Is China’s New Megacity a Big Deal for Steel Demand? Not Really

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Last month, China announced plans to build a new megacity from scratch. Since the city will be twice the size of New York City, analysts expect the project to require huge amounts of steel and other industrial metals such as aluminum and copper.

Two-Month Trial: Metal Buying Outlook

According to Citi Research analysts, 12-14 million tons of extra steel will be required annually to build this new development. Since the country’s current domestic demand is about 700 million tons, that would lift Chinese steel demand by 2% per year over the next 10 years.

But are the analysts correct? Should we expect a steel demand boost over the next 10-15 years?

Although building this city from scratch will indeed require a lot of steel, analysts are making the mistake of missing the forest for the trees. The key driver for steel demand in China is the net migration from the countryside to cities. It doesn’t really matter whether China builds a new megacity or it expands its city limits. The key measure is the rate of urbanization in the country at a national level.

Urban and rural population in China. Source: China’s Economy book by Arthur R.Kroeber

China’s urban share has grown quickly over the past two decades since its rural population peaked in 1995. Last year, China’s urban population share reached 57.9%. The share, however, is still small given the country’s income level.

Most demographers expect China’s urbanization rate to reach 75% like in other developed countries. Therefore, although construction growth in China has now peaked, there is still a lot to be built. It’s just that the annual rate of new construction no longer needs to be greater.

What This Means For Metal Buyers

The construction of a new megacity in China won’t necessarily increase its annual steel demand. China’s urbanization rate continues to grow, so the country will continue to build infrastructure to move people out of rural areas. China will need more steel either way. But as the country puts the brakes on credit growth, China’s appetite for steel will likely remain subdued. Bigger surprises could come from the supply side of the equation as China closes steel capacity, although so far, that hasn’t translated into lower output.

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