Global crude steel production fell for the fourth consecutive month in November, pulled down by a slump in output from top producer China on Beijing’s aggressive measures to curb production to reduce pollution and weaker domestic steel demand. Production went up across India, the United States and Japan for the reported month with the United States logging the biggest gain.

According to the latest World Steel Association (“WSA”) report, crude steel production for 64 reporting nations dropped 9.9% year over year to 143.3 million tons (Mt) in November. A double-digit decline in output in Asia and Oceania along with lower production in the Middle East more than offset higher production across other regions in the reported month.

China Production Slumps on Decarbonization Drive

Crude steel production from China fell for the fifth straight month in November on government’s actions to cut production to clean up the environment in a bid to reach its carbon neutrality goal by 2060. Weak steel demand in the construction sector, softness in domestic steel prices and power shortages also contributed to the decline.

Per the WSA, production in China, which accounts for nearly half of the global steel output, tumbled 22% year over year to 69.3 Mt in November. Output is also down from 71.6 Mt in October. Production slipped 2.6% year over year to 946.4 Mt in the first eleven months of 2021. China’s monthly steel output has been declining since July after hitting a record high of 99.5 Mt in May 2021.

China is aiming to keep 2021 steel output within last year’s record levels. Beijing has been pushing steel mills in the country since early July to implement output and capacity curbs to comply with the norms to cut carbon emissions. The steel sector is among the biggest sources of carbon emissions in China, accounting for roughly 15% of national carbon emissions. China has set a national goal to achieve peak carbon emissions for the steel sector by 2025.

China’s steel output is expected to continue to shrink through December due to mandatory production cuts. Output is also likely to be capped by softer steel demand in the country, partly resulting from a slowdown in demand in the construction sector. However, production is likely to rebound in first-quarter 2022 as steel mills in the country complete the required curtailments for 2021.

Steel demand in China has softened since the second half of 2021 due to a slowdown in the country’s economy. China's GDP expanded 4.9% year over year in the third quarter of 2021, slowing from a 7.9% growth in the second quarter, per China's National Bureau of Statistics.

A slowdown in construction and manufacturing activities has led to the contraction of demand for steel in China. Manufacturing is being hurt by semiconductor shortages, supply-chain disruptions and power outages. Beijing’s move to take the heat out of its property market partly through credit tightening measures bodes ill for construction steel demand. The debt crisis at one of China top property developers, Evergrande, also increases the risk of a financial contagion in the country’s property sector. Real estate accounts for roughly 40% of China's steel consumption. A boom in the property sector played a major role in driving China's steel production last year. The WSA expects steel demand in China to contract 1% year over year in 2021 factoring in the negative trends in the country’s real estate sector.

How Other Major Producers Fared in November?

Among the other major Asian producers, India — the second-largest producer — saw a 2.2% rise in production to 9.8 Mt in November. Steel demand is picking up in India on a revival in economic activities post the deadly second wave. Government’s infrastructure push and focus on accelerating the rural economy augur well for steel demand in the country.

Production in Japan jumped 10.7% to 8 Mt in the reported month. Output rose for the ninth consecutive month as steel makers in the country are seeing an upturn in domestic demand from the pandemic-induced lows. Higher demand and steel prices are also driving profit margins of Japanese steel makers. Crude steel output in South Korea rose 2.7% to 5.9 Mt. Consolidated output went down 15.5% to 98.3 Mt in Asia and Oceania reflecting the sharp decline in China.

In North America, crude steel production climbed 13.8% to 7.2 Mt in the United States in November. Steel demand has rebounded in the Unites States with the resumption of operations, leading to an uptick in capacity utilization and domestic steel production. U.S. capacity utilization rate broke above the important 80% level in May 2021 for the first time since the start of the pandemic last year, and remains above that level amid strong domestic demand. Overall production in North America rose 9.3% to roughly 9.7 Mt.  

In the Europe Union (EU), production from Germany, the largest producer in the region, ticked down 0.3% to 3.4 Mt. Total output was up 3.7% in the EU to 12.9 Mt. European steel makers are facing headwinds from a slowdown in automotive steel demand. The semiconductor shortage is hurting demand from car manufacturers. The spike in electricity costs is also weighing on steel producers in Europe, especially electric arc furnace producers, due to an increase in steelmaking costs.  

Output in the Middle East slipped 5.3% to 3.8 Mt in November. Iran, the top producer in the region, saw a 5.2% decline to 2.7 Mt. Africa recorded a 37.4% surge to 1.5 Mt.

Among other notable producers, output from Turkey went up 6.1% to 3.4 Mt. Production from Brazil, the biggest producer in South America, increased 2.5% to 3.1 Mt in November.

Steel Prices Cooling Off, but Industry Fundamentals Remain Favorable

The steel industry has staged a strong comeback this year after being rattled by the fallout from the coronavirus pandemic last year, thanks to a strong revival in end-market demand and an upswing in steel prices.

The pandemic hurt demand for steel across major end-use markets for much of the first half of last year. However, the industry has rebounded strongly on solid pent-up demand and a rally in steel prices. The resumption of operations across major steel-consuming sectors such as construction and automotive following the easing of lockdowns and restrictions globally has led to an uptick in steel demand.

Steel prices have also escalated to record highs this year. Strong demand and persistent supply shortages have also led to a spike in U.S. steel prices this year to historically high levels, allowing U.S. steel companies to churn out record profits despite an uptick in costs of raw materials including ferrous scrap and headwinds from supply-chain and logistics issues.

After plummeting to a pandemic-led low of roughly $440 per short ton in August 2020, the benchmark hot-rolled coil (“HRC”) prices witnessed a significant rally, breaking above the $1,900 per short ton level in August 2021 on the back of a mismatch between supply and demand.

However, HRC prices have come under pressure since October after peaking in September 2021, dragged down by shorter lead times, imports of lower-priced steel and a slowdown in demand in automotive resulting from production cuts by carmakers in the wake of the semiconductor shortage. Nevertheless, HRC prices (currently hovering around $1,600) remain elevated notwithstanding the recent correction, as they are well above the year-ago levels and nearly four-times higher than the August 2020 low.

Demand weakness in automotive is likely to continue as the chip shortages are unlikely to abate anytime soon.  Despite a slowdown in steel demand in the automotive space amid the ongoing chip crunch, healthy demand in other end markets including construction and supply disruptions due to mill outages and scheduled maintenance are likely to lend support to HRC prices through the balance of this year and into 2022, driving profit margins of steel companies.

Steel Stocks Worth A Look

A few stocks currently worth considering in the steel space are TimkenSteel Corporation , EVRAZ plc , Commercial Metals Company (CMC Quick QuoteCMC - Free Report) and United States Steel Corporation (X Quick QuoteX - Free Report) .

TimkenSteel sports a Zacks Rank #1 (Strong Buy) and has a projected earnings growth rate of 425.8% for the current year. The Zacks Consensus Estimate for TMST’s current-year earnings has been revised 25.2% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

TimkenSteel beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 59.2%. TMST shares have surged around 237% in a year.

EVRAZ has a projected earnings growth rate of 244.8% for the current year. EVRZF's consensus estimate for the current year has been revised 2% upward over the last 60 days.

Shares of EVRAZ have gained around 36% in the past year. EVRZF currently carries a Zacks Rank #1.

Commercial Metals carries a Zacks Rank #1 and has an expected earnings growth rate of 10.5% for the current fiscal year. The consensus estimate for CMC's current fiscal year earnings has been revised 6.6% upward over the last 60 days.

Commercial Metals beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. It has a trailing four-quarter earnings surprise of roughly 7.4%, on average. CMC has rallied around 75% over the past year.

United States Steel carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for X’s current-year earnings has been revised 7% upward over the last 60 days.

United States Steel has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 24.5%. X shares have gained around 38% over the past year.