Here’s a take from Barclays that reiterates my views nicely:
The impact of higher infrastructure spending on steel demand will be tempered by the weak property market, which has much higher contribution to steel consumption. Historic analysis shows iron-ore and steel prices tend to fall during periods with high infra spend and weak property starts.
• Impact on steel and iron-ore demand subdued due to weak property market: Infrastructure is only ~21% of Chinese steel demand, compared to property at ~38%.
• So our bear case for an 8% decline in property steel demand this year would require infrastructure to grow ~15% to offset it, assuming all other end demand drivers are flat – which is not necessarily a given as auto/machinery sales are declining sharply YTD.
• Steel demand will also be suppressed by the increasing share of lower steel-intensity ‘new infrastructure’ and the nominal nature of infrastructure spend vs. CPI/PPI averaging 5%.
• Even in our bull case scenario for steel demand up 3.1% y/y, we still see crude steel production run-rates declining 11% vs. current levels over the rest of 2022.
• We looked at historically analogous periods when China’s infrastructure spending was growing strongly (>15% y/y) and outperforming relative to floor-space starts (>15% delta).Iron-ore prices on average declined by 20% both during the period of infrastructure outperformance and the subsequent 6-month period. In the converse situation, when floorspace starts were strongly outgrowing infrastructure, iron-ore and steel prices rose.This highlights that infrastructure tends to be used as a counter-cyclical stimulus measure when the broader economy is struggling.
• We expect falling iron ore prices over H2-22 underpinned by lower steel production in China, rising seaborne supply, prolonged lockdowns and weak property market.
The only problem for this analysis is that it is assuming property starts fall only 20%. Sales are averaging -50% so it is assuming a booming recovery in H2 that is nowhere in sight.
Barclays bear case is the base case. The real risk case is -13%+ for property-related steel output or minus another 100mt of iron ore demand.
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.
