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China Q1 Steel Output Up Despite Coronavirus-Led Slowdown
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China’s crude steel production expanded in the first quarter of 2020 even though the coronavirus pandemic ravaged domestic steel demand. Crude steel output from China — the world's biggest steel producer — rose 1.2% year over year to around 234.5 million tons in the first three months of the year, per China's National Bureau of Statistics (“NBS”).
China Steel Oversupply Spells Problem
Rising steel production in China, which accounts for more than half of the global steel output, has led to high levels of finished steel inventories in the country amid weak steel demand at home.
Steel demand weakened in China as major end-user industries were put in partial shutdown to blunt the spread of the outbreak. Meanwhile, steel production increased during the first quarter as blast furnaces across the country continued to run.
The increase in the first quarter came despite a decline in output in March as steel mills in China scaled down production last month in the wake of a slowdown in demand and a pile-up in inventories. While steel inventories in China fell modestly during March, they remain significantly elevated. Bloated inventories have built pressure on China’s domestic steel prices. Crude steel production is likely to pick up pace as economic activities in China gradually resume moving ahead.
Continued build-up of inventories of steel products, including hot-rolled coil, cold-rolled coil and rebar due to rising production coupled with softer domestic demand, will likely further hurt prices in China and globally. Increasing steel stockpiles have also ignited industry-wide concerns of China flooding global markets with cheap steel exports.
China’s overcapacity remains an overhang for the steel sector. Despite Sino-U.S. trade tensions, China’s steel mills ramped up production last year to take advantage of healthy profit margins. Higher domestic steel demand was another driving factor.
According to the World Steel Association ("WSA"), the international trade body for the iron and steel industry, China’s production jumped 8.3% year over year to 996.3 million tons in 2019. The country’s share of the world crude steel production rose to 53.3% in 2019 from 50.9% in 2018.
Notably, production from China rose 5% year over year to 74.8 million tons in February 2020, per the WSA. Steel producers in China continued to ramp up output even though coronavirus-induced disruptions crimped their profit margins.
Steel Sector Reeling Under Coronavirus
Weaker steel demand in China, the world’s top consumer, amid a faltering domestic economy spells problem for the steel industry. The deadly virus has sent stock markets across the globe into a tailspin and also taken a heavy toll on most commodities (including steel) this year due to worries over demand weakness in China.
The pandemic has wreaked havoc on China’s economy. It has slowed down activities in the construction space, a major steel end-market. The automotive industry, which consumes a big chunk of steel, is also among the industries that have been dealt a heavy blow. The pandemic has put brakes on automobile production in China due to shortage of manpower and disrupted supply of auto parts. Moreover, manufacturing activities in the country dropped in the first quarter of 2020, impacted by shutdowns imposed by China authorities to contain the spread of the virus.
China’s GDP shrank 6.8% year over year in the first quarter of 2020, per the NBS, the first contraction in decades, as the coronavirus outbreak and China government’s containment efforts including shutdowns, travel restrictions and quarantines to limit human contact hurt industrial production and retail sales. Industrial production fell 8.4% year over year in the quarter, while manufacturing industry output tumbled 10.2%, the NBS noted.
The International Monetary Fund (“IMF”) envisions China’s economy to grow just 1.2% in 2020. This is a sharp slowdown from 6.1% growth in 2019. China’s economy saw the weakest growth in almost three decades in 2019 amid the tariff war with the United States.
While China is slowly resuming economic activities, it would be a challenging task for Beijing to bring the economy out of its slumber as containment actions across the world amid the pandemic have crippled global demand.
The demand environment for steel in China is not expected to get better anytime soon as business activities in the country are expected to remain subdued. The current feeble economic and demand situations in China do not look supportive over the near term. Elevated supply amid ebbing demand is expected to exert pressure on steel prices in China, pulling down global prices as well.
Meanwhile, American steel stocks have remained out of favor this year. The virus outbreak has triggered a bloodbath in major U.S. steel stocks. Shares of U.S. steel makers such as United States Steel Corp. (X - Free Report) , Nucor Corporation (NUE - Free Report) , Steel Dynamics, Inc. (STLD - Free Report) and Cleveland-Cliffs Inc. (CLF - Free Report) , which completed the purchase of AK Steel last month, have tumbled roughly 43%, 37%, 35%, and 58%, respectively, year to date. Shares of ArcelorMittal (MT - Free Report) , which is among the biggest steelmakers in North America and caters a broad U.S. manufacturing base, are also down 48%.
While Steel Dynamics, Cleveland-Cliffs and ArcelorMittal currently carry a Zacks Rank #3 (Hold), both United States Steel and Nucor have a Zacks Rank #4 (Sell).
U.S. steel prices also came under pressure over the past few weeks amid the virus plight. The benchmark prices for hot rolled band steel hit $523 per net ton on Apr 15, down roughly 7.1% from $563 net ton two weeks ago, according to SteelBenchmarker.
Notably, U.S. steel prices surged past $900 per ton in 2018 on Trump administration’s imposition of a 25% steel tariff. Given the current weak demand and steel pricing environment, prospects of a material rebound in steel stocks appears to be limited over the short haul.
The Zacks Steel Producers industry currently carries a Zacks Industry Rank #155, which places it at the bottom 39% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The Zacks Steel Producers industry has also underperformed the broader market year to date. The industry has tumbled 40.6% so far this year compared with the S&P 500’s decline of 13.6%.
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China Q1 Steel Output Up Despite Coronavirus-Led Slowdown
China’s crude steel production expanded in the first quarter of 2020 even though the coronavirus pandemic ravaged domestic steel demand. Crude steel output from China — the world's biggest steel producer — rose 1.2% year over year to around 234.5 million tons in the first three months of the year, per China's National Bureau of Statistics (“NBS”).
China Steel Oversupply Spells Problem
Rising steel production in China, which accounts for more than half of the global steel output, has led to high levels of finished steel inventories in the country amid weak steel demand at home.
Steel demand weakened in China as major end-user industries were put in partial shutdown to blunt the spread of the outbreak. Meanwhile, steel production increased during the first quarter as blast furnaces across the country continued to run.
The increase in the first quarter came despite a decline in output in March as steel mills in China scaled down production last month in the wake of a slowdown in demand and a pile-up in inventories. While steel inventories in China fell modestly during March, they remain significantly elevated. Bloated inventories have built pressure on China’s domestic steel prices. Crude steel production is likely to pick up pace as economic activities in China gradually resume moving ahead.
Continued build-up of inventories of steel products, including hot-rolled coil, cold-rolled coil and rebar due to rising production coupled with softer domestic demand, will likely further hurt prices in China and globally. Increasing steel stockpiles have also ignited industry-wide concerns of China flooding global markets with cheap steel exports.
China’s overcapacity remains an overhang for the steel sector. Despite Sino-U.S. trade tensions, China’s steel mills ramped up production last year to take advantage of healthy profit margins. Higher domestic steel demand was another driving factor.
According to the World Steel Association ("WSA"), the international trade body for the iron and steel industry, China’s production jumped 8.3% year over year to 996.3 million tons in 2019. The country’s share of the world crude steel production rose to 53.3% in 2019 from 50.9% in 2018.
Notably, production from China rose 5% year over year to 74.8 million tons in February 2020, per the WSA. Steel producers in China continued to ramp up output even though coronavirus-induced disruptions crimped their profit margins.
Steel Sector Reeling Under Coronavirus
Weaker steel demand in China, the world’s top consumer, amid a faltering domestic economy spells problem for the steel industry. The deadly virus has sent stock markets across the globe into a tailspin and also taken a heavy toll on most commodities (including steel) this year due to worries over demand weakness in China.
The pandemic has wreaked havoc on China’s economy. It has slowed down activities in the construction space, a major steel end-market. The automotive industry, which consumes a big chunk of steel, is also among the industries that have been dealt a heavy blow. The pandemic has put brakes on automobile production in China due to shortage of manpower and disrupted supply of auto parts. Moreover, manufacturing activities in the country dropped in the first quarter of 2020, impacted by shutdowns imposed by China authorities to contain the spread of the virus.
China’s GDP shrank 6.8% year over year in the first quarter of 2020, per the NBS, the first contraction in decades, as the coronavirus outbreak and China government’s containment efforts including shutdowns, travel restrictions and quarantines to limit human contact hurt industrial production and retail sales. Industrial production fell 8.4% year over year in the quarter, while manufacturing industry output tumbled 10.2%, the NBS noted.
The International Monetary Fund (“IMF”) envisions China’s economy to grow just 1.2% in 2020. This is a sharp slowdown from 6.1% growth in 2019. China’s economy saw the weakest growth in almost three decades in 2019 amid the tariff war with the United States.
While China is slowly resuming economic activities, it would be a challenging task for Beijing to bring the economy out of its slumber as containment actions across the world amid the pandemic have crippled global demand.
The demand environment for steel in China is not expected to get better anytime soon as business activities in the country are expected to remain subdued. The current feeble economic and demand situations in China do not look supportive over the near term. Elevated supply amid ebbing demand is expected to exert pressure on steel prices in China, pulling down global prices as well.
Meanwhile, American steel stocks have remained out of favor this year. The virus outbreak has triggered a bloodbath in major U.S. steel stocks. Shares of U.S. steel makers such as United States Steel Corp. (X - Free Report) , Nucor Corporation (NUE - Free Report) , Steel Dynamics, Inc. (STLD - Free Report) and Cleveland-Cliffs Inc. (CLF - Free Report) , which completed the purchase of AK Steel last month, have tumbled roughly 43%, 37%, 35%, and 58%, respectively, year to date. Shares of ArcelorMittal (MT - Free Report) , which is among the biggest steelmakers in North America and caters a broad U.S. manufacturing base, are also down 48%.
While Steel Dynamics, Cleveland-Cliffs and ArcelorMittal currently carry a Zacks Rank #3 (Hold), both United States Steel and Nucor have a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
U.S. steel prices also came under pressure over the past few weeks amid the virus plight. The benchmark prices for hot rolled band steel hit $523 per net ton on Apr 15, down roughly 7.1% from $563 net ton two weeks ago, according to SteelBenchmarker.
Notably, U.S. steel prices surged past $900 per ton in 2018 on Trump administration’s imposition of a 25% steel tariff. Given the current weak demand and steel pricing environment, prospects of a material rebound in steel stocks appears to be limited over the short haul.
The Zacks Steel Producers industry currently carries a Zacks Industry Rank #155, which places it at the bottom 39% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The Zacks Steel Producers industry has also underperformed the broader market year to date. The industry has tumbled 40.6% so far this year compared with the S&P 500’s decline of 13.6%.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
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