Weak property investment and slower infrastructure fixed-asset investment (FAI) in 2023 will put pressure on China’s steel and cement market fundamentals. China steel’s demand is largely driven by construction, but manufacturing also accounts for around 30% of steel demand. We expect stable manufacturing FAI growth in 2023, but such growth is unlikely to offset a slowdown in construction activity. As a result, we expect pressure on steel’s average selling price (ASP) and cautious production volume.
Still, we think margins will improve in 2023 on lower raw material costs. Cement’s ASP and volume also face downside risks because the sector has more exposure to property construction, squeezing margins. However, the overall industry margin should remain healthy in the high teens while that of our rated issuers will remain above 20%. We believe industry consolidation will continue in both the steel and cement sectors, driven by stricter environmental regulations and the phasing out of inefficient smaller-sized producers. In the steel sector, we believe changes in product mix is inevitable in response to a structural change in steel demand shifting toward sectors such as auto and high-end machinery or equipment. For the cement sector, we expect leading players to continue their investment in extending value chains and diversifying geographically.
