Posted on 11 May 2023
Improvement in demand in China in 2Q23 from continued growth in investments, and a likely decrease in prices of raw materials should improve margins in the basic materials sector, Fitch Ratings says.
Fitch expects robust growth in fixed asset investments (FAI) to continue from 1Q23, which will spur more construction activity. Manufacturing FAI rose by 7% yoy in 1Q23, while infrastructure FAI rose by 9%, driven by policy support as the government relied on infrastructure investment to drive economic recovery. The expansion in infrastructure and manufacturing FAI more than offset a continued decline in property FAI.
Supply discipline by both cement and steel producers will kick in as voluntary production cuts in April and May come into effect, while aluminum capacity is likely to be hampered by power shortages in Yunnan. In addition, Fitch expects prices of key inputs, like coal and iron ore, to decline.
This should help prices of aluminum and cement to recover after weakness in 1Q23 due to higher output as producers anticipated a rebound in demand after the lifting of Covid-19 restrictions at end-2022, and seasonally lower construction activity in 1Q. Aluminum producers also faced softer-than-expected auto demand. Steelmakers’ prices recovered in 1Q23, mainly due to higher iron ore prices that drove up costs, but margins in 2Q23 will be supported by a price correction in iron ore and production cuts by producers.
Source:Fitch Ratings
