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Global Steel Output Drops as China Loses Steam: What's Ahead?

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Global crude steel production retreated in October as output in China – the world's biggest steel producer – dropped on a yearly basis for the first time in 2019, partly due to Beijing’s stringent anti-pollution measures.

The World Steel Association ("WSA") – the international trade body for the iron and steel industry – reported yesterday that crude steel production for 64 reporting nations went down 2.8% year over year to 151.5 million tons (Mt) in October. Production fell across all major steel-producing countries in the reported month.  

Chinese Steel Juggernaut Slows

Production from China, which accounts for roughly half of the global steel output, slipped 0.6% year over year to 81.5 Mt in October, the first monthly decline of the year on a year-over-year comparison basis.

A slowing economy, implementation of strict anti-smog production curbs across key steel-making provinces in the country (including Hebei and Shandong) as well as weaker profit margins at steel mills contributed to the slowdown in Chinese steel production. Moreover, the week-long National Day holiday in early October is another factor for the output curtailment.

China’s production surged 10% year over year to an all-time high of 89.1 Mt in May 2019 as steel mills in the country bumped up output even though higher feedstock costs due to a spike in iron ore prices as a result of mine disruptions in Brazil squeezed their profit margins.

Notably, Chinese production increased at a fast pace during the first eight months of 2019, before slowing down in September. High production levels for the most part of this year coupled with a sharp increase in iron ore prices squeezed margins at domestic steel mills.

Despite the recent slowdown in production, China’s steel overcapacity remains an overhang for the steel sector. A glut of Chinese steel has put downward pressure on steel prices in China and globally.

Notwithstanding Sino-U.S. trade tensions, China’s steel mills cranked up output last year to take advantage of fat profit margins. China’s steel production climbed 6.6% year over year to reach 928.3 Mt last year.

Moreover, Chinese steel output has spiked 7.4% on a year-over-year comparison basis to roughly 829.2 Mt for the first ten months of 2019, according to the WSA.

China’s crude steel production is expected to go up 7% year over year to around 994 Mt in 2019, per the China Iron and Steel Association.

Demand Slowdown Hits Other Major Producers

Among other major Asian producers, India – the second-largest steel producer – saw a 3.4% decline in production to 9.1 Mt in October. Steel consumption in India has been hurt in the recent times by a slowdown in economic activities in the country. Reduced infrastructure spending, slowdown across major sectors like automobiles and construction and slumping domestic steel prices are plaguing the Indian steel industry.

Output in Japan dropped 4.9% to 8.2 Mt in the reported month. The U.S.-China trade conflict has triggered a slowdown in steel demand in that country. Japanese steel makers are hit by weakening demand in automotive and machinery. Production in South Korea also fell 3.5% to 6 Mt. Consolidated output fell 1.3% to 108.9 Mt in Asia.

In North America, crude steel production was down 2% to 7.4 Mt in the United States. This follows a 2.5% decline seen a month ago.

The Trump administration’s imposition of hefty punitive tariffs on steel imports helped U.S. steel industry capacity break above 80% (the minimum rate required for sustained profitability of the industry) last year after remaining below that level for years. The trade actions drove up production capacity of U.S. steel producers including United States Steel Corp. X, Nucor Corp. NUE, Steel Dynamics, Inc. (STLD - Free Report) and AK Steel Holding Corp. AKS amid lower imports and also provided a boost to domestic steel production.

However, higher production driven by the added capacity has contributed to the sharp decline in U.S. steel prices this year. Some of the U.S. steelmakers have recently taken steps to reduce excess capacity in the wake of falling domestic steel prices. Notably, weak market conditions have forced U.S. Steel to idle two of its blast furnaces in the United States. Capacity cuts have contributed to the recent decline in U.S. steel production. However, lower production is yet to make any notable positive impact on domestic steel prices. American steel producers are also contending with slowing steel demand, especially in automotive.

Nucor, U.S. Steel, Steel Dynamics and AK Steel each currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, output in Canada fell 2% to around 1.1 Mt and also declined 3.6% in Mexico to 1.5 Mt. Overall production in North America slipped 2.2% to roughly 10 Mt.  

In the Europe Union, production from Germany, the biggest producer in the region, dropped 6.8% to 3.3 Mt. Output fell 3.7% in Italy to around 2.2 Mt. France saw a 10.6% decline to roughly 1.2 Mt while output tumbled 7.6% in Spain to 1.2 Mt. Total output was down 8.7% in the European Union to around 13.3 Mt. Weakening demand in automotive and slowing construction is denting steel consumption in Europe. A soft manufacturing sector is hurting steel producers in Europe.

Output in the Middle East went up 2.9% to 3 Mt with Iran, the top producer in the region, seeing a 7.5% rise to 2.2 Mt. Africa recorded a 16.6% decline to around 1.1 Mt in the reported month.

Among other notable producers, production from Turkey slid 15% to 2.7 Mt. Output from Brazil, the largest producer in South America, tumbled 19.4% to 2.6 Mt.

What Lies Ahead?

Profit margins at Chinese steel mills are expected remain under pressure through the winter months (November to March) – typically the weak demand season. Construction activities tend to taper off during winter towards the end of the year, depressing demand for steel.

As such, steel production in China is likely to remain under check through the remainder of this year amid weaker demand and margins. Moreover, anti-pollution curbs across key steel-making provinces during winter to improve air quality are expected to trigger some slowdown in steel output. The supply restriction is also expected to lend some support to both Chinese and global steel prices.

Meanwhile, strength in the real estate sector is expected to boost steel demand growth in China. The WSA expects real estate investments to drive a 7.8% growth in steel demand in China this year, notwithstanding a slowdown in the world’s second-largest economy.

Earlier this month, ArcelorMittal MT, the world’s biggest steel producer, also revised higher its expectations for steel consumption growth in China for 2019. The steel behemoth expects real estate demand to drive the upside.  

According to the National Bureau of Statistics (NBS), China's property investment rose 10.3% in the first ten months of 2019. Beijing is also stepping up efforts to ramp up infrastructure investment to prop up its faltering economy that has been battered by the trade war with the United States. This bodes well for steel demand growth in China as real estate and infrastructure account for bulk of overall steel consumption in the country.

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