China’s Infrastructure Steel Demand Seen Soft In H2 Amid Lackluster Fiscal Spending

A modest outlook for China’s fiscal spending in the second half of 2021 is expected to keep infrastructure steel demand over the period flat or lower from a year earlier, sources said.
China has been making efforts to address hidden local debt risks associated with local governments, leading to curtailed fiscal spending in the infrastructure sector in the first half of 2021 than in the same period of 2020.
With expected lackluster demand for infrastructure steel in the second half of 2021, Chinese long steel prices and margins will largely depend on how strictly steel output cuts will be implemented through the period, the sources said.
Several provinces in China have announced plans to cut steel output in the second half of 2021 in a move that falls in line with the country’s efforts to keep this year’s annual crude steel output below 2020 levels.
Fiscal spending slows
According to data from Ministry of Finance, or MOF, fiscal spending on transportation over January-June declined 3% on the year, while spending on urban and rural communities over the same period fell 2% on the year.
The fiscal spending on these two sectors was also 16% and 32% lower, respectively, than in the same period of 2019.
Meanwhile, China issued Yuan 1.014 trillion ($156.4 billion) of new local government special bonds in H1, accounting for about 28% of the annual quota of Yuan 3.65 trillion, while over the same period of 2020, Yuan 2.231 trillion of special bonds were issued and accounted for 60% of the annual quota that year.
The special bonds are designed to mainly fund infrastructure projects.
However, China has tightened standards around the issuance of local government special bonds, in a bid to keep the funding from flowing into the property sector, and also keep the hidden debts from rising further. Therefore, special bonds issued in 2021 may fall short of the annual quota, and also remain lower than the number of bonds issued in 2020, according to sources.
China’s infrastructure investment in H1 rose 7.8% on the year, according to National Bureau of Statistics.
But the growth rate of infrastructure investment may turn negative in H2, while infrastructure steel demand may also decrease from a year earlier at the same time, partly due to higher base in H2 2020 and partly as a result of lackluster government funding, some sources said.
Output cuts boost steel futures
However, if China strictly implements steel output cuts, domestic steel demand from construction sites would still exceed supply and help push long steel prices and margins higher, some sources said.
Stricter cuts would drive China’s crude steel output down by 59 million mt, or 11%, on the year, in the second half of 2021, S&P Global Platts calculations based on National Bureau of Statistics data shows.
Although most steel mills have not yet started trimming steel output, the futures market has begun to price in the output cut factor, with the October rebar contract already rising to Yuan 5,753/mt, and the January 2022 contract to Yuan 5,774/mt as of July 29. The estimated margin of the January contract reached around Yuan 1,600/mt ($247/mt), a source said.
On July 28, the rebar transaction price in the Beijing spot market was Yuan 5,455/mt, with margins at $41/mt, according to Platts data.
Some market sources expect China’s steel production will be reduced in the second half from the first half of 2021, but it remains to be seen whether the output cut target will be fully achieved.