What we learned from the Chinese and European infrastructure initiatives

In the European Union and China, Fastmarkets noted emphasis paid on infrastructure developments – a common tool in down times – to stimulate the economies. These measures had common themes.

‘Traditional’ vs ‘new’ infrastructure – a noticeable shift in direction, but both go hand in hand
The infrastructure measures imposed can be divided into traditional – i.e. transportation, non-residential construction, bridges, roads, ports, railways – and new infrastructure initiatives such as renewable energy, cyber technologies (5G), and green initiatives to combat climate change. In the past, an infrastructure spending measure would only encompass the traditional industries, but now a large portion of this spending is in the form of new or green infrastructure in both the EU and China, as we examined.

2020 additional infrastructure spending ($bn)

Source: Fastmarkets, various Exchange rates: $ = 7.017 yuan, $ = €0.84811

But new infrastructure does not necessarily replace the traditional, both work hand in hand to provide stimulus across industries as well as time. For the initial injection of funds, the traditional initiatives have been deployed for 2020 and 2021 support while the new/green initiatives will take longer to implement and produce the desired economic results. Nevertheless, it is at times like these that long-awaited new infrastructure plans can gain footing. But these cannot be started without the support of traditional projects to jumpstart the process.

This is where the term “shovel-ready” comes to mind. While the term was made famous in the United States in 2008 by President Barack Obama, it actually has its history in President Roosevelt’s New Deal to get people back to work quickly during the Great Depression with projects that could start in a short period of time. Particularly, one such project was an archeological excavation in upstate New York where workers were encouraged to bring their own shovels if they could.

Whether in 20th Century US or modern EU or China, the goal remains the same – a portion of stimulus, if it is going to have a desired immediate effect, needs to happen quickly on projects that do not require a long lead time. In the case of the current EU and Chinese initiatives, these “shovel-ready” projects were already on the books but needed a topping off to move forward.

Rail to the rescue?
In both cases, rail projects that had been slowed or delayed were now pushed to the lead. In the EU, a €2 billion ($2.4 billion) recovery fund announced for 140 transport projects, this included €1.6 billion to cover 55 rail infrastructure projects located on the trans-European transport (TEN-T) core network. The Cohesion Fund, the EU’s grant scheme, has also allocated a total of €63.4 billion to activities under TEN-T and Connecting Europe Facility (CEF) for Transport.

In China, the original outlook for total infrastructure spending for 2020 was for a 3.8% increase over the 2019 total. This was then increased to about 5% for the year, an incremental increase of about $29 billion toward traditional infrastructure spending, of which railway still remains the most important part.

Rail vs 5G and what does it mean to metals?
While rail can also be considered “green” as well as traditional infrastructure, the push toward new energy/infrastructure initiatives is the long game portion of the infrastructure stimulus. These are longer-term projects where more funding is earmarked. Even in China’s recently-announced 14th Five-Year Plan, technology innovation is emphasized, over the “system innovation” of the 13th Five-year Plan.

The EU aims to prioritize climate actions with a green recovery package worth over €2 billion, while €8.2 billion has been set aside for Digital Europe, for example.

The effect on metals demand and usage will be shifted as well. Our initial estimates suggest that tonnages demanded in the new infrastructure will be lower. Fastmarkets has estimated that rail projects consume 2.5 times the amount of steel than the same investment value in 5G infrastructure.

But all is not lost in metals. In value-added terms, the new infrastructure projects will consume higher-grade steel, alloys and base metals. The stimulus for metals will therefore be in innovation to provide these materials at competitive prices. As has been the case for years, metals markets are moving to higher value-added materials and this trend will not change but will be likely pushed further by these infrastructure initiatives.

And Fastmarkets will be there to document it.