supply to prevent economy growth slowing down caused by overdoing of real estate regulation, and shows that the country is trying to increase supply to restrain housing price from soaring when taking measures to depress speculative or investment-driven housing demand at the same time. We anticipate that the basic trend of commercial housing regulation policy in 2012 will not change, and commercial housing sales of the year will decrease by 8%-12%. But the decrease will be offset by construction of low-income houses. 7 million units of low-income housing are planned to be constructed in 2012, lower by 3 million units from 2011; and 5 million units of low-income housing are required to be completed, 700 thousand units more than last year.
As to demand for steel products, construction of low-income housing will stimulate demand for some construction steel products. The 5 million units of low-income housing required to be completed in 2012 will create a demand for 18.85-21.13 million tonnes of construction steel, on the assumption that each unit of low-income housing averages 65 square meters and that each square meter needs 0.558-0.065 tonnes. But nowadays low-income housing construction still faces problems like lack of fund, real demand for construction steel products needs to be watched, and the country is still keeping tight control on commercial housing, so the predicted growth in demand for construction steel products in 2012 will be modest.
Water conservation and hydropower industry
On the basis of prior NO.1 document of central government in 2012, the report further emphasizes to improve irrigated area facilities and small-sized farmland water conservation works; speed up conservancy of middle and small-sized rivers, reinforcement of small reservoir and integrated control of flood and geological disaster.
The fiscal budget on water conservation project in 2012 is increased by 84% than 2011. Actually the State Council routine meeting early in February of 2011 has decided to finish reinforcement of 5400 small-sized reservoirs before the end of 2012 (average investment of CNY4.5 million on each reservoir, CNY24.4 billion in total). Calculated by 100-130 tonnes of steel products for each reservoir reinforcement, there will be a demand for 500-700 thousand tonnes of steel products in 2012.
Besides, the report also mentions to develop hydropower, and improve proportion of new energy and renewable energy. And National Energy Administration announced earlier that the scale of permitted construction of hydropower projects in 2012 is 20 million kilowatt, up by 57% than 2011. Construction of hydropower station often stirs demand for steel products.
The report says China will continue to firmly control bank loans to high energy-consuming, high-polluting and over-capacity industries this year. And at the same time, it proposes to control increasing volume, optimize inventory volume, promote merger and acquisition of enterprises of some industries like automobile, steel, shipbuilding and cement to improve industry concentration and economics of scale. It means that steel products demand of related industries will be limited, and actually sales growth rate of automobiles and engineering machinery has reached record low based on the data of January 2012.
For the consumption aspect, the report underlines expanding consumer demand and set up a permanent mechanism for boosting consumption. The earlier national business work meeting also proposed to conclude the experience of “home appliance to the countryside” and “old for new”, and make following policies in time. If related policies are executed during Q1, the prosperity of home appliance industry may improve during the second half of the year, and demand for steel plate will be stimulated then.
In sum, Chinese economy will maintain a steady growth in 2012, the possibility of policy easing is slight and policy environment will be better than 2011. Demand for steel products may continue to increase as a result, with limited range. We anticipate that apparent consumption of crude steel in 2012 will be 680 million tonnes, slightly more than last year.
Steel price has risen and may keep steady for the short term due to the favorable factors like iron ore price rise, EXW price rise by steelmakers and inventory decrease. But we should notice that the earlier price rise is the result of pull-up of steel mills and traders, so downstream demand increase still needs to be watched, which will eventually determine the steel products price trend in the medium term.
