China's soft infrastructure growth seen jamming breaks on steel demand in 2023

China's pace of infrastructure sector is likely to be curtailed by a lack of funding from local governments and pose a key challenge to steel demand recovery in 2023, industry sources told S&P Global Commodity Insights.

The infrastructure sector in China is a major consumer of steel and tends to dictate market trends.

As of Feb. 7, 15 provinces and cities have announced investment plans for 2023, mainly covering projects such as infrastructure, energy, industrial zones, schools and hospitals.

The total planned investment for these projects is Yuan 6.904 trillion ($1.018 trillion) in 2023, up 0.5% from 2022. Last year, however, investments on major projects in these regions were up 9.6% from 2021, S&P Global calculations showed.

While several major provinces such as Zhejiang, Hubei and Sichuan are yet to announce their detailed investment plans for key projects in 2023, some market participants see any further government-backed stimulus to be relatively lower after a robust aid package in 2022.

According to S&P Global estimates, China's steel demand in infrastructure sector would rise 2.3% on the year to 231.4 million mt in 2023. Last year, the demand picked up 5.1% on the year to 226.1 million mt.

Challenges ahead

One of the reasons behind the possibly lower growth rate in infrastructure is that local government spending is expected to be constrained in 2023 due to elevated debt and rapidly falling land sales and property-related taxes.

The value of China's property home sales and land sales in 2022 fell by 26.7% and 48.4% on the year, respectively, according to data from the National Bureau of Statistics.

Meanwhile, the slowdown in the property sector, the biggest steel demand driver in China, is likely to be mitigated in 2023 due to massive government relief measures introduced last year, and domestic consumption should recover modestly after the country's post-pandemic reopening, according to market participants.

As a result, there is no need to inject a further huge stimulus into infrastructure in 2023 to cushion the property and consumption sectors, they said.

Some steel market participants pointed out that government stimulus packages announced in 2022 targeting the infrastructure sector would continue to lend support to the sector in 2023.

"The steel demand may gain momentum in April-June from infrastructure projects launched in the fourth quarter of 2022. But currently the steel market is under pressure, as seasonal demand recovery from construction sector [infrastructure and property combined] has so far been slow and steel inventories have kept rising," a southern China trader said.

The Chinese domestic rebar prices in Beijing spot market, assessed by Platts, fell 4% from the end of January to Yuan 4,093/mt on Feb. 7, according to S&P Global data.

The major reason behind the slow demand recovery was insufficient funding to property sector, while government spending on some infrastructure projects, especially municipal projects such as subways, was also on the lower side, the trader said.

However, steel markets will be keeping a close eye on the upcoming key national events that are expected to influence the state of the economy.

China will hold the National People's Congress and the Chinese Political Consultative Conference in early-March to set targets for 2023.

Traditionally, infrastructure construction gains pace after the two meetings are held, as economic goals become clearer for local governments, market sources said.

But without any further strong stimulus, the strength in infrastructure construction may dwindle towards the end of 2023, they added.