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China Churns Out Record Steel in May as Demand Picks Up

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China’s crude steel production shot up to a new record high in May on an uptick in demand from construction and manufacturing sectors as the country continues its gradual recovery from the fallout of the coronavirus pandemic.

Crude steel output from China — the world's biggest steel producer — went up 4.2% year over year to 92.27 million tons in May, according to China's National Bureau of Statistics (“NBS”). Production also surged 8.5% from April. For the first five months of 2020, output rose 1.9% year over year to 411.75 million tons, per NBS.

China on Road to Recovery Post Virus-Led Slump

The pandemic had a devastating effect on China’s first-quarter economic growth. China’s GDP shrank 6.8% year over year in the first quarter, the first contraction in decades, as travel restrictions and quarantine measures hurt industrial production and retail sales.

However, life in China, which came out of the lockdown ahead of other countries, is gradually approaching normalcy. The world’s second-biggest economy is slowly clawing back from the coronavirus-induced slump.

China’s manufacturing sector, which reeled under the effects of the Sino-U.S. tariff war for most part of 2019, suffered another shock amid the pandemic. Manufacturing activities in the country dropped in the first quarter of 2020, impacted by shutdowns imposed by China authorities to stem the spread of the virus.

However, manufacturing activities picked up in April and May on a rebound in domestic demand. The official manufacturing purchasing managers’ index (PMI) clocked at 50.6 in May. A reading above 50 indicates expansion in activity. China’s industrial production also went up 4.4% year over year in May, the strongest pace since December 2019, with manufacturing seeing a 5.2% growth.

Business activities in the construction sector also picked up pace in May. Moreover, China’s passenger car sales rose for the first time in almost a year in May as government stimulus measures revived consumer demand, signalling a rebound in the world’s biggest automobile market from the crisis wrought by coronavirus.

Government stimulus measures are likely to continue to cushion China’s economy moving ahead. Beijing is looking to rev up the economy with big infrastructure spending and is also taking steps to boost domestic consumption. China, last month, unveiled a roughly $500 billion stimulus focused on tax cuts, infrastructure projects and job creation to get the economy back on track. However, the road to recovery could be bumpy given the potential for a “second wave” of infections and sluggish overseas demand.

Demand Rebound to Further Drive Steel Production

Coronavirus ravaged domestic steel demand in China, where the outbreak first broke out. However, a recovery in construction and manufacturing activities is driving demand for steel in China, the world’s top consumer of the commodity.

Crude steel production in China is expected to continue to rise moving ahead as business activities in the country gradually pick up pace. Steel mills in the country are likely to further ramp up production on recovering profit margins and optimism that government stimulus measures will boost domestic steel demand.

World Steel Association ("WSA"), the international trade body for the iron and steel industry, recently said that it expects steel demand in China to rise 1% in 2020. All major steel-consuming sectors in China were back to near full productivity by the end of April. The WSA expects steel demand in China to be driven, in the second half of 2020, by the construction sector that has already attained full productivity.

Construction will be supported by infrastructure investment driven by Beijing’s new infrastructure push. The automotive industry is also expected to be backed by incentive measures. However, the recovery in China’s manufacturing sector is expected to be slow due to the global economic slowdown, per the trade body.

Meanwhile, steel stocks are gaining traction of late partly due to the demand recovery in China. Shares of major steel makers such as ArcelorMittal (MT - Free Report) , United States Steel Corp. (X - Free Report) , Nucor Corporation (NUE - Free Report) and Steel Dynamics, Inc. (STLD - Free Report) have spiked roughly 36%, 71%, 35%, and 53%, respectively, over the past three months.

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are Ternium S.A. (TX - Free Report) and Companhia Siderurgica Nacional (SID - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ternium beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 83.7%. The company also has an expected long-term earnings per share growth rate of 3.4%. The stock is also up roughly 44% over the past three months.

Companhia Siderurgica beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters. The consensus EPS estimate for the current year has been revised 25.7% upward over the last 30 days. The stock is also up roughly 35% over the past three months.

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