World Steel May Production Slumps Despite Record China Output

Global crude steel production took a tumble in May as disruptions associated with the coronavirus

Global crude steel production took a tumble in May as disruptions associated with the coronavirus pandemic hurt output across the world and crippled demand in major steel-consuming sectors. A surge in production from China to a new record high was more than offset by declines across other major producers.

Per the latest World Steel Association (“WSA”) report, crude steel production for 64 reporting nations plummeted 8.7% year over year to 148.8 million tons (Mt) in May. Notably, output declined in every region during the reported month.

China Churns Out Record Production

Crude steel production from China — the world’s biggest steel producer — shot up in May to an all-time high on an uptick in demand from construction and manufacturing sectors as the country continues its gradual recovery from the fallout of the pandemic. Per the WSA, production in China, which now accounts for more than 60% of the global steel output, went up 4.2% year over year to 92.3 Mt in May. Output also surged 8.5% from April.

China, which came out of the lockdown ahead of other countries, is slowly clawing back from the coronavirus-led slump. China’s steel production tumbled in March as steel mills in the country scaled down production in the wake of a slowdown in domestic demand and a pile-up in finished steel inventories. Production started to recover in April on the back of the restart of idled capacity and increased utilizations.

However, China’s overcapacity remains an overhang for the steel sector. Despite the coronavirus-induced demand destruction, China’s crude steel production expanded in the first quarter of 2020. For the first five months of 2020, output rose 1.9% year over year to roughly 411.8 Mt, according to the WSA.

Rising production would further add to China’s finished steel inventories which have already swelled due to disruptions associated with coronavirus. Continued build-up of inventories of steel products including hot-rolled coil and rebar will likely exert pressure on steel prices in China and globally.

How Other Major Producers Fared in May?

Among other major Asian producers, India saw a 39.1% decline in production to 5.8 Mt in May, the third consecutive month of decline. The stringent nationwide lockdown to blunt the spread of the coronavirus forced steel manufacturers in the country to cut production amid shortage of labor and raw materials. Disruptions due to the coronavirus crisis also hurt domestic steel demand.

Production in Japan dropped 31.8% to 5.9 Mt in the reported month. Steel makers in the country have been hit by weak demand in automotive and machinery amid the virus crisis. Crude steel output in South Korea also fell 14.1% to 5.4 Mt. Consolidated output dipped 3.3% to 113.5 Mt in Asia.

In North America, crude steel production slumped 36.6% to 4.8 Mt in the United States in May.

Coronavirus has taken a big bite out of the U.S. steel industry. The pandemic has squeezed demand for steel across major end-use markets such as construction and automotive. Ebbing demand has forced domestic steel mills to curtail production with capacity utilization plummeting to multi-year lows. U.S. steel prices have also come under pressure this year amid a weak demand environment.

Meanwhile, output in Canada dropped 19.6% to around 0.8 Mt while in Mexico it fell 13.2% to roughly 1.5 Mt in May. Overall production in North America tumbled 31% to roughly 7.1 Mt.  

In the Europe Union (EU), production from Germany, the biggest producer in the region, went down 18.9% to 2.9 Mt. Output skid 43.6% in Italy to roughly 1.3 Mt. France also saw a 36.5% slump to 0.8 Mt while output dropped 33.7% in Spain to around 0.8 Mt. Muted demand in automotive and slowing construction is hurting steel consumption in Europe. Total output was down 26.8% in the EU to around 10.5 Mt.

The WSA sees steel demand in the EU to contract 15.8% this year. The manufacturing sector in the EU was expected to rebound in 2020 following a recession in 2019. However, it has been pushed into a deeper recession amid lockdowns that led to a significant decline in orders. The trade body expects the automotive sector in the region to be the worst hit.

Moreover, output in the Middle East slipped 7.3% to 3.1 Mt in May. Iran, the top producer in the region, saw an 8.9% rise to roughly 2.4 Mt. Africa recorded a 42% decline to around 0.7 Mt in May.

Among other notable producers, output from Turkey fell 25.8% to 2.3 Mt. Production from Brazil, the largest producer in South America, dropped 22.6% to roughly 2.2 Mt.

The WSA noted that due to the difficulties presented by the pandemic, many of the figures for May are estimates that may be revised with next month’s production update.

What Lies Ahead?

Crude steel production in China is likely to continue to rise moving ahead on the back of a rebound in domestic demand and economic activities. A recovery in construction and manufacturing activities is driving demand for steel in China, the world’s top consumer of the commodity.

Steel mills in China are likely to further ramp up production on recovering profit margins and optimism that government stimulus measures will boost domestic steel demand. Beijing is looking to stimulate the economy with big infrastructure spending and is also taking steps to boost domestic consumption.

The WSA 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 envisions 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. A faster recovery in China than the rest of the world is expected to mitigate the anticipated decline in this year’s global steel demand.

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 , United States Steel Corp. X, Nucor Corporation NUE, Steel Dynamics, Inc. STLD and Cleveland-Cliffs Inc. CLF, which completed the purchase of AK Steel earlier this year, have spiked roughly 15%, 36%, 35%, 39% and 52% respectively, over the past three months.

While ArcelorMittal, United States Steel, Nucor and Steel Dynamics currently carry a Zacks Rank #3 (Hold), Cleveland-Cliffs is a Zacks Rank #2 (Buy) stock.

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

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