Global crude steel production expanded in January as output in China – the world's biggest steel producer – spiked despite holiday-related closures and strict quarantine restrictions imposed by Beijing to put a check on the spread of coronavirus.

The World Steel Association ("WSA") – the international trade body for the iron and steel industry – said that crude steel production for 64 reporting nations rose 2.1% year over year to 154.4 million tons (Mt) in January. Production expanded across China and the United States while falling in other major steel-producing countries like India, Japan and South Korea in the reported month.  

Production Surges in China Amid Virus Outbreak

Production from China, which accounts for more than half of the global steel output, jumped 7.2% year over year to 84.3 Mt in January. Production increased sharply notwithstanding the Lunar New Year holidays and the government's stringent measures including lockdowns and quarantines to contain the coronavirus epidemic. Much of the impacts of the restrictions are likely to get reflected in February 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 healthy profit margins. Higher domestic steel demand was another driving factor.

China’s steel output surged in 2019 despite the country’s efforts to curb its massive excess steel capacity. The country’s production shot up 10% year over year to an all-time high of 89.1 Mt in May 2019. Output rose at a solid pace through the first three quarters of 2019.

According to the WSA, China’s production jumped 8.3% year over year to reach 996.3 Mt in 2019. The country’s share of the world crude steel production rose to 53.3% in 2019 from 50.9% in 2018.

How Other Major Producers Fared in January?

Among other major Asian producers, India – the second-largest steel producer – saw a 3.2% decline in production to 9.3 Mt in January. Steel consumption in India has been hurt in the recent times by a slowdown in economic activities in the country. Reduced infrastructure spending and slowdown across major sectors like automobiles and construction are plaguing India's steel industry. Coronavirus-induced disruptions are also likely to put pressure on domestic steel prices.

Production in Japan slipped 1.3% to 8.2 Mt in the reported month. Japan's steel makers are hit by weakening demand in automotive and construction amid a slowing domestic economy. Production in South Korea, which is now witnessing the world's second-worst virus outbreak, also dropped 8% to 5.8 Mt. Consolidated output rose 4.2% to 111.4 Mt in Asia.

In North America, crude steel production expanded 2.5% to 7.7 Mt in the United States in January. Notably, production in the country went up 1.5% year over year to 87.9 Mt in 2019, per the WSA.

The Trump administration’s imposition of hefty punitive tariffs on steel imports has helped U.S. steel industry capacity break above 80% (the minimum rate required for sustained profitability of the industry) 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 Quick QuoteX - Free Report) , Nucor Corp. (NUE Quick QuoteNUE - Free Report) , Steel Dynamics, Inc. (STLD Quick QuoteSTLD - Free Report) and AK Steel Holding Corp. amid lower imports and also provided a boost to domestic steel production.

However, higher production driven by the added capacity contributed to the sharp decline in U.S. steel prices last year. Some of the U.S. steelmakers have taken steps to reduce excess capacity in the wake of lower domestic steel prices. There has been some recovery in U.S. steel prices over the past few months on the back of a series of price hike actions by major U.S. steel mills and supply-side actions, raising hopes for a reversal of fortunes in 2020.

Nucor, Steel Dynamics and AK Steel each currently carry a Zacks Rank #3 (Hold), while U.S. Steel has a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, output in Canada fell 6.5% to around 1.1 Mt and also skid 15.9% in Mexico to 1.4 Mt. Overall production in North America slipped 1.4% to roughly 10.2 Mt in January.  

In the Europe Union, production from Germany, the biggest producer in the region, tumbled 17.7% to around 2.8 Mt. Output fell 4.9% in Italy to roughly 1.9 Mt. France saw a 4.5% rise to roughly 1.3 Mt while output tumbled 34% in Spain to around 0.8 Mt. Total output was down 12% in the European Union to around 12.3 Mt.

Sluggish demand in automotive and slowing construction is denting steel consumption in Europe. A soft manufacturing sector hurt steel producers in Europe last year. The coronavirus outbreak in the continent, which has worsened of late, is likely to dent steel demand over the short haul.

Output in the Middle East shot up 29.5% to 3.8 Mt with Iran, the top producer in the region, seeing a 46.9% surge to 2.9 Mt. Production in Iran, which has emerged as a new hotspot for coronavirus, is likely to take a hit in the coming months. Africa recorded a 18.4% decline to around 1 Mt in January.

Among other notable producers, output from Turkey climbed 17.3% to 3 Mt. Production from Brazil, the largest producer in South America, fell 11.1% to roughly 2.7 Mt.

What Lies Ahead?

The coronavirus crisis is likely to keep steel production in China under check moving ahead. The disruptions associated with the virus are expected to lower steel output in the country, at least through March. Profit margins at China's steel mills are also expected remain under pressure amid the epidemic, which may also trigger a slowdown in steel output. A number of steel mills in China have reportedly started to cut back production in response to a weakening domestic demand and surging finished steel inventories in the country. Rising inventories have put downward pressure on China’s domestic steel prices of late.

Meanwhile, the demand environment in China is also expected to remain weak over the near term, exacerbated by coronavirus. The epidemic has slowed down activities in the construction space (a major steel end-use market) in China as workers who returned from the Chinese New Year holidays were being quarantined.

Manufacturing activities in the country have also been disrupted due to the shutdowns imposed by the Chinese authorities. While factories have started to reopen, they are struggling to get back on their feet as raw materials are in short supply due to intense transport controls and many workers still remain quarantined.

ArcelorMittal (MT Quick QuoteMT - Free Report) , the world’s biggest steelmaker, earlier this month said that it expects coronavirus to have a short-term negative impact on demand in China. ArcelorMittal, a Zacks Rank #3 stock, expects overall demand in the country to be flat to 1% higher in 2020.

The WSA also envisions a slowdown in demand in China this year amid a faltering domestic economy. Demand growth in China is projected to slow to 1% this year from an estimated 7.8% growth in 2019, per the trade body. While strength in the country’s real estate sector bodes well for steel demand, a weak manufacturing sector would be a deterrent.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>