This budget detail could hold the clue to Chinese commodity demand in 2021
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A key budget item that helped underpin Chinese commodity demand in 2020 hasn’t changed much in 2021, CBA says.
That said, commodity analyst Vivek Dhar said there are signs Chinese steel demand is “slowing modestly”, this year.
Resources investors have been appraising talk of a new commodities ‘super cycle’ as the global economy emerges from COVID-19.
Some analysts have pointed to structural forces at play as demand picks up, while a lack of capex investment means it won’t be met by an equal amount of supply.
The dynamic is at play in iron ore markets, while another analyst told Stockhead recently that the fundamentals for copper are looking “extremely attractive”.
Recent coverage from Stockhead’s Mike Cooper pointed to expert commentary which said the current commodity cycle will be underpinned by strength in the iron ore market.
But research from ANZ this week raised the prospect that China’s central bank may put an upward bias on interest rates this year, as it prioritises the “regulation of financial bubbles” over policies supporting growth.
And for any iron ore story, Chinese commodity demand is likely to play a key role.
After a big post-COVID infrastructure push in 2020 said China’s iron ore imports continued to rise (by three per cent) through January and February this year, Dhar said.
However, other signs point to a mild slowdown, starting with manufacturing PMIs which have eased back from their December highs.
In addition, Chinese authorities flagged they expect this year’s budget deficit to hit 3.2 per cent of GDP — down from 3.6 per cent last year.
But Dhar highlighted recent commentary from Chinese Premier Li Keqiang, who handed down the ruling party’s estimate for low-cost bond quotas available to local governments.
“Local government special bonds have become the primary financing tools to support public-led infrastructure projects,” Dhar said.
This year’s quote is for CNY3.65 trillion — down (but only slightly) from CNY3.75 trillion last year.
In addition, the 2021 quota is still “much higher” than the 2019 quota of CNY2.15 trillion, Dhar said.
So while current signs suggest demand won’t increase from last year’s torrid levels, the stance of Chinese policy makers indicates steel-heavy infrastructure projects will still be prevalent in the year ahead.