Steel/Building Materials - "Impacts of Stimulus Package on Cement & executive, domestic, economic, measures, decided

yangh

Events:
The State Council decided at a recent executive meeting that China will pursue an active fiscal policy and a moderately accommodative monetary policy. The meeting announced 10 measures to further expand domestic demand and fuel economic growth. It is estimated China will invest Rmb4 trillion by the end of 2010 to implement this package of measures, which focuses on social well-being, infrastructure, the ecological environment and post-earthquake reconstruction.
Our Comments:
Active fiscal policy could fuel demand for cement and steel
Of the 10 measures, the following may have a major impact on steel and cement demand: 1) Stepping up major infrastructure building, including railways, highways and airports; 2) increasing the pace of construction of rural infrastructure; 3) accelerating development of housing for low-income groups unable to afford other homes.
Cement could benefit more from the stimulus package than steel
All of China’s cement goes to the construction industry, whereas 50% of steel demand comes from manufacturing, meaning that a turnaround in the steel industry is unlikely amid China’s gloomy exports and continued slowdown in auto, home appliance and other manufacturing subsectors. In 2007, infrastructure (ports, railways, highways, and airports) contributed 34% of total cement demand, as compared to 6% for rural development (excluding demand for the construction of highways of grade two or lower, as this is counted as infrastructure demand) and 1% for low-rent housing construction. The remaining demand came from urban housing construction. In contrast, 7.2% of steel demand in 2008 is likely to come from transport infrastructure, 1.7% from rural development, 0.7% from low-rent housing construction, and the remainder from urban housing construction and the manufacturing industry.
We estimate the impact on the demand of steel and cement industry, based on available investment data (the latest Rmb4 trillion package, Rmb2 trillion railway investment, and expected Rmb5 trillion investment in transport infrastructure). CICC forecasts for transport infrastructure investment suggest 2009 cement consumption growth of 9.8% for transport infrastructure construction and 15.7% for rural development, while steel consumption growth should be 11.9% for transport infrastructure construction and 15.0% for rural development. Overall, we expect 5.6% growth of both cement and steel consumption in 2009, assuming cement and steel consumption growth for urban property construction declines 7%. Our latest forecasts are only 0.8ppt and 0.3ppt higher than our previous forecasts, which already priced in infrastructure investment expansion.
Funding sources and construction schedule are major uncertainties
No details about the Rmb4 trillion stimulus package have yet been given. Widespread concerns include: 1) Will the planned investment in highways in rural areas turn out be abortive due to low investment yield? 2) Will rural infrastructure construction go ahead as scheduled, given declining local government fiscal revenue? 3) Specific data on low-rent housing construction have not been disclosed, with the financing power of local governments being key.
Steel stocks could continue to benefit short term, but improvement in fundamentals will take some time
The steel industry is hardest hit right now, and we think that downstream demand could continue to weaken into 1Q09, making it hard to accurately forecast steel producers’ 4Q losses, and this exposes steel stocks to uncertainty. Infrastructure construction has a limited positive impact on steel industry, as steel demand and supply are determined by the overall state of the economy. and the stocks are unlikely to have a high safety margin until possibly poor 4Q08 results have been fully priced in.
Positive impact to cement industry could be significant; cement stocks might still see a boost
Nevertheless, impacts are expected to be limited between December 2008 and March 2009, as the period is the traditional low season of the cement sector and most infrastructure projects will have to be suspended. Rather, wee expect cement producers to report declining earnings due to weakening property demand. Given their expensive valuations, investors are advised to take profit by selling cement stocks. As any material boost from future infrastructure investment will likely be seen in 2H09, investors may adopt a range-bound and seasonality-based trading strategy before 2H09.
 [attach]9450[/attach]