China’s Rate Cut Bring Hopes For Steel Industry

China, in a measure to maintain the growth of the economy, has cut its key lending and deposit rate by 25 bps to 6.31 per cent and 3.25 per cent respectively. The cut in the interest rate will provide funds at lower cost to various businesses and enterprises in the country. Further, the cut will push investment in the country, thereby leading to higher growth.

China is also one of the biggest commodity markets in the world. The commodity market in China is facing a downtrend due to a slowdown in the economy. And to combat the weakening situation, China has opted to cut the rate also in order to revive the falling commodity market in spite of the fear of rising inflation. Among the major commodity markets the steel industry is one of the largest markets for China, which at presently is facing severe problems such as slowdown in demand, situation of oversupply, fluctuating raw material prices, higher competition, falling steel prices and global price risk, etc.

China’s industrial output growth in April disappointed at 9.3 per cent, down from 11.9 per cent in March and the lowest level since the financial crisis. Further, Chinese GDP grew by 8.1 per cent in the March 2012 quarter, which was at its weakest pace in nearly three years. The lower GDP growth was due to decrease in exports, the domestic property market and its self-geared slowdown of fixed-asset investments. 

The slowdown in the infrastructure and construction activity due to lower demand for housing dented the demand for steel in the economy which further resulted into a sharp correction in the steel prices in the last five months. The steel production in China has remained muted in the last four months, indicating a weak demand scenario. 

However, with the rate cut and other stimulus measures, this will bring some cheer to the steel industry in China and across the globe. There are various plans to increase the investment in infrastructure projects and providing funds at lower cost to boost demand in the economy. The increase in infrastructure spending will result into a higher demand for long steel products. This will lead to a rise in the steel prices which will provide relief to the ailing steel producers in terms of margins and profitability. The impact will also be seen in India as imports will get costlier, leading to more domestic sales. 

In conclusion, we believe the rate cut will definitely help the Chinese economy to maintain decent growth in the coming quarter. However, inflation will remain a major concern too. The rate cut will boost the commodity markets and the metal industry in China. The overall impact will also be seen in the global markets as China is also one of the largest consumers of major raw materials such as iron ore, coking coal etc. In India, the steel prices will remain firm. Moreover, the iron ore prices will also increase as India is a major exporter of iron ore to China.