China’s new stimulus hope fails to lift steel markets on dim demand recovery

The Chinese steel market remains unfazed by the latest developments around monetary and fiscal stimulus expected next year as such support would be unlikely to reverse the downward trend in steel demand in 2025, market participants said Dec. 13.

Hopes of new stimulus emerged during the top political economic conference in China Dec. 12, a development that is usually seen as supportive for steel markets, but steel futures demonstrated a contrary trend.

On Dec. 13, the most actively traded rebar and hot-rolled coil May contract on the Shanghai Futures Exchange closed at Yuan 3,360/mt ($462/mt) and Yuan 3,491/mt, down a respective Yuan 68/mt and Yuan 71/mt on the day, according to exchange data.

The annual Central Economic Work Conference, held by China's top leaders to decide priorities for the economic work in 2025, announced Dec. 12 to adopt a "moderately loose" monetary policy in 2025, with reductions in the bank reserve requirement ratio and interest rates at an appropriate timing to ensure ample liquidity.

The last time China used a "moderately loose" monetary policy was in 2009, when the economy was facing downward pressure from the global financial crisis.

The "moderately loose" monetary policy in 2009 led to a Yuan 4 trillion stimulus, which quickly boosted China's property and infrastructure investment, and restored economic and steel demand growth in tandem.

However, market sources said this time will be different.

Even with more aggressive monetary stimulus, the boost to the economic growth and steel demand is likely to be nowhere near what it was in 2009, as China's property sector has already entered a long structural downtrend, and the growth of infrastructure investment is unlikely to gain pace, due to almost completed urbanization and lack of funding from debt-strapped local governments, according to sources.

"The economy is not short of liquidity, but lacks new economic growth pillars that can replace property and infrastructure sectors," said a mill source.

He added that although the annual Central Economic Work Conference also referred to vigorously boosting consumption in the home market in 2025, there was still long way to go to revive household income expectations before the consumption sector can recover.

The conference also pledged to adopt a more proactive fiscal policy, such as setting a higher deficit ratio for 2025, and to increase the issuance of ultra-long special treasury bonds and local government special bonds.

However, the steel market was not expecting these fiscal stimulus packages to bring much incremental steel demand in 2025, as part of the fresh fiscal packages would be used to pay down or swap local governments' existing debts.

Other than that, more government funding has been channeled to so called 'new infrastructure,' such as 5G or new energy, which is less steel intensive than traditional infrastructure, such as roads, bridges and airports.

"I think it's almost certain that China's construction steel demand will continue to drop in 2025, and the growth in manufacturing steel demand should be too moderate to offset the dents in construction sector, especially as potential escalation of the US tariffs is likely to weigh on China steel demand from the export-oriented manufacturing sector," said another mill source.

However, some trade sources stressed that debt swaps at local governments could ease their payment burden of hidden debts in 2025, so that infrastructure investment at least related to clean energy, such as wind and solar power and charging piles for electric vehicles, is still expected to gain more government funding next year and benefit flat steel demand.

"I'm not that pessimistic about the Chinese steel market in 2025, as I think China will adopt more aggressive monetary and fiscal stimulus next year, which will bring inflation back and support steel prices," added a trade source.

But some other market sources pointed out that the conference did not mention any supply-side reforms, which means overcapacity is likely to persist in the Chinese steel market at least in 2025 and continue to limit upside for steel prices.