Three “Beyond expectations” for the future steel market

Looking into the future macro-economic trend, a new round of global economic recession is likely to break out, and its recession degree is likely to be greater than the last round of subprime mortgage crisis, thus causing monetary easing in various countries to exceed expectations, and China’s counter-cyclical adjustment to exceed expectations.The above three “beyond expectations”, is bound to have a major impact on the steel market.

 1.A new recession may be deeper than expected

Since a period, mainly because the United States trump deliberately to provoke a trade war, the world’s leading institutions have lower economic growth forecasts, there is a lot of thought in 2020 the American economy will enter recession, so the downturn in the global manufacturing index stocks tumbling prices, international trade, slow down investment prospects, such as the United States both short-term and long-term bond yields down.There are signs that a new round of world economic recession may be coming.

 Moreover, if there is a new recession, it will be deeper and longer than expected, because the timing is so bad.This is because: after the last round of economic crisis, countries around the world show one of the few “solidarity”, agreed not to trade protectionism and currency devaluation processes “consensus”, have started to stimulate domestic demand, especially extreme monetary quantitative easing in the United States and China’s “four trillion” stimulus measures, has promoted the rally in the global economy. 

The recession came on the eve of a deepening trade war sparked by the trump administration.The consensus of not pursuing trade protectionism and currency depreciation has been broken. The us government, in particular, is naked beggar-thy-neighbour, prioritization of us interests, unbridled extreme trade protectionism and manipulation of the exchange rate to push the depreciation of the us dollar.In this context, it will not only push the global economy into recession, but also increase the depth and duration of the recession.Federal reserve chairman colin Powell recently warned that uncertainty over U.S. trade policy is causing problems such as a slowing global economy, weak U.S. manufacturing and weak capital spending.So this recession is likely to be deeper and longer than the previous one. 

If a new round of global economic recession becomes more severe, the external environment of Chinese steel market is bound to become more severe, especially after the us trump administration imposed tariffs on most imported goods on September 1.Statistics show that in the first seven months of this year, due to the negative impact of the trade war, China’s steel exports fell 2.9 percent year on year, and the growth rate of mechanical and electrical products was 8.5 percentage points lower than that of the same period last year.It can be predicted that the * downturn in Chinese steel exports, both direct and indirect, will come after trump imposed high tariffs on most Chinese imports on September 1.As a result, China’s steel market will be depressed by external demand headwinds in the short term.Current steel market prices fall, should be the reaction and digestion of this impact. 

2.monetary easing may be more aggressive than expected

Faced with the resulting recession due to extremely severe trade protectionism, governments around the world, especially the United States, have no choice but to ease their monetary quantitative easing.What if, for example, trump has little ammunition left for a trade war when he slams tariffs on most Chinese imports?After all, for trump, most of the goods that have been postponed are hard to deal with. Many of them are related to the “national economy and people’s livelihood” of the United States and the direct interests of ordinary American consumers.As for the so-called order of us companies to withdraw from China, it is more wishful “madness”, which is difficult to achieve in the short term.That makes it easy to understand why Mr Trump has been so exasperated that he has even threatened “hot war”. 

In terms of looser monetary policies around the world, the European central bank has indicated that it will cut interest rates aggressively and carry out more aggressive asset purchase program in September.The Japanese government also said it would keep monetary policy loose.The fed is expected to cut rates by 25 basis points at its September and October meetings, and may even cut rates by 50 basis points in September.Other central Banks have already cut rates and expect further cuts.If the global economy, especially the U.S. economy, enters a formal recession in 2020, or if it is to avoid such a bad situation, it will surely trigger a wave of interest rate cuts and money printing by central Banks around the world, even to an unprecedented extent.Therefore, the monetary easing this time may be larger than expected, even beyond the last round of financial turmoil.To this, steel market participants, also want to be prepared. 

While the resumption of loose monetary policy around the world is good for economic growth, it will also create future asset and commodity price bubbles, including those in the black series of commodity prices and stock market asset prices.This effect is expected to be felt in the three to six months after the implementation of the monetary easing policy, with a somewhat sluggish impact on the spot market and an earlier impact on the futures market.In the medium term, the steel market will be the first to suppress the situation. 

3.China’s counter-cyclical adjustment may exceed expectations

Faced with a global recession that may exceed expectations, extreme pressure from Donald trump, and a more severe external demand situation, Chinese policy makers are bound to strengthen counter-cyclical adjustment, so their intensity will exceed expectations.In strengthening counter-cyclical regulation, it is likely to be a three-pronged approach:

First, a more proactive fiscal policy.The implementation of this policy has been on the way, mainly to cut taxes and fees, expand fiscal spending.According to statistics, in the first seven months of this year, the growth rate of tax revenue fell by 13.7 percentage points year-on-year, while the growth rate of general public budget expenditure increased by 2.6 percentage points year-on-year.The next phase of fiscal policy is expected to be more aggressive. 

The second is loose monetary policy.Although we stressed that China’s monetary policy is given priority to with me, the current level of interest rates is reasonable, but if the outbreak of severe global recession, under the environment of global central Banks slash rates generally, expect the people’s bank of China will “keep pace with The Times”, the implementation of looser monetary policy, not only will fall and lower interest rates, and efforts will be more than expected. 

Third, we will strengthen infrastructure investment to strengthen weak links.With much weaker external demand, China’s policy makers are likely to implement large-scale infrastructure projects to stimulate rapid growth in domestic demand and make up for the losses incurred outside the dyke and ensure economic growth within the proper range.In this regard, we do have a lot of “short board”, as well as a strong material base of production, so we have the ability and operating space.For example, it is believed that in the next 20 years, 80% of the population will continue to flow into and live in first-tier and second-tier cities and other provincial capitals, which will generate huge demand for housing and public facilities.All these are the basic construction space of China in the future, which can be done in advance.So in the face of a severe global recession, China cannot rule out the possibility of another high-intensity stimulus. 

Thanks to the large-scale capital construction, the demand of the steel industry benefits more from many industries.Driven by this, China’s domestic steel demand will once again see a “golden growth period”.