Global crude steel production expanded in July as steel mills in China -- the world's biggest steel producer -- ramped up production to record high. Higher output from India and the United States also supported the growth.
According to the latest report from the World Steel Association ("WSA") -- the international trade body for the iron and steel industry -- crude steel production for 64 reporting nations spiked 5.8% year over year for the reported month to 154.6 million tons (Mt).
Chinese Mills Beef Up Output
Production from China, which accounts for around half of the global steel output, shot up 7.2% year over year to a new record high of 81.2 Mt in July, exceeding the previous peak level of 81.1 Mt registered in May.
Chinese steel mills are ramping up production, driven by higher profits. Mills in the country are taking advantage of higher domestic steel prices that translates to higher profits for the Chinese steel industry. The spike in output came despite Beijing’s ongoing efforts to reduce the country’s massive excess steel capacity and streamline its burgeoning steel sector.
Fears of renewed oversupply of steel in the market triggered by a surge in production in China to record highs in the recent months have gripped the steel industry lately. Chinese steel mills have been beefing up output to take advantage of strong profit margins since the four-month production restriction to curb pollution during the winter months was lifted by Beijing in March 2018.
The ramp up in Chinese output, notwithstanding the ongoing trade spat between Beijing and Washington, has raised industry-wide concerns that a glut of cheap Chinese steel will put downward pressure on steel prices globally.
How Other Key Producers Fared in July
Among other major Asian producers, India saw an 8% rise in production to 9 Mt in July. Steel mills in the country have been benefiting from strong domestic demand.
Output in Japan slipped 2% to 8.4 Mt in July as heavy rain affected production in western Japan during the month. Production in South Korea edged up 0.1% to 6.2 Mt. Consolidated output were up 6.3% to 109 Mt in Asia.
In North America, crude steel production rose 4.5% to 7.3 Mt in the United States. American steel mills are benefiting from higher domestic steel prices courtesy of the Trump administration’s trade actions to curb imports.
The tariffs are expected to boost production capacity of U.S. steel makers amid lower imports. The U.S. Department of Commerce earlier this year said that the trade actions are aimed at increasing domestic steel production from its present capacity of 73% to approximately an operating rate of 80% -- the minimum rate required for the long-term viability of the industry.
While there are still uncertainties surrounding exemptions of countries, there is no denying the fact that the trade actions have instilled optimism in the long-struggling American steel industry.
Meanwhile, output in Canada fell 9.3% to around 1 Mt in July. Overall production in North America was up 2.7% to roughly 10.1 Mt.
In the Europe Union, production from Germany, the biggest producer in the region, jumped 10.9% to 3.9 Mt. Output rose 3.3% in Italy to 2.2 Mt while declining 3.8% to 1.3 Mt in France. Spain saw a 20.1% surge to 1.2 Mt. Total output rose 3.9% in the European Union to 14.5 Mt.
Output in the Middle East climbed 16.8% to 3 Mt with Iran, the top producer in the region, seeing a 13.2% rise to 2 Mt. Africa recorded a 14.3% gain to 1.2 Mt in the reported month.
Among other notable producers, production from Turkey was down 2.3% to 3.3 Mt. Output from Brazil, the largest producer in South America, increased 6.7% to 3 Mt.
Crude steel capacity utilization ratio for the reporting countries was 77.5% in July, down from 78.9% recorded in the previous month while up from 73.8% a year ago.
Steel Sector in Fine Shape
The steel industry has staged a comeback after being out of favor for long, taking succour from a recovery in steel demand and prices and a strengthening global economy.
While the industry is still challenged by excess capacity driven by a continued surge in production in China, it is gaining from a cyclical upturn in steel demand on the back of strong economic momentum across advanced and developing economies and strength across automobile and construction sectors -- two major end-use markets.
Steel producers are poised to gain from an upturn in global steel demand. The WSA predicts global steel demand to expand 1.8% in 2018 as favorable global economic scenario, a rebound in commodity prices and strong investment will drive steel demand in both developed and developing economies.
The Zacks Steel Producers industry currently carries a Zacks Industry Rank #117, which places it at the top 46% of more than 250 Zacks industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Steel Stocks to Watch For
A few stocks worth considering in the steel space are Carpenter Technology Corporation CRS, Universal Stainless & Alloy Products, Inc. USAP, Allegheny Technologies Incorporated ATI and EVRAZ plc EVRZF. While Carpenter Technology and Universal Stainless sport a Zacks Rank #1 (Strong Buy), Allegheny and EVRAZ carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Carpenter Technology has an expected earnings growth of 43.2% for 2018. Earnings estimates for the current year have been revised 4.7% upward over the last 60 days. The stock has also rallied roughly 50% over the past year.
Universal Stainless has gained around 65% over the past year. Earnings estimates for the current year have been revised 24.2% upward over the last 60 days.
Allegheny has an expected earnings growth of 241.7% for 2018. Earnings estimates for the current year have been revised 18.8% upward over the last 60 days. The stock has also gained roughly 31% over a year.
EVRAZ has an expected earnings growth of 183.3% for 2018. Earnings estimates for the current year have been revised 30.8% upward over the last 60 days. The stock has rallied roughly 227% over the past year.
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