Global crude steel production expanded in February on the back of a surge in output in China, the world's biggest steel maker, despite Beijing’s efforts to curb output during winter months to streamline its burgeoning steel sector and mounting trade tensions with the United States. Higher output from India, which pipped Japan as the second-largest steel producer, also supported the production growth.
According to the latest report from the World Steel Association ("WSA") – the international trade body for the iron and steel industry – crude steel production for 64 reporting nations went up 3.5% year over year for the reported month to 131.8 million tons (Mt). This follows a paltry 0.8% increase in January.
Chinese Steel Mills Ramp Up Output
Production from China, which accounts for around half of the global steel output, spiked 5.9% year over year to 64.9 Mt in February as steel mills in the country took advantage of higher domestic steel prices that translates to higher profits for the Chinese steel industry.
Chinese steel output was expected to decline during winter months as Beijing had implemented a four-month reduction in production to reduce the country’s excess steel supply and clean up the environment. Production is expected to rise further moving ahead as those winter restrictions ended earlier this month.
The rise in production in February also came amid escalating trade tensions between the United States and China. The Trump administration has slapped a 25% tariff on steel imports with China being one of the main targets of the punitive trade action.
While China only accounts for 2% of U.S. steel imports, it has been repeatedly accused of dumping its excess steel capacity. Notably, President Trump has a record of attacking China for unfair trade practices. This is well reflected in his plans to impose sweeping tariffs on imports from China worth as much as $60 billion, announced last week.
Beijing has also responded with plans to levy tariffs on a range of American products with U.S. export value of $3 billion in 2017, including a 15% tariff on steel pipes. Nevertheless, the world’s two largest economies are reportedly in talks to avert a full-blown trade war.
How Other Major Producers Fared in February?
Among other major Asian producers, India saw a 3.4% rise in production to 8.4 Mt in February. Indian steel mills have been benefiting from higher domestic steel prices and increasing local demand.
Production in Japan slipped 0.5% to 8.3 Mt in February following a 0.3% rise a month ago. South Korea also witnessed a 2.1% decline to 5.4 Mt. Consolidated output were up 4.3% to 90.5 Mt in Asia.
In North America, crude steel production rose 0.4% to 6.4 Mt in the United States. This follows a 2.2% decrease in production in January. The rebound came as American steel mills benefited from higher domestic steel prices.
Moving ahead, the trade tariffs are expected to boost production capacity of U.S. steel makers amid lower imports. The U.S. Department of Commerce had said that the trade actions are aimed at increasing domestic steel production to roughly 80% operating rate from its present 73% capacity.
On prospects of higher steel demand as a result of the U.S. trade measures, U.S. Steel Corp. (X - Free Report) said recently that it will restart one of its Granite City Works blast furnaces and steelmaking facilities. Another U.S. steel major, Nucor Corp. (NUE - Free Report) also recently said that it will build a rebar micro mill in Florida. This $240-million investment will be Nucor’s second rebar micro mill.
Meanwhile, output in Canada skid 10.4% to around 1 Mt in February. Overall production for the region was down 2.3% to roughly 9.1 Mt.
In the Europe Union, production from Germany – the biggest producer in the region – fell 3.2% to 3.3 Mt. Output went up 4.5% in Italy to 2.1 Mt while rising 1% to 1.3 Mt in France. Spain saw a 0.4% increase to 1.1 Mt. Total output fell 0.8% in the European Union to 13.4 Mt.
Output in the Middle East climbed 19% to 2.9 Mt with Iran, the top producer in the region, seeing a 48.6% surge to 2.1 Mt. Africa logged a 4% gain to 1.1 Mt in the reported month.
Among other notable producers, production from Turkey was up 8.7% to 3 Mt. Output from Brazil, the largest producer in South America, rose 5.5% to 2.7 Mt.
Crude steel capacity utilization ratio for the reporting countries was 73.3% in February, up from 71.5% a year ago and 72.8% in the previous month.
Steel Sector on the Mend
The steel industry has staged a recovery after being out of favor for long. The industry enjoyed a good run in 2017 notwithstanding a few lingering challenges. Continued momentum in the automotive space and a recovery across housing and commercial construction markets have been key tailwinds for the steel industry. The automotive and construction industries will continue to provide the backbone to the industry.
The Zacks Steel Producers industry has outperformed the broader market in a year’s time. The industry has gained around 13.2% in this period, higher than the S&P 500’s corresponding return of around 10.8%.
While the overall demand fundamentals for steel is improving, the industry is still challenged by sustained overcapacity. The global steel industry continues to reel under the effects of excess capacity -- the biggest obstacle to persistent growth and profitability.
Steel Stocks to Watch For
A few stocks worth considering in the steel space are Tenaris S.A. (TS - Free Report) , Allegheny Technologies Incorporated (ATI - Free Report) and Salzgitter Aktiengesellschaft (SZGPY - Free Report) . While both Tenaris and Allegheny sport a Zacks Rank #1 (Strong Buy), Salzgitter is a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Tenaris has an expected earnings growth of 44.2% for 2018. Earnings estimates for the current year have been revised 32.1% upward over the last 60 days.
Allegheny has an expected earnings growth of 62.5% for 2018. Earnings estimates for the current year have been revised 2.4% upward over the last 60 days. The stock has also gained roughly 33% over a year.
Salzgitter has an expected earnings growth of 76.5% for 2018. The stock has gained roughly 42% over the past year.
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