Boston, MA -- (SBWIRE) -- 10/09/2013 -- China's metals industry is set to face a protracted period of slowing growth as the country's rebalancing process begins in earnest. Companies operating in sectors that are tied heavily to the construction industry will take the brunt of weakness from the sharp slowdown in fixed asset investment. The consolidation of the bloated steel sector will be a painstakingly slow and painful process as concerns over maintaining employment will temper Beijing's appetite for a considerable shake-out of the steel industry over the near term.

With the Chinese economy on course for a continued slowdown over the coming years, we believe that China's metals industry will come under increasing pressure in the future. As evidenced by recent events, China's economy appears to be finally buckling under the weight of its credit binge and we believe that a recession is at hand (see 'All Signs Point To H213 Recession', June 27). The downshift in the Chinese economy will take its toll on the metals industry as the construction sector experiences a sharp slowdown over the coming years.

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We expect construction activity in China to moderate significantly in the coming quarters despite the recent announcement of a 'mini-stimulus' by the Chinese government. Our forecast for China's real GDP to average 6.1% between 2013 and 2023, compared with an impressive average real GDP growth rate of 10.3% per annum over the past decade, implies that demand for metal will eventually falter. Indeed, metals such as steel and nickel are most exposed to the economic slowdown in China due to their pronounced usage in the construction industry. However, we note that China will retain a structural deficit for key metals such as iron ore, copper and nickel despite slowing consumption growth.

Consolidation To Take Place Gradually

We believe government plans to significantly consolidate the metals and mining industry will be watered down in the coming months as concerns over maintaining employment continue to take precedence. The unwinding of the bloated steel sector will be a slow process, punctuated by intermittent support from the Chinese government to keep many of the loss-making steel mills in operation. This is especially so during the early phase of a leadership transition and in the face of a slowing domestic economy.

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