China's 1.2 trillion yuan dam project lifts metals markets, but isn't a quick fix for glut
Ferrous markets rallied sharply this week following the Saturday (Jul 19) groundbreaking ceremony attended by Chinese Premier Li Qiang.
Iron ore futures for October delivery on the Singapore Exchange surged as much as 4.9 per cent this week, and Shanghai steel futures jumped almost 4 per cent on Thursday from pre-announcement levels.
As the world's largest and most costly hydropower dam, the output of the Yarlung Tsangpo River project would treble that of the Three Gorges Dam and generate an estimated 300 trillion watt-hours of electricity annually, supporting power demand in Tibet and the rest of China.
The electricity generated each year would be more than five times the amount of electricity consumed in Singapore in 2024.
According to estimates by Chinese ferrous markets trade monitor LGMI Steel, the dam is expected to drive six million tonnes of steel consumption – far surpassing the Three Gorges Dam's steel usage of 70,000 tonnes – due to the Tibetan Plateau's complex landscape and harsher climate conditions requiring greater steel intensity.
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Macquarie Group's commodities strategist Florence Sun estimated that demand for steel could be around three to five million tonnes, featuring a mix of rebar and various special steels, given the unique geographical environment. She also noted that the cost of the new dam would be 4.5 times that of the Three Gorges Dam.
While the project will generate substantial demand for ferrous metals such as iron ore and steel, its five- to seven-year construction timeline on the Yarlung Zangbo River means the impact will be gradual rather than immediate, given staggered procurement over the build period, noted Edward Meir, senior metals analyst at Marex.
He expects steel and cement to see the biggest demand boost from the project, with modest growth of copper demand for power transmission.
Meanwhile, a struggling construction sector continues to drag on ferrous metal demand, said Sabrin Chowdhury, head of commodities at BMI.
'More such projects will be necessary to bring about a sustained rise in metals demand,' she noted.
Similarly, in a note on Tuesday, Citi Research highlighted the long construction timeline and limited front-loaded demand, with the usage of metal to be spread over many years. However, the project still reflects China's medium to long-term plans for large-scale, long-distance power transmission infrastructure.
'Although precise copper and aluminium consumption from the associated transmission lines remains unclear, ultra-high voltage corridors, especially aluminium-intensive ones, will be needed to deliver power to eastern and southern China,' wrote the team.
Power-grid related metals would thus see continued demand growth over the coming years, noted the team.
'Anti-involution' (fan nei juan) rhetoric
Beyond the mega-hydropower project, the recent ferrous complex rally has been fuelled in part by China's 'anti-involution' campaign targeting industrial overcapacity. Over the past fortnight, iron ore, coking coal and coke all posted gains as markets anticipated supply-side reforms.
Citi Research wrote in a Jul 15 note: 'The anti-involution campaign aims to break the cycle of destructive price wars and chronic overcapacity that have plagued Chinese industry profitability.' This policy push has drawn comparisons to the 2016-2017 supply reforms that sparked a historic iron ore rally.
China's ferrous complex has been struggling with a persistent supply-demand imbalance, particularly as property sector weakness continues to weigh on demand for construction materials, while supply expands amid damaging price wars.
With production capacity still outstripping demand, traders appear to be pricing in expectations that Beijing will force meaningful capacity rationalisation.
However, the research team does not expect a repeat of the 2016-2017 playbook, given different fundamentals. 'We see the current rally in the steelmaking ingredient as unsustainable and short-lived.'
China's policymakers have been advocating a more measured approach to urban planning and upgrades, which are expected to be less steel-intensive than the full demolitions and property upcycles that spurred the previous ferrous rally.
The 'anti-involution' rhetoric has been emphasised directly by China's top leaders, underscoring the country's urgent need to break out of the deflationary cycle.
In a meeting chaired by President Xi Jinping on Jul 1, the Central Finance and Economic Affairs Commission said Beijing needed to 'guide enterprises to improve product quality and promote the orderly exit of outdated production capacity'.
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