China Drives World Steel Growth: Will Coronavirus Curb Output?
Zacks Investment Research | Feb 28, 2020 07:19AM ET
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.
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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. (NYSE:X) , Nucor Corp. (NYSE:NUE) , Steel Dynamics, Inc. (NASDAQ:STLD) and AK Steel Holding Corp. (NYSE:AKS) 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).
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