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Tuesday, 08 November 22
OUTLOOK ON CHINA’S WEAKENED BASIC MATERIALS SECTOR CLOUDED BY POLICY SWINGS - FITCH RATINGS
Fitch RatingsFitch Ratings expects basic materials demand in China to improve qoq in 4Q22, driven by seasonally higher construction activity, solid infrastructure investments and steady auto demand from supportive policies. However, a yoy decline is inevitable, while potential policy changes around Covid-19 pandemic restrictions and property developer funding may alter current expectations.
 
Basic materials demand remained weak in 3Q22, in line with our expectation. The weakness continued in July and August due to seasonally low demand. However, a recovery in September was driven by steady manufacturing investment and rising infrastructure activity, which offset lower property investment. Meanwhile, prolonged Covid-19 related restrictions continued to pressure demand.
 
Commodity prices decreased during 3Q22, while margin trends differed among sectors. Steel saw a sharp drop in the average selling price (ASP) to close to pre-pandemic levels, driven by a weak market and flow through from lower raw material prices. The margins of steel makers recovered to breakeven levels, from a loss-making position at end-2Q22, as iron ore and coking coal prices corrected.
 
Cement ASP declined over July-August due to seasonality and weak fundamentals, despite continued output cuts. The ASP recovered in September, but remained much lower on a yoy basis. Strong coal prices saw cement producers’ margins weaken, particularly in September, driven by the need to prepare for heating in winter and recovering demand in downstream sectors.
Source: Fitch Ratings


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