China's establishment of the Xiongan New Area in Hebei Province is good news for the country's steel producers. The government is planning to expand the size of the new area to 2,000 square kilometers by 2050 and that will have a significant increase on domestic steel demand.
The developed area in Xiongan now takes up 100 square kilometers. That is to double by 2030 before the region hits its maximum size in 2050. The area target is much larger than either the Shenzhen or the Shanghai Pudong developments, but if anything the hopes for Xiongan are even greater than the original plans for either of those.
Citi Bank predicts Xiongan's GDP in 2021 will be seven times its 2016 figure. The percentage of the new area's contribution to Shanghai's GDP had grown by 47 percent in 1995, five years after Shanghai's Pudong New District was set up.
So the hope is that construction required by the Xiongan New Area in Hebei will give similar impetus to the country's steel producers. Yang Xiaolei, a senior analyst at SWS Research, believes Xiongan's construction would definitely boost Hebei's steel chain.
"Xiongan pulls on both the upstream and the downstream in the steel market. Hebei has significant deposits of coking coal and hard coke, and so Xiongan's construction needs should boost national fixed-asset development by a full one or two points," said Yang.
Citi Bank's report says Xiongan's construction plan will need 25-30 million tons of steel for residential property construction and 35-40 million tons for transportation and logistics projects.
As the demand for raw materials increases, analysts say steel prices are also likely to go up. Since the middle of 2016, the futures price of rebar on the Shanghai Commodity Exchange has already risen by some 40 percent.
"The increase in demand will have an obvious impact on the price and that has been reflected since the second half of last year. The construction in Xiongan will pull up demand in nearby steel markets. Overall prices will rise, though probably not as dramatically as they have risen since the fourth quarter of last year," said Liu Xuezhi, Senior Analyst at Bank of Communications.
The State Assets Supervision and Administration Commission said that at least 31 state-owned enterprises will participate in the construction of the Xiongan New Area, including China Railway Group, China Eastern Airlines and China National Offshore Oil Corporation.