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sbb analytics china 2008

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    I also posted this on the MGX thread.

    Steel Business Briefing Analytics China

    13 November 2008

    Beijing’s US$586 billion stimulus package - is it
    enough?


    • This week the government announced a major stimulus package
    worth approximately RMB 4 trillion ($586 billion) to be rolled out
    over two years, intended to kick-start a domestic demand recovery.
    According to the government’s plans, almost 80% of the money will
    spent on steel intensive infrastructure and construction projects.

    • The majority of projects outlined in the stimulus package are not
    new ideas, and were included either in the 2006-2010 five year plan
    or assubsequent initiatives. As such, it should be relatively easy for
    the government to bring these projects forward and get them
    started in the first half of next year.



    • Given the longs intensive nature of construction and infrastructure
    development, the direct benefits of the stimulus package will for the
    most part be felt by producers of rebar, wire rod and sections.
    China’s first and second tier producers and indeed the multitude of
    middle ranking players that invested heavily in flat product capacity
    over the last few year, will have to wait for the trickle down effects of
    the government’s actions (i.e. improved confidence finding its was
    through to the manuacturing sector).Even then, there is no
    guarantee that demand will be strong enough to make full use of
    the 70-80m t/y of HRC capacity installed over 2007 and 2008.

    • While RMB 4trn is certainly a lot of money - indeed the
    announcement was larger than many had expected - it is important
    to put this figure into some context. China’s total investment in
    fixed assets (FAI) in 2007 came to RMB 13.7 trn, and in 2008 this
    is set to increase by around 20-23% to RMB 16.4 trn. Given that
    the stimulus package is to be split over two years and assuming
    the split is even, we estimate that the government package offers
    RMB 1.8 trn of FAI in each year, equivalent to 11% of the
    estimated 2008 FAI total.

    • Were it not for the stimulus package, there are reasons to believe
    that FAI growth could have slowed considerably next year. From
    January to September this year, around 34% of China’s FAI came
    directly from local and central government funds. It is estimated
    that local governments source a large proportion of their revenue
    from land sales and taxes related to the construction and real
    estate sectors. Sales of land for development between January and
    September this year were down 3% y-o-y, and with construction
    activity remaining weak, this is likely to restrict funds available to
    local governments.

    • Another 33% of funds for FAI were contributed directly from
    “Institutions and Enterprises”, which include China’s state owned
    and private businesses. As the business climate has grown
    progressively worse throughout the second half, many of these
    companies have been loss making or at least taking defensive
    positions against the downturn. It is therefore likely that
    investments made by these companies next year will be down on this year.

    • In this context, the government’s stimulus appears to be just
    filling a potential gap in next year’s FAI. Rather than sending steel
    demand soaring to dizzy heights, on its own the government’s
    package is more likely to help return demand to a modest level of
    growth. At this stage we are not adjusting our forecasts for 2009 of
    3-4% AC growth (to 430m t, finished basis) and 0% production
    growth (500-505m t, crude).
 
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