Ferrous metals 'thought of the week'

March 15, 2017

How are China's lending conditions and construction industry affecting the ferrous metals market?


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  • This week we would like to discuss lending conditions in China, with focus on the impact on the heavy industry, and steelmaking in particular.
  • The Chinese government and Central bank have a selection of fiscal and monetary instruments at their disposal to prop up growth. The injection of credit as liquidity via aggregate financing is one of them. Aggregate financing, the broadest possible indicator of credit expansion, reflects the amount of liquidity that the financial system provides to the economy.
  • As mentioned in some of our earlier research notes, our view is that physical commodity trading and processing is a very cash/credit intensive business. We also believe that it is not the total amount of money in circulation, but rather the credit creation which drives the demand for raw materials that matters. As such, we had expressed in those research notes that the absence of any meaningful Keynesian style government intervention will likely see the manufacturing sector under pressure which is likely to drag down demand for steel.
  • The recent release of key macroeconomic data from China caught our attention. Latest aggregate financing in January came in at 3.7 TN Yuan, an all-time high. The amount of newly created loans by the banks in China, although declined 19% Yoyo, too showed expansionary signals as compared to previous months.
  • If we revisit what happened last year where we saw unprecedented efforts by the Chinese central government to provide much needed stimulus. These measures provided much needed uplift as PMI manufacturing data which had been in contraction since august 2015, reversed fortune in march last year and the latest February figures continue to suggest upward momentum.
  • With the additional credit made available, we are interested in examining the impact this could have in cash intensive heavy industries such as steel making and eventually its impact on steel production. This is done through our understanding of the amount of loans made to the heavy industry.  
  • If we perform a 3-month rolling basis for the loans to industry and compared that to the nominal steel production volumes, we observed an interesting relationship. The sustained decline in credit extended to the heavy industries in 2h 2015, coincided with a fall in steel production. A similar relationship can be observed early last year as the sharp rebound in credit extended to industries was met by improvements in steel production volumes. Our data does suggest some resilience in the steel production activity
  • In addition as part of our study, If we reuse last year’s February and March loan figures to forecast steel production volumes, it does give us an interesting insight. Based on the uptick that we see, it does suggest that nominal steel production figures could contract slightly in February before increasing to about 67mln tones in March.