China unveils infrastructure plans at NPC, will boost steel, diesel demand

Singapore — China has laid out plans to issue Yuan 3.75 trillion ($526.8 billion) of new local government special bonds this year, up from Yuan 2.15 trillion in 2019, which will boost infrastructure construction and benefit diesel as well as steel consumption.

The announcement came during Premier Li Keqiang's address to the National People's Congress on May 22, when he said there would be no GDP target for China in 2020 due to uncertainty caused by the coronavirus outbreak.

Li said the emphasis would be on maintaining employment levels and maintaining living standards rather than significantly boosting economic growth. While this may have sent out weak signals regarding commodities demand -- and indeed iron ore futures declined initially -- the focus on infrastructure should generate strong demand for steel and raw materials.

The new local government special bonds, which are designed to support infrastructure construction, could boost infrastructure investment growth from 3.8% in 2019 to 7%-10% in 2020, some market sources said.

Some iron ore market sources were cautiously optimistic about the outlook for the rest of this year. "It's a positive policy as the bonds are higher than last year," one source said.

A steel analyst said given the growing pressure of unemployment, traditional infrastructure was the best way of boosting investment and keeping employment at a decent level. He believed railways and urban rail transport system projects would receive most fiscal support among other traditional infrastructure projects.

A pick-up in infrastructure project activity could also provide a boon for oil product prices.

"Construction projects can provide strong stimulation for gasoil demand, a Beijing-based analyst said. "Fuel is burnt at construction sites, and is used to transport material and in industry to produce materials, like cement," he said, adding that construction-related activities would account for up to 50% of gasoil demand in China.

A Hong Kong-based analyst said the Chinese government's plan to boost electronic vehicles would threaten market share of gasoline-fueled cars, while jet fuel was unlikely to fully recover to 2019 levels due to the reduction in international flights.

S&P Global Platts Analytics forecasts that China's gasoil demand still sees year-on-year contraction of 1.9% in Q3 but a growth of 1.16% in Q4 this year, after declines by over 6% in the first six months.

Platts Analytics expects China's total oil demand to fall by 3.8% to about 14.2 million b/d in 2020, compared to a 4.6% growth in 2019.

S&P Global Ratings in May forecast GDP growth of 1.2% for China, noting that "China is healing, gradually" and expecting stimulus to be restrained this year.