Can China’s “silk road” save iron ore?

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From Morgan Stanley:

Although unlikely to boost demand this year, wethink OBOR could potentially provide new sources of commodity demand in the coming years. We think that if the initiative energizes global infrastructure development beyond our base case, OBOR could lift the associated commodity consumption patterns.

In September 2013, Chinese leader Xi Jinping first discussed the’One Belt One Road’ (OBOR) conceptand in March 2015, the NDRC released an action plan, officially launching the initiative. The development strategy aims to connect and integrate the Asia Pacific region, the Eurasia continent through to Europe, essentially reinvigorating ancient overland and maritime trade routes.

The geography spans over 60 countries, reaching from Southeast Asia to Northern Europe.

The broader goal is to enhance regional trade, investment and infrastructure development, backed by over USD140 billion in funding via new and existing regional institutions. In our view, these types of trade partnership pushes are typical stages of development from emerging economic powerhouses post industrialization, similar to stages Britain and the United States took on. Amid recent momentum in government supportand funding approvals, OBOR has become a hotly debated topic in investment circles. Indeed, during our recent metals and mining due diligence trip in China, it was a theme that came up in nearly every meeting, with most companies declaring their involvement as a source of pride, as well as a source of future growth. In the early stages of the initiative’s life-span, the reappear to be more questions than answers, namely over what it actually means for the Chinese economy.

Specifically, we are often asked whether or not it will become a boon for Chinese steel production and exports of other infrastructure related materials. We think that OBOR will only deliver new sources of commodity demand if the initiative triggers greater infrastructure build than what is already in our base case, or pulls forward the trend.

However, should the OBOR initiative increase infrastructure build, global steel demand could rise above our current base case assumptions. Furthermore, this would likely lead to an increase in Chinese steel exports, potentially offsetting our current projections of negative steel production growth in China over the next three years.

You never know but this is a pretty wild hope. Are we going to see wondrous co-investment across 60 countries? Not likely.

Because Chinese steel exports are coming under intensifying protectionist pressure this will most likely be an offset to that, not new demand.

Moreover, the real downdraft for steel is residential property not infrastructure and none of the supply side banks have modeled a steep enough slope for that yet.

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This looks like more of the same glide slope management to lower and less commodity intensive growth.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.