China Steel Output Rises Despite Oversupply Amid Coronavirus

China’s steel production continues to expand notwithstanding disruptions from the coronavirus pandemic. Latest data revealed that steel mills in China — the world's biggest steel producer — ramped up production in the first two months of 2020 even though the country struggled to contain the outbreak of the deadly virus.

China, which accounts for more than half of the global steel output, churned out 154.7 million tons of crude steel in the first two months of the year, up 3.1% from the same period last year, per China's National Bureau of Statistics (NBS).

Too Much China Steel Spells Problem

While production continued to rise during the first two months of 2020, disruptions in transportation and logistics due to coronavirus led to surging finished steel inventories in China amid weak domestic demand. Steel demand weakened in China as major end-user industries were put in partial shutdown due to the outbreak. On the other hand, steel production increased as blast furnaces across the country continued to run notwithstanding coronavirus-induced disruptions.

The closure of a large number of factories across China to put a check on the spread of the virus disrupted the supply chain. The city of Wuhan in Hubei province, the epicenter of the coronavirus pandemic that has already infected more than 218,000 people and killed more than 8,800 globally, is one of China's biggest manufacturing centers and the country’s transportation and logistics hub. Coronavirus crippled the transport links across the country.

Per the China Iron and Steel Association, inventories of finished steel products were up 45% year over year in late February in China. Soaring 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 weaker domestic steel demand would further hurt prices in China and globally. Rising steel stockpiles has also ignited industry-wide concerns that it will lead China again flooding global markets with cheap steel exports.

The steel industry continues to reel under the effects of sustained oversupply of steel in the market, exacerbated by continued growth in production in China. Despite U.S.-China trade tensions, China’s steel mills beefed up output last year to take advantage of fat profit margins. Healthy domestic steel demand was another driving factor.

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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 shot up 7.2% year over year to 84.3 million tons in January 2020, per the WSA. Production surged despite the Lunar New Year holidays and the government's stringent measures including lockdowns and quarantines to contain the coronavirus.

Steel Sector Stung by Coronavirus

A slowdown in steel demand in China, the world’s top consumer, amid a slowing domestic economy spells problem for the steel industry. The lethal virus has taken a heavy toll on commodities including steel due to worries over demand weakness in China (Read: Zacks Investment Research

Written By: Zacks Investment Research