Global steel demand is expected to contract this year as coronavirus-induced lockdowns and disruptions have impacted industrial activities, accordingly the latest Short Range Outlook from the World Steel Association (“WSA”), the international trade body for the iron and steel industry.
The WSA predicts steel demand to drop 6.4% to 1,654 million tons (Mt) in 2020 due to the coronavirus pandemic. The association, however, envisions demand to recover next year and rise 3.8% year over year to 1,717 Mt.
The outlook for 2020 assumes that lockdowns in most countries continue to be eased during June and July and major steelmaking economies do not suffer from substantial secondary waves of the virus outbreak.
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. Demand in China, the world’s top steel consumer, is predicted to rise 1% in 2020.
The association expects steel demand to drop significantly in most countries, in particular in the second quarter, as coronavirus-led shutdowns and disruptions in supply chains have hurt consumption. While lockdowns have hurt all steel-consuming sectors, automotive and mechanical machinery in particular are highly exposed to a protracted demand shock. The situation is forecast to get better with the easing of restrictions that started in May, but the path of recovery is likely to be slow.
Recovery in China to Ease Weaknesses Elsewhere
A rebound in economic activities is expected in the third quarter of 2020 as most countries have been gradually reopening from lockdowns since May, the WSA noted.
The economic recovery in China, which came out of the lockdown ahead of other countries, started in late February and is rapidly approaching normalcy. China’s GDP shrank 6.8% year over year in the first quarter of 2020, the first contraction in decades, as travel restrictions and quarantine measures hurt industrial production.
The WSA said that all major steel-consuming sectors in China were back to near full productivity by the end of April. It expects a rebound in steel demand in China in the second half of 2020 driven 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.
Meanwhile, the WSA expects steel demand in the developed economies to fall 17.1% in 2020. Demand in the European Union (EU) is forecast 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 WSA envisions the automotive sector in the region to be the worst hit.
In the United States, the trade body predicts steel demand to drop 22.9% in 2020. The pandemic has led to a sharp manufacturing recession in the United States that is expected to hit the bottom in the second quarter. A decline in oil prices has put pressure on investment in the energy sector while lower income and confidence due to rising unemployment has impaired residential construction. Non-residential construction is also expected to decline in 2020.
Steel demand in Japan is forecast to decline 19.1% in 2020 as automotive and machinery sectors in the country have been hurt by lower exports and stalling investments. The WSA also sees demand in South Korea to dip 12.7% this year as a weak domestic economy and weaker export markets are expected to lead to a double-digit drop in major steel-using sectors.
Meanwhile, steel demand in the developing economies (excluding China) is projected to contract by 11.6% in 2020. Stricter lockdown measures in certain countries due to inadequate health capacity, limited fiscal support, lower commodity prices and currency depreciation are among the factors that are expected to contribute to the decline.
Notably, the WSA expects India to witness a 18% decline in steel demand in 2020. Industrial activities in India have been ground to a halt as the country has implemented the most stringent nationwide lockdown measures in the world. The recovery in the country’s construction sector is expected to be slow due to labor shortages while the automotive sector will be hit hard by slower demand recovery and supply chain disruptions, the associat noted.
Steel Stocks Bearing the Brunt of Virus Impact
Shares of steel companies have gotten punished this year amid the coronavirus outbreak. In particular, worries over a slump in steel demand has triggered a broad-based selloff in U.S. steel stocks. The pandemic has dealt another blow to the embattled U.S. steel industry which reeled under the effects of a sharp decline in domestic steel prices and damaging impacts of the U.S.-China trade war last year.
While shares of U.S. steel companies have gained some ground of late partly due to a demand recovery in China, they are still down year to date. Shares of major American steel makers such as United States Steel Corp. X, Nucor Corporation NUE and Steel Dynamics, Inc. STLD have tumbled roughly 18%, 21% and 17%, respectively, year to date. ArcelorMittal MT, which is among the biggest steelmakers in North America, has also seen its shares tank roughly 35% this year.
United States Steel, Nucor, Steel Dynamics and ArcelorMittal each currently carry a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The U.S. steel industry is rattled by a slowdown in domestic steel demand across major end-use industries including construction. The coronavirus-led demand destruction has forced domestic steel mills to idle operations and scale down production.
The pandemic also led to a downswing in U.S. steel prices amid slowing demand. The benchmark hot-rolled coil steel prices retreated to multi-year lows during the first quarter of 2020. However, U.S. steel prices have gained some traction over the past few weeks on the back of steel mills’ price hike actions and higher scrap prices. However, the current weak economic and demand situations coupled with the deepening Sino-U.S. rift do not look supportive for a significant uptick in steel prices over the near term, thus limiting prospects of a rebound in steel stocks.
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