Steps to boost steel domestic demand can lead to currency depreciation
This week Beijing has announced that it will issue special bonds worth RMB 1.35 trillion (USD 199billion) for financing the ongoing infrastructure projects, will cut RMB 1.1 trillion in taxes in the current year and will also set up a state guarantee fund to provide loans worth RMB 140 billion to 150,000 small companies.
These measures are designed by the country’s government to boost spending and stimulate economic growth and to lift demand for steel products from the manufacturing and construction sectors. China also intends to maintain a stable monetary policy to provide sufficient liquidity in the banking system, which is a positive sign for the credit-sensitive real estate sector that is China’s largest steel consumer.
China-U.S. trade war over the past few weeks has resulted in the depreciation of Chinese currency yuan. Now with higher fiscal spending and easing monetary policy, the Chinese currency is likely to weaken further as more yuan will be available to buy U.S. dollars.
The industry experts believe that this depreciating Chinese currency will make steel exports more lucrative, the result of which will not be seen immediately but after a month or two in the form of increased shipments outside China as the time lag for export deliveries from the country usually varies from six to eight weeks.
Tighter supplies will lead to increased prices and profits for steel companies
On the demand side, although domestic and export demand will get a boost from the government’s fiscal and monetary policies, stricter environmental protection policies could tighten supplies for rest of the year.
With more stringent policies announced by the Chinese government to tackle the problem of rising pollution, several mills in Tangshan city which is China’s major steel manufacturing hub, have currently shut down sintering units with others operating at 50% of capacity, while blast furnace operating rates are down by around 30%. This year China has announced winter production cuts across 80 cities instead of just 28 cities last year including the three largest steel producing provinces of Hebei, Jiangsu and Shandong.
Amid tighter supplies due to production cuts starting from November till March next year and increased demand due to growing real estate investment, Chinese steel prices which are already on a roll over past three months are likely to increase further.
The profits of steel companies have remained at historically high levels since late April and the bullish outlook for demand and supply is likely to maintain or even lift profit margins for the rest of the year. The only issue that can weigh down the company’s profits is the expenditure to set up equipment for reducing emissions, as Hebei province has set a 1 October as a deadline for all mills to adhere to ultra-low emissions regulations.