China Lowers Growth Target For 2012

China’s premier Wen Jiabao on Monday said that the target at which China will grow this year is set at 7.5 per cent. This was the lowest target set in the last seven years. The official further stated that a lower GDP growth was targeted in order to maintain qualitative demand-driven growth and not just supply or export-driven with the aim of keeping the inflation under control at 4 per cent this year.

Chinese economy is the second-largest economy in the world and in the last three years has continuously grown between 8-10 per cent levels, that too at a time when all the other major economies were struggling from the fear of recession.

China is also the largest producer and consumer of steel in the world. Nearly 45-50 per cent of the world’s steel production and consumption is in China which had a crude steel capacity of 800 million tonnes in 2011 while the consumption stood at 623 million tonnes in 2011, up by 8.8 per cent on a YoY basis with an utilisation ratio of 85 per cent.

However, with the slowdown in economy we expect the steel demand growth to follow a similar trend in 2012. Given the liquidity situation and the slowdown in the construction and manufacturing sector too, we do not expect any major growth in demand in 2012. The problem of oversupply will also persist during the year.

China has seen a decline of 13 per cent in its crude steel production for January 2012 which stood at 52.1 million tonnes as compared to January 2011. With the slowdown in demand in China and other developed economies we expect the global steel and iron ore prices to move in the downward direction. Lower demand and oversupply situation will lead to higher inventories. Moreover, with the high input cost of coking coal and lower steel prices we can see margin erosion for steel companies. The repercussion may also be reflected in the Indian markets if our domestic consumption does not recover.

As of now the domestic demand has started improving in the last few months which has resulted into a marginal hike in steel prices. There could be a correction in the commodity prices if China’s steel demand slows down this year. This year the Chinese demand has been projected to grow at 4 per cent to 700 million tonnes as against the 8.8 per cent growth witnessed in 2011. Meanwhile, continued weak demand has resulted in an inventory pile-up for the steel companies, thus impacting the cash cycle and resulting in a de-stocking of this inventory at lower prices. This will ultimately impact their margins.

The HRC prices all over the globe have seen some upside movement in the month of January, especially in the US and Germany. However, Chinese HRC prices have not seen much upside in the last three months and are currently hovering around USD 694 per tonne. And if the demand situation doesn’t improve from here on, it may lead to a decline in international steel prices in the coming months.

In the meantime, the domestic market may remain better off in the coming quarter as inflation is slowing down and the interest rate is getting peaked out after the CRR cut of 50 bps by the RBI. We can see some pick-up in demand in the coming quarter through an upward movement in the steel prices over the coming months which is at presently insulated with the high rupee depreciation value. Once the rupee appreciates, there will be pressure on the Indian steel prices too. We believe that the slowdown in global demand will continue in the coming quarters. Debt problems still persist with some of the major economies while lower economic growth in China coupled with high inventory pile-up and subdued demand will lead to price pressures internationally.