China has set a GDP growth target for 2021 of “above 6%,” below the market consensus of 7%-9%, indicating that stable economic growth, deleveraging and decarbonizing of the economy will be priorities for the year, rather than maintaining high GDP growth, which is set to adversely impact infrastructure and property steel demand, as well as steel production, according to S&P Global Platts Analytics.
In line with the lower-than-expected GDP growth target, the government also reiterated the commitment to align total social financing and broad money growth with nominal GDP growth, which is in line of China’s monetary normalization process, starting from May 2020.
The decreased fiscal stimulus, in terms of deficit and local government special bonds, means infrastructure construction is unlikely to surpass the level seen in 2020. Platts Analytics said it expects infrastructure steel demand to have zero or low single-digit growth in 2021.
Moreover, the government work report declared to cut energy consumption per GDP by around 3% by reducing pollution emissions in 2021, while there was no such target made for 2020. As the iron and steel industry is a major carbon emitter, it will no doubt be targeted for carbon emissions reduction in 2021. China’s Ministry of Industry and Information Technology has cited the plan to cut steel output no less than three times already in 2021 as the most effective way to reduce emissions.
Platts Analytics expects steel output cuts to occur in the second half of 2021, as demand is likely be lower in H2 than in H1. Implementation of emissions quotas could be a way to enforce production cuts if emissions quotas allocated to mills are exceeded. However, any steel production cuts need be gradual and moderate in order to avoid drastic market fluctuations.
According to Platts Analytics, too much steel production cuts and too fast will not only hurt downstream steel users, but could also erode the steel industry’s profitability, as 93 million tonnes a year of brand-new crude steel making capacity were just commissioned in 2019-2020.