China’s ambitious One Belt, One Road initiative will expand roads, railways and ports in various countries across the traditional Silk Road. The huge build out could also be a boon for the steel and materials sectors, along with related exchange traded funds.
According to BHP Billiton, President Xi Jinping’s plans to revive the ancient Silk Road could double the growth rate of steel demand in China as the country’s companies secure the lion’s share of overseas contracts for construction materials and equipment, reports Henry Sanderson for the Financial Times.
“This will drive demand for raw materials,” Arnoud Balhuizen, head of marketing at BHP, one of the world’s largest producers of steelmaking ingredient iron ore, told the Financial Times. “This extra steel demand will ultimately be met by China.”
BHP projects China’s steel demand will continue to ramp up before peaking in the middle of the 2020s.
“It will peak at some point towards the mid to the end of the next decade,” Balhuizen said. “We still think there’s growth in China’s steel production.”
Others, though, remain more cautious, projecting the One Belt, One Road policy won’t fuel the economy as much as China’s previous 2009 fiscal stimulus.
“Quantifying the potential impact on commodity markets of the Belt and Road Initiative is difficult, given the number of variables,” HSBC said. “On the demand side, how much spending will actually occur, and when, is highly uncertain. Supply is also uncertain, given China’s dominant role in many commodity markets.”
Nevertheless, BHP projects that 400 core projects could require $1.3 trillion in spending. Power, railways, pipelines and other transport projects could make up 70% of the total investment. Consequently, the projects could consume an additional 15 million metric tons of steel per year over the next decade.
ETF investors could potentially capitalize on this build out through a number of options. For instance, the VanEck Vectors Steel ETF (NYSEArca: SLX) provides a direct play on global steel producers. The broad sector plays like the iShares S&P Global Materials (NYSEArca: MXI) also include large exposures to chemicals, metals & mining and construction materials industries.
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