The inverse relationship between the strength of the U.S. dollar and the price of commodities has held good over time.
That relationship isn’t a constant, of course. Political, economic or supply-demand fundamentals can trump dollar strength at times of stress. However, as a broad measure, it can impact prices day to day, week to week and year to year.
While stock prices are currently at all-time highs, commodity prices are as cheap today as they pretty much have been for decades — not historic lows, but relatively speaking commodities have not enjoyed the same boost from cheap money and asset-boosting policies like quantitative easing that stock prices have seen.
In the last two years alone, one site lists 10 major tailings dam failures alone; environmental damage from tailing ponds is only the thin end of the wedge when it comes to the wider remit of potential environmental consequences arising from mineral extraction.
Yet not one of those events listed was in China, despite half the world’s metals being refined and produced there, and a sizable proportion of the world’s mines being in China.
The assassination of Iranian top military official Qassem Soleimani outside Baghdad airport last week caused a near 4% surge in oil prices and a drop in share prices as investors took fright at the prospect of an all-out war between the U.S. and Iran. Not long after, however, oil prices retreated over 4% to below $60 per barrel Wednesday morning after President Donald Trump said Iran appeared to be “standing down.”
In reality, while that remains a possibility, a more likely outcome is an ongoing lower-level exchange of tit-for-tats as evidenced by Iran’s attack overnight earlier this week on two airbases housing U.S. and coalition forces in Iraq.
2020 will — economically, anyway — be shaped in no small part by what happens in China.
The world’s second-largest economy has been on a slide in terms of GDP growth for years now. The 18-month trade war with the U.S. has contributed to that decline and has been the cause of considerable investor anxiety.
As if the downturn due to a trade-war-induced slowdown in China were not enough, the European automotive industry is facing the challenge of a rapid switch from diesel to petrol engines that has been gathering pace for the last two years. At the same time, the industry has also had to deal with the implementation of new legislation designed to reduce car makers’ overall fleet emission levels.
An article in the Financial Times explains the impact of the new legislation on Europe’s automakers, an industry that supports some 14 million workers across the continent.
Quoting Max Warburton, an auto analyst at Bernstein, the article says each carmaker faces its own CO2 target based on the weight of its vehicles. A business selling smaller cars, such as PSA, therefore has a lower CO2 target than a company with a heavier average vehicle, such as Mercedes-Benz owner Daimler.
The targets for each company vary from around 91 g/km to just over 100 g/km. Some carmakers, like PSA, have already made good progress, switching less fuel-efficient, four-cylinder GM engines in their new Astra range to new three-cylinder PSA engines has improved efficiency by some 21%.
However, carmakers like PSA do not have a lot of luxury saloons and SUVs in their lineup. Daimler, BMW and JLR do, and the situation is made worse by a rise in sales of such vehicles in recent years.
Europe — once the home of the small, fuel-efficient compact — has fallen in love with the SUV. Some 40% of cars sold in the E.U. are now SUVs and automotive carbon emissions have, as a result, risen for the first time in a decade.
Potential fines for missing these new fleet emission limits are punishing, the FT states. Every gram over the target incurs a penalty of €95 — multiplied by the number of cars sold by the carmaker, the costs could be crippling. “It’s just stunning how much is going to have to be achieved in the next 18 to 24 months,” Warburton is quoted as saying.
If the industry sold exactly the same mix of vehicles in 2021 as it did last year, carmakers together would face penalties of €25 billion, the Financial Times reports.
This comes on the back of 17 months of slowing car sales in China, Germany’s biggest auto export market, and the losses being sustained on the sale of every electric vehicle (EV) sold, such as they are. EV sales in Europe have stalled without heavy subsidies: the buying public is, well, not buying.
Relatively higher prices and range anxiety, exacerbated by inadequate charging infrastructure and long charging times, are putting off buyers despite boosters suggesting the EV market is on the cusp of take-off.
European carmakers are already reining back sales of luxury gas guzzlers like Mercedes AMG range in order to help meet the new targets, but those are by far the most profitable part of their range — putting overall company profitability under pressure.
Job losses, even in highly protected job markets like Germany where an axed position is estimated to cost the employer around €100,000, are likely over the next 2-3 years. A separate Financial Times article states in the next decade almost a quarter of a million auto jobs will be lost in the country, quoting Ferdinand Dudenhöffer, the director of the Center for Automotive Research at the University of Duisburg-Essen.
The article goes on to report German automakers and part suppliers, from Daimler and Audi to suppliers including Continental and Bosch, have already announced around 50,000 jobs will be lost or are at risk so far this year, as their traditional businesses become less profitable. This comes at a time of potentially crippling investment demands in the switch to EV production and development of the supply chain such as battery plants.
The Financial Times estimates the German car industry alone, which directly employs 830,000 people and supports a further 2 million in the wider economy, will be forced to plow some €40 billion into battery-powered technologies over the next three years. Job losses so far have been limited by automakers’ relative healthy profits this decade.
From 2020 onwards, however, the situation is set to deteriorate as overall profitability suffers. “No one will survive in the form they exist today,” Ralf Kalmbach of consultancy Bain & Co, who has spent 32 years advising German carmakers, is quoted as predicting.
The E.U. is making some concessions to limit the damage. Carmakers will be measured on only 95% of their fleet in 2020, giving them a little breathing space to continue selling their most-polluting — and often most-profitable — vehicles longer.
But unlike the U.S., European firms cannot buy and sell credits, they can only pool overall fleet results with competitors, which naturally carries a cost.
Ultimately, legislators and the industry will have to find solutions to redress the imbalance between what consumers want to buy and what manufacturers want to sell them. That will require a combination of penalties, incentives, investment and rapid technological innovation – a challenging and heady combination of demands to be met in the first half of the coming decade.
Trade remains critical to President Donald Trump for two reasons. For one, he loves chasing a deal more than anything else. Second, he has staked his reelection on his ability to deliver trade deals that improve the U.S.’s economic position, but not necessarily large trade wins.
Voters will likely see trade improvements as a win. It will take six months to see any actual results after the ratification and implementation of any deal.
And six months from now will show results just in time for the election.
How should metal buyers view the USMCA deal today?
Many companies have already taken steps to prepare for this deal.
In other words, businesses made changes to their operations in anticipation of the ratification of the deal.
The International Trade Commission estimates the deal will impact real GDP by 0.35%, or $68.2 billion. Some estimates suggest growth can reach 0.6%.
With some of the restrictions already lifted on steel and aluminum, it remains unclear how much growth has already occurred. U.S. dairy farmers, for instance, will gain access to certain segments of the Canadian market previously closed off due to strict regulations.
The true impact involves creating business certainty.
Any expansions or investments on the sidelines waiting for the final rules can now proceed as planned. However, that appears likely to have only a marginal impact on any of the countries involved.
Is the China trade deal the end to all trade deals?
The president has asked for sweeping change from China. Specifically, Trump has sought solutions to currency manipulation, intellectual property protection for U.S. companies, continued purchases of farm goods, the curbing of subsidies to state-owned companies, and access to the Chinese market for some U.S. tech companies (such as Google and Facebook).
It appears as though the deal will address some of these, particularly currency manipulation, rules around intellectual property and farm purchases. Critics say it doesn’t go far enough to address the state subsidies and blocking of U.S. tech companies.
In exchange, the U.S. will roll back some tariffs and not implement new ones. This could have an impact on hundreds of billions of dollars and would change trade patterns globally.
With the implementation of tariffs, companies developed alternative sources. Some of those sources have proved better than previous options and some less so. Trade between the U.S. and China will return, but not to pre-tariff levels. Any new, efficient supply chains will remain in place.
They say timing is everything
The flurry of activity likely comes down to the election cycle. At this point, the president can’t wait any longer and has to take the wins where he can get them.
These two trade deals could also force Europe to come to the table with its own agreement. If this happens, the “trade World War” will come to a cease-fire, with no country left financially crippled and also no monumental victor. This will provide global stability for several markets — always a positive sign.
The actual result of the individual trade deals appears marginal but still serves as an improvement on existing multidecade-long trade deals. The culmination of the deals could strengthen the world economy.
Tariffs created significant headwinds to growth in virtually all corners of the world. We know these trade deals will serve as Trump’s “big win.” His showmanship will ensure he will take credit, whether fact-based or otherwise.
The world will decipher fact from fiction during the second half of 2020.
Don Hauser joined MetalMiner’s commercial team in November 2019 after more than a decade as a cost management specialist and global supply base manager at John Deere.
As the year draws to a close, it’s a good time to take a look back at some of the commentary here on MetalMiner from this calendar year.
One such example is our coverage of the “skills gap” in U.S. manufacturing was the subject of a recent webinar hosted by Avetta with MetalMiner’s participation.
Earlier this year, I visited the Chicago Industrial Arts and Design Center, where I spoke with founder Matt Runfola, students and instructors about the state of the skills gap in the U.S. manufacturing sector.
Standing on an otherwise quiet stretch of Ravenswood Avenue on Chicago’s North Side — with a green barrier of vegetation obscuring the Metra tracks on the other side of the street — one can hear faint sounds of hard work being done.
The Chicago Industrial Arts and Design Center, located at 6433 N. Ravenswood Ave. in Chicago’s Rogers Park neighborhood. Fouad Egbaria/MetalMiner
In a building that was once home to the Chicago Radio Laboratory in the 1920s, 6433 N. Ravenswood Ave. in Chicago’s Rogers Park neighborhood is now home to the Chicago Industrial Arts and Design Center (CIADC).
Inside, one finds a variety of work being done by a diverse group of people: teenagers, retirees, artists, and individuals simply looking to learn how to make things or try something new.
Under the watchful eyes of instructors, high school students busy themselves in the welding shops, wielding welding torches as sunlight peeks cautiously into the workspace on a pleasant August morning.
On the second floor, students of all ages work with wood, carving and cutting and measuring amid the pervading aroma of sawdust.
Another floor up and one finds students learning the tricks of casting, with the results of that work scattered about the workspace: a defiantly clenched fist, stately busts and metallic chicken feet.
Founded in 2015 by Matt Runfola — a self-proclaimed steel guy who says his motto is “fabrication, fabrication, fabrication” — students come to the CIADC from as far north as the Illinois-Wisconsin border and as far south as western Indiana to learn how to weld, cast and woodwork under the tutelage of experts.
The workspace at 6433 N. Ravenswood Ave. houses tools like a CNC router, an English wheel, and casting molds of varying shapes and sizes.
In short, it is a place of innumerable possibilities, brought into the world by innumerable creative and technical decisions.
Chicago’s North Side is not exactly known for its industrial character — so how did this workspace across the street from Metra tracks come to be?
The CIADC’s creative missions finds its roots in the art of disassembly.
CIADC founder Matt Runfola shows off the nonprofit’s CNC router. Fouad Egbaria/MetalMiner
As a child growing up in rural upstate New York — “farm country” he notes, populated by “mechanical stuff galore” — Runfola enjoyed taking things apart.
“I just had an affinity for having my hands on stuff taking things apart,” Runfola said. “I raced motorcycles when I was young. Part of racing dirt bikes is you’re constantly breaking them, so it’s a lot of opportunity to pull them apart.
“I think it was with that the realization [came] that someone, somewhere designed everything on that motorcycle. I was very intimately involved with tearing that motorcycle apart and putting it back together week in and week out.”
That love of tinkering inspired a curiosity about design, eventually leading him to the Rochester Institute of Technology, where he got his bachelor’s degree in mechanical engineering.
Runfola wasn’t satisfied with “typical engineering” — he gravitated toward jobs that gave him access to shops where things are made, working on designing and prototyping.
“I started to whet my appetite with creativity,” Runfola said. “It was like ‘hey, design can be used to make things that I want to make, not just make things that other people made.”
That interest led him to the world of custom furniture and sculpture, which he worked in on the side. He also worked as a manufacturing engineer for a company that designs skateboards and snowboards.
But that experience prompted him to reconsider the best outlet for his passion.
“I realized at that time that the engineers, as much as we were making everything happen, we weren’t the creative geniuses behind the product,” he said. “It was marketing, and in that industry it’s very much marketing-driven.”
That realization brought him to Chicago, where he worked on the marketing side for Brunswick Corporation. Eventually, he moved on, pursuing a position as an introductory metal sculpture teacher.
“I really never looked back from that point,” he said. “I left the corporate world and focused for a number of years on my own product line of custom furniture … while I was teaching.”
That experience led him to open the CIADC as an outlet for those interested in metalworking, woodworking or casting, something he said was a “void” in the Chicagoland area.
In short, he founded the nonprofit to give people an “easier opportunity to explore the industrial arts.”
“People in high school, people outside of a university setting, do not have access to, not just working with their hands but working with their hands with these industrial processes,” he said.
During a tour of the facility, Runfola talked excitedly amid the clanging of metal and cutting of wood, lighting up when asked to explain the difference between TIG and MIG welding.
“We really go to great lengths to make it comfortable for people to cross the threshold to enter into our facility,” Runfola said. “We feel very strongly that once people are in a class and learning, 99% of people are going to fall in love with this type of work.”
Many younger students come into the shop not exactly knowing what they’re getting themselves into, Runfola said, but once they realize they can safely handle material to produce something of their own creation, it gives them satisfaction.
Cam White, 15, a high school student, is relatively new to the CIADC.
“In Chicago, it’s really hard to find places to do woodworking and metalworking,” she said during her third day of classes at the CIADC. “I was researching it because I wanted to do more hands-on things.”
Student Cam White, 15, concentrates in the metalworking shop. Fouad Egbaria/MetalMiner
White said woodworking was her primary interest, but she opted to take metalworking class to try something new. White said she isn’t sure if she would want to pursue a career using the skills she’s learning in the shop, but she does want to have her own home shop someday.
White said that among her friends, her interest in this type of work is unique.
“They’ll say ‘oh that’s cool,’ but they’re not interested in it,” she said. “They’re more interested in me doing it than actually them doing it.”
White said she’s not a “technology person,” adding that the type of “old school” work done in the shop might not appeal to other people in her age group.
“Now with all the industrial stuff and all the gaming and coding and stuff you can do in that realm, more of my friends lean to that side and less of woodworking and shop-type things,” she said.
Meanwhile, Tom Bittman, 70, retired after a career in commercial banking, first took classes at the CIADC in the fall of 2018.
“I enjoy making things,” he said. “I have a lifelong hobby of woodworking. I’ve taken some classes in woodworking at other places as well.”
While surfing the Internet, Bittman came across the CIADC and decided to check it out. Like White, he decided to try something new — after taking woodworking classes last fall, he delved into metalworking this spring.
“It’s a learning thing for me,” he said. “It’s entertainment, it’s learning, it’s a little adventure doing something new someplace new with new people.”
Last year, Bittman said he learned about all the ins and outs of woodworking, including cutting and shaping, in addition to use of the various machines in the shop.
“It’s the same thing with metal — just very different,” he said, laughing.
Of course, without dedicated, competent instruction, some students’ desire to learn could wane.
A bust on display in the third-floor casting shop. Fouad Egbaria/MetalMiner
Olivia Jade Juarez, 27, works as an instructor and manager of CIADC’s welding and forging shop.
Jade Juarez studied sculpture during her time in art school using a wide range of materials, but did not work with metal much at that time.
Out of school, however, she worked at the Anderson Ranch Arts Center in Colorado, which had a sculpture department largely focused on metalworking tools.
Working as an assistant there, she had to quickly familiarize herself with the tools and techniques of metalworking.
Fortunately, she picked it up quickly.
“There’s this perception that metalworking is really rough and tumble and everything is super heavy,” she said. “I quickly realized there is a little bit of that, but it is more than anything precision and patience.”
She later worked as an assistant for metals sculptor Vivian Beer for a year, after which she decided to move back to her hometown Chicago.
She heard about the CIADC based on a recommendation from someone at Anderson Ranch, admitting that she first came to the center to use the space for her own work. However, she decided to take a class and eventually spoke with Runfola about taking on a teaching job at the center.
Jade Juarez said her favorite type of student is one who comes in with no experience.
“I’ve had a few elderly people come in and just to see them — it’s almost as if they renew themselves a little bit just to be handling flames and fire and welding, forging,” she said. “It’s really exciting to see them realize that they can still do things like that and that it’s not that far out of reach.”
Companies in industries that need workers to do these types of things — metalworking, in particular — are hoping that more people reach that realization.
The “skills gap” is something often bandied about these days — that is, that there are not enough skilled workers to fill manufacturing jobs in the U.S.
According to a skills gap study by Deloitte and The Manufacturing Institute, 2.4 million jobs could go unfilled between 2018 and 2028 as a result of the skills gap, amounting to a potential economic impact of $2.5 trillion.
Runfola said the CIADC’s mission is not necessarily to give people the skills to move into careers in these types of fields. However, he did express hope that the pendulum will swing back in manufacturing’s direction.
“When it comes to skilled workforce and filling the voids, people are realizing that being in the trades is not because you can’t do anything else,” Runfola said. “I think that’s an important thing that people are realizing again.
“It’s almost like we knew that mid-2oth century and the latter part of the 20th century, but somehow we started forgetting that.”
In an increasingly tech-driven world, part of that drive to remember will depend on drawing interest from younger people, like White.
Whether it’s kids in the city or the suburbs, Runfola argued very few of them have the opportunity to do this type of work, at home or in school. To that end, Runfola noted the center offers a scholarship program based on financial need, through which qualifying families can receive 80% off tuition.
“That’s one way that we’re trying to remove roadblocks and get as many teens as possible in here,” Runfola said. … “Right now it’s about piquing their curiosity so at least it’s on their radar.”
Jade Juarez said the idea of making things is perhaps being lost among people in her generation.
“There’s a lot of things you buy that are already made,” she said. “There isn’t much critical thought or questioning about how things are made anymore.
“There’s a really deep disconnect between what you end up having or using and what the raw materials started out as. I think the culture is very different now — it’s just ordering stuff.”
While the modern consumer culture allows for ease of purchasing items at a click, the result is a dwindling self-sufficiency, she argued.
“Not many people know other people who are welders or carpenters or just people in the trades,” she said.
She argued one simple way to help reverse the decline of the skilled labor workforce is to reintroduce shop classes into high schools (she noted she did not have a shop class at her high school).
“Then you have that seed or a memory of having built something, so that later on when it’s more of a financial decision, you’re not going in completely blind,” she said. “I really hope that it shifts back.”
While craft work is not quite the same as the industrial trades, she called it a sort of “sister or brother” to it; she said a rise in do-it-yourself (DIY) projects is an encouraging sign of a general interest in making things.
“That kind of hunger for learning … could be cultivated more,” she said. “It doesn’t have to be a hobby or this quirky thing you do, it can be your career.”
While there is no easy answer or quick solution to the skills gap in the U.S., Runfola hopes the CIADC can do its part in its own small way.
“High-value manufacturing is flexibility, it’s being able to change product lines quickly and efficiently and you’ve got people that can adapt very easily,” he said. “In our small way, I feel that’s what we’re equipping people that come out of our classes with, that versatility.”
Manufacturing trends are often discussed in large, impersonal numbers: a skills gap of 2.4 million, for example (not much less than the population of the city of Chicago).
As such, attempts at reforming the system are often placed in the context of Big Change, whether it’s government-subsidized programming, changes in high school curricula or private sector spending on professional development.
While it may be true that such changes are needed to combat the so-called skills gap, the conditions for Big Change can sometimes be produced through incremental efforts on the ground.
“I feel like I was given throughout my whole career trajectory … I was given opportunities to learn, to be exposed to new things, to have people be patient with me,” Runfola said. “I feel like that’s what we’re doing here.”
Vertical integration may play well in classic corporate HBR (Harvard Business Review) circles, but steel industry observers may have a hard time envisioning the synergies Cliffs outlined in its merger announcement and presentation Dec. 3, creating a best-in-class, EBITDA-maximizing combined Cliffs-AK Steel entity!
To us, the best rationale for the deal appears on slide 14, outlining AK Steel’s short-term debt position:
If you buy the notion that Cliffs can swallow AK and convert that company’s debts to its own and save on interest expense, then score one for the deal!
So why would Cliffs buy AK Steel?
A compelling reason appears on slide 11:
Despite AK Steel’s relatively improved financial performance under the leadership of CEO Roger Newport, if AK Steel represents ~30% of Cliff’s annual iron ore sales, Cliffs faces significant “customer concentration risk.” In other words, the health of AK Steel would significantly — negatively — impact Cliffs.
Forget about “renewal risk” — let’s just call it “customer risk.”
Cliffs would be hosed without a healthy AK Steel!
What about AK’s Ashland Works?
We continue to see different public announcements from AK Steel about the cost of Ashland Works. The Ashland Works facility today operates a hot-dipped galvanizing line (the blast furnace was idled nearly four years ago).
According to comments from AK Steel directly, “…the company announced it would close the ‘largely-idled’ Ashland Works facility by the end of 2019 to ‘increase utilization’ at its other U.S. operations. The plant employs 230 people and the closure would yield approximately $40 million in annual cost savings, according to the company.”
But by keeping it open, as detailed by Cliffs, the Ashland Facility, “Eliminates up to $60m of closure-related costs.” The Ashland facility will instead undergo a conversion, which it says, “Potentially provides a compelling, low-capex, high-return opportunity to be a significant merchant pig iron supplier in the Great Lakes.” (We presume U.S. Steel and ArcelorMittal will avail themselves of this compelling offering.)
So, we’re not sure if keeping Ashland Works open saves money or if closing it does.
We won’t pontificate over the “AK Steel best-in-class position in non-commoditized steel” for a variety of reasons that we have previously covered here in our GOES MMI series. (Or the fact that the rise of electric vehicles will start to make a dent in the need for the kinds of automotive exhaust grades, such as 439 and 441, produced by AK Steel.) We acknowledge AK does have a strong position in ultra-high-strength steels.
So, the real question comes down to the “synergies” outlined by Cliffs.
Does the margin Cliffs generates — approximately $30/$40 per short ton for every pellet produced and sold to AK — translate to an EBITDA jump of that same amount for steel products sold by AK, such that they leapfrog the EAF producers, as Cliffs suggests?
Europe is sometimes — often, even — chided for its slow decision-making, which is seen by many as a product of being a “Club of 27” and the need to gain consensus for coordinated action.
But a recent FT article describes an impressively fast response to Europe’s realization that it is being left behind in the lithium battery industry and, by extension, the wider Electric Vehicle (EV) market.
The EU car industry had assumed up to a couple years ago that batteries would become a commodity and were low on the list of priorities in developing a competitive domestic EV industry. But although carmakers have invested billions in developing models and technologies around EV automobiles, the European car market remains almost totally reliant on imports for batteries despite the fact that nearly 40% of the vehicle value is said by the FT to be the batteries.
For an industry that is the backbone of European manufacturing, that is a staggeringly exposed position to be in. Even the 3% that are made in Europe are mostly by Asian-owned companies.
Global production is dominated by Japan’s Panasonic, South Korea’s Samsung and CATL and BYD of China, the FT reports, with China by far the largest, as this chart courtesy of the FT illustrates.
But that is all about to change.
With €1 billion of funding from Volkswagen, Goldman Sachs and Ikea, a company called Northvolt will launch its first factory at Vasteras in Sweden as a dress rehearsal for a much larger Gigafactory in Skelleftea, in northern Sweden, where production should start in 2021.
Supported by cheap loans from the European investment bank and state aid from the EU, the Skelleftea plant is projected to cost up to €4 billion, but will be bigger than Tesla’s Nevada Gigafactory producing some 40 gigawatt hours of capacity by 2024, or some 2 billion individual battery cells, the FT reports. That should be enough for some 500,000 to 600,000 electric vehicles a year with the first phase of capacity already sold out to European carmakers.
Some may question the sense in locating the factory just south of the Arctic Circle, far from car plants, but the rationale is it can access cheap hydropower. As a result, the plant’s energy costs will be a quarter to a third of those available to its competitors in China.
To form a truly integrated supply chain, however, the EU’s European Battery Alliance (EBA) will need to develop mine supply and lithium refining. Although potential mining projects in some 10 EU countries have been identified, the upstream end of this supply chain remains the farthest from self-sufficiency.
Europe’s move to EVs is being driven more by legislation than customer demand. Much as it is in the U.S., the public remains deeply skeptical of the technologies’ ability to deliver a seamless replacement for the internal combustion engine.
Yet a combination of ever more stringent emission standards on manufacturers, tax penalties and incentives on consumers will bolster support of ventures like Northvolt bringing battery making closer to home — and the market will shift to EVs during the next decade, whether Joe Public wants it (or even believes it) today.
But this time around Beijing seems to have a greater tolerance for slowing growth.
While stimulus measures are expected as early as December, the Financial Times reported, they are not expected to be on the scale of those seen in 2008-2009 and 2015-2016.
Freya Beamish, an analyst at Pantheon Macroeconomics, is quoted by the Financial Times as saying China’s stimulus in the 2018-2019 period will be equivalent to about 7% of GDP over the two-year period. Measures taken in 2015 and 2016 were worth 10% of GDP, while the 2008-09 stimulus amounted to 19% of GDP, according to an OECD estimate.
Beijing appears constrained by a number of factors, policy-driven and economic, in what it can do and how far it can go.
Office space is at an all-time high in some Chinese cities, forcing the delay and cancellation to high-profile skyscraper projects and more general office developments, the Financial Times reported.
Following a surge in new residential housing starts earlier this year, growth has since moderated and is expected to slow further in 2020. Beijing seems reluctant to undermine the currency by further monetary easing and is particularly sensitive to avoiding property price rises by stoking demand.
The Financial Times reports that Chinese states and municipalities are already heavily indebted and banks are reluctant to increase bad debts. While infrastructure lending is the most likely form of stimulus, it will probably not be on the same scale as previous measures.
A former Chinese bank official is quoted as saying that due to previous infrastructure investments, “Cities and provinces are having trouble financing new projects as they must spend a significant portion of their cash-paying off debt.” Possibly as a result of this, investment spending grew by only 3.4% in the first three quarters of this year.
This moderation in appetite for further stimulus coming on top of the cooling housing market undermines the case made in a recent article we reviewed suggesting steel prices could be set for a recovery, extrapolating on the apparent recovery of the Chinese steel sector.
If the Financial Times is correct in its analysis above, any current strength in Chinese — and, by extension, southeast Asian — steel prices could be relatively short-lived.