China Pushes Up World Steel Output Amid Coronavirus Disruption

Global crude steel production expanded in February as output from China – the world's biggest steel producer – shot up notwithstanding stringent measures including lockdowns and quarantines imposed by Beijing to curb the spread of the deadly coronavirus.

Per the latest World Steel Association (WSA) report, crude steel production for 64 reporting nations rose 2.8% year over year to 143.3 million tons (Mt) in February.

China Ramps Up Production Despite Virus Crisis

China’s steel production expanded in February even as the country struggled to cope with the coronavirus pandemic. Production from China, which accounts for more than half of the global steel output, jumped 5% year over year to 74.8 Mt in February.

Steel producers in China continued to crank up output last month even though coronavirus-induced disruptions crimped their profit margins and put a lid on domestic steel demand.

China’s overcapacity remains an overhang for the steel sector, putting downward pressure on steel prices in the country and globally. Notwithstanding 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 WSA, China’s production jumped 8.3% year over year to reach 996.3 Mt in 2019. The country’s share of world crude steel production rose to 53.3% in 2019 from 50.9% in 2018.

How Other Major Producers Fared in February?

Among other major Asian producers, India – the second-largest steel producer – saw a 1.5% increase in production to 9.6 Mt in February. Lower infrastructure spending and slowdown across major sectors like automobiles and construction are plaguing India's steel industry. Disruptions due to the coronavirus crisis are also putting pressure on domestic steel prices. Moving ahead, nationwide coronavirus lockdown is expected to force steel manufacturers in the country to cut production amid shortage of labor and raw materials.

Production in Japan went up 2.2% to 7.9 Mt in the reported month. Japan's steel makers have been hit by softening demand in automotive and construction amid the coronavirus crisis. Production in South Korea rose 2.1% to 5.4 Mt. Consolidated output expanded 4.5% to 101.7 Mt in Asia.

In North America, crude steel production spiked 3% to 7.2 Mt in the United States in February.

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. (NYSE:X) , Nucor Corp. (NYSE:NUE) , Steel Dynamics, Inc. (NASDAQ:STLD) 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. Prices gained some upward momentum toward the end of 2019 on the heels of price hike actions by major U.S. steel mills and supply-side actions. However, U.S. steel prices have again come under pressure over the past couple of months amid the virus crisis.

U.S. Steel and Steel Dynamics currently carry a Zacks Rank #3 (Hold), while Nucor has a Zacks Rank #4 (Sell).

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

Meanwhile, output in Canada slipped 2.5% to around 1 Mt while in Mexico it fell 19.3% to 1.3 Mt in February. Overall production in North America were down 1.3% to roughly 9.6 Mt.

In the Europe Union, production from Germany, the biggest producer in the region, tumbled 12% to around 2.9 Mt. Output was flat in Italy at roughly 2 Mt. France saw a 1.3% decline to roughly 1.2 Mt while output skid 38.1% in Spain to around 0.7 Mt. All these countries are reeling under the effects of coronavirus, as reflected by the daily surge in new cases. Total output was down 9% in the European Union to around 12.3 Mt.

Subdued demand in automotive and slowing construction is hurting steel consumption in Europe. 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 22.9% to 3.6 Mt with Iran, the top producer in the region, seeing a 34.3% surge to 2.7 Mt. Africa recorded a 4.1% decline to around 1.2 Mt in February.

Among other notable producers, output from Turkey went up 8.2% to 2.9 Mt. Production from Brazil, the largest producer in South America, fell 1.3% to roughly 2.7 Mt.

Soaring China Steel Inventories Raise Concerns

Although production rose in China during the first two months of 2020, disruptions in transportation and logistics due to coronavirus led to an increase in finished steel inventories in the country amid weak domestic demand.

Per China Iron and Steel Association, inventories of finished steel products were up around 45% year over year in late February in China. Rising steel inventories also put downward pressure on China’s domestic steel prices.

Continued build-up of inventories of steel products including hot-rolled coil and rebar due to rising production coupled with softer domestic steel demand will likely further hurt prices in China and globally. Increasing steel stockpiles has also ignited industry-wide concerns that it will lead to China again flooding global markets with cheap steel exports.

According to S&P Global (NYSE:SPGI) Platts, finished and semi-finished steel inventories held by steelmakers, rolling and processing plants and traders are expected to reach 100 million Mt by the end of this month and pose a significant challenge to the China market in the second quarter. Although certain steel mills in China have started reducing output this month due to elevated steel inventories and tight cash flow, others that reduced or suspended output in the first two months of 2020 have restarted or increased production due to improved logistics and modestly improved demand, per Platts.

Demand to Remain Muted

Steel demand has weakened in China, the world’s top consumer, as major end-user industries were put in partial shutdown due to the virus outbreak. The demand environment for steel in China is not expected to get better anytime soon as economic activities in the country are expected to remain subdued.

The outbreak has slowed down activities in the construction space (a major steel end-use market) in China. The automotive industry, which consumes a big chunk of steel, is also among the industries that have taken a heavy hit. The pandemic put brakes on automobile production in China due to plant shutdowns. Automakers in the country are operating significantly below their production capacity as shortage of manpower and parts are delaying a recovery.

Moreover, manufacturing activities in the country have been disrupted due to the shutdown imposed by China authorities. While factories have started to gradually reopen, they are struggling to resume full operations as raw materials are in short supply due to transport controls and many workers still remain quarantined. Activities are expected to pick up in April.

The WSA had earlier stated that it sees a slowdown in demand in China this year amid a weakening 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. A weak manufacturing sector is expected to be a deterrent.

ArcelorMittal (NYSE:MT) , the world’s biggest steelmaker, also envisions coronavirus to have a short-term negative impact on demand in China. The steel giant expects overall demand in the country to be flat to 1% higher in 2020.

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