2022 steel market environment tends to improve



Looking into the Chinese steel market in 2022, the market environment is still positive and negative factors, opportunities and challenges coexist, but positive and opportunity factors are greater than negative and challenging factors, the overall situation will tend to improve.

Looking into the Chinese steel market in 2022, the market environment is still positive and negative factors, opportunities and challenges coexist, but positive and opportunity factors are greater than negative and challenging factors, the overall situation will tend to improve.

First, the steel market in the New Year five factors

1. From the perspective of domestic market environment, "carbon peak" and "carbon neutrality" are still major factors affecting the relationship between steel supply and demand. "Carbon peaking" and "carbon neutrality" is a long-term strategic goal of China's development. In the New Year, "carbon cap" and "carbon reduction" measures will only intensify, not weaken. On the other hand, in the New Year, the national energy and power supply is likely to become a "bottleneck", once the power limit, steel and other energy consuming consumers will bear the brunt. Due to its impact, it is expected that the domestic production growth of steel and all black series commodities will continue to be restricted, which will make the supply and demand relationship further improved.

2. From the perspective of the international market environment, the improvement of Sino-US trade relations, the extinction of the epidemic and the official effect of RCEP will become three positive factors for China's steel market in the New Year. The "trade war between China and the United States" initiated by the United States and the forced "decoupling of trade between China and the United States" have greatly impacted the interests of both sides and caused huge disruption and chaos in the global supply chain. In particular, it has become a driving factor of tight prices and relatively serious inflation in the United States, which has aroused widespread opposition from some interest groups in the United States and other countries. According to media reports, prices in the United States have continued to rise in 2021, and prices soared again in September and October, pushing the year-on-year inflation rate to 5.4% and 6.2% respectively, the highest level since 2008 and far higher than the 2% annual growth target set by the Federal Reserve. This suggests that upward momentum in US prices is building as companies shift cost pressures by raising prices. Many economists, including some Fed officials, expect inflationary pressures to persist until 2022. US President Joe Biden therefore said that "reversing inflation is a top priority".

All this has led the current US administration to accept that trade decoupling with China is unrealistic and that it needs to improve trade relations with China. In a previous speech on trade policy towards China, US Trade Representative Mary Dedge called for a "targeted tariff relief process" to remove tariffs on $370 billion worth of Chinese products imposed by the Trump administration while maintaining pressure on China. It stressed that the goal of trade talks with China was primarily to promote Chinese purchases of US products, "not to escalate trade tensions with China", and that the US intended to drop plans for China to reform its "non-market economy". Moreover, if the United States is to avoid a more inflationary outlook, it should reduce or eliminate its steep tariffs on Chinese goods and avoid the huge import costs that would result. To this end, Janet Yellen, the US Treasury Secretary, recently said that "the US may consider eventually reciprocal cuts in some tariffs with China, which would help to reduce inflationary pressures in the US". All in all, there are signs that the New Year will see a shift towards easing, rather than continuing or further straining, Sino-US trade relations. This makes the external environment of China's steel market tend to improve.

The global pandemic is expected to subside in the New Year, and a more dire situation is unlikely. This is because of the universal vaccination in all countries, especially rich developed countries; Multiple effective prevention and control measures for the spread of the epidemic; The emergence of effective drugs and methods to treat the novel coronavirus will bring the global epidemic under control. As the global epidemic turns to subside, China has been extensively vaccinated with booster vaccine, and economic life has restarted, which is bound to push global consumption, production, logistics and human flow back to normal, thus generating new driving force for steel market demand.

The US Congress recently approved a trillion-dollar infrastructure plan, and the US plans to launch five to 10 global infrastructure "flagship projects" from January 2022. Although these plans have the purpose of competing with China's "One Belt, One Road" and so on, but if they can be really started, it can still stimulate the global total steel demand, directly or indirectly benefit the Chinese steel market.

Moreover, the Regional Comprehensive Economic Partnership (RCEP), which will take effect on January 1, 2022, will also gradually boost China's exports, including direct and indirect steel exports.

3. Global demand continues to depend on the Chinese supply chain. In the New Year, global demand, especially US demand, will not become less dependent on the Chinese supply chain, and may even increase. According to the statistics of the General Administration of Customs, from January to October 2021, the national export (RMB), a year-on-year growth of 22.5%, in dollar terms, export growth of 32.3%, strong export growth exceeded expectations. Even in the face of high tariffs and talk of "decoupling", China's exports to the US rose 21.8 per cent year-on-year in the first October of this year, or more than 30 per cent in dollar terms.

Therefore, this situation is largely due to the crisis in the global supply chain excluding China, especially in the domestic supply chain of the United States, which resulted in a great dependence on Chinese goods. At a seasonally adjusted annual rate, the United States bought $635 billion in Chinese goods, equivalent to 27 percent of U.S. manufacturing gross domestic product. It is believed that this supply crisis will continue until 2022, which will allow global demand to continue to rely on the Chinese supply chain, thus continuing to generate a demand boost for Chinese exports, both direct and indirect.

4. Domestic fixed asset investment is expected to stabilize and rebound. Fixed asset investment is the main downstream user industry of steel. In 2021, the national fixed asset investment was relatively sluggish, especially the growth rate of real estate investment fell in the second half of the year, and the real estate investment also changed from 10% year-on-year growth in May to 3.5% year-on-year decline in September. In the first three quarters of this year, infrastructure investment grew only 1.5% year-on-year, with a 6.9% year-on-year decline in the third quarter, which was the main factor behind the weak steel domestic demand. It is expected that in the New Year, the national fixed asset investment is expected to stabilize and pick up speed. The positive factor is that the central bank has asked for a relaxation of mortgage limits, regular issuance of compliant loans to developers, to meet their "reasonable" financing needs, and to ensure the smooth operation of the property market. Under the premise of "no speculation in housing and housing", more easing policies are likely to be introduced in 2022, including easing related credit policies and accelerating construction of public housing. Under its influence, the new construction area of the national real estate will likely increase in 2022, driving the growth of real estate investment.

Infrastructure investment is also expected to rebound. In the New Year, authorities are expected to loosen fiscal policy, including accelerating the issuance and use of local government bonds, accelerating the approval of local projects and partially relaxing strict controls on financing by local government financing vehicles. At the same time, some infrastructure projects are likely to be launched ahead of schedule. Infrastructure investment growth is expected to rebound to around 4% in 2022.

Second, the trend of rising inflation has become the biggest uncertainty of economic recovery and steel market

Global inflation, which starts to rise at the present stage, will continue to develop in 2022, which is bound to force central banks around the world to tighten monetary policies and form a certain degree of brake on economic activities, thus becoming the biggest uncertainty of global economic recovery and steel market in 2022.

Us CPI data in recent months have suggested inflation will take longer to rise than expected, putting pressure on the Fed to raise rates sooner or cut back sooner. According to the current information, the "exit roadmap" of the Federal Reserve is roughly as follows: 1. Reduce asset purchases and shift from extreme monetary easing to moderate monetary easing. It will be implemented in November 2021. 2. Complete cessation of asset purchases and a shift from easy monetary policy to conventional monetary policy, around mid-2022. 3. Raise the benchmark interest rate in the second half of 2022, one increase in 2022, three increases in 2023, and three increases in 2024. With Federal Reserve interest rates close to zero, the 10-year Treasury yield is around 1.31%.

High global inflation and a general tightening of monetary policy by central banks around the world will restrain economic growth. Inflation risks were cited in part by the International Monetary Fund, which in October cut its forecast for global economic growth in 2021, slightly lower than the 6 percent forecast in July. The uncertainty of global economic recovery, resulting in the uncertainty of China's steel market demand, also poses its biggest challenge. (Original article by Lange expert Chen Kexin, reproduced, please indicate the source)

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