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World Steel Output Up: China is a Risk Looming on the Horizon

A slowdown in steel demand in China, the world's top consumer, amid a cooling Chinese economy is a major concern for the steel industry.

Global crude steel production expanded in October as steel mills in China, the world's biggest steel producer, churned out record monthly output.  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 156.6 million tons (Mt).
China Chalks Up Record Production

Production from China, which accounts for around half of the global steel output, surged 9.1% year over year to a new record high of 82.6 Mt in October, exceeding the previous peak of 81.2 Mt registered in July.

Notwithstanding the ongoing U.S.-China trade tensions, Chinese steel mills have been beefing up output to take advantage of strong profit margins. 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. Chinese crude steel output rose 6.4% year over year to 782.46 million tons the first ten months of 2018, according to China's National Bureau of Statistics (“NBS”).

Fears of 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.

The ramp up of output in China amid sluggish domestic steel demand has raised industry-wide concerns that a glut of Chinese steel will put downward pressure on steel prices globally. Nevertheless, production is likely to tighten in the coming months as China has started implementing a four-month reduction in output aimed at curbing pollution during the winter months.

How Other Key Producers Fared in October

Among other major Asian producers, India saw a 0.4% rise in production to 8.8 Mt for the reported month. Indian steel mills have been benefiting from strong domestic demand.

Output in Japan slipped 4.5% to 8.6 Mt in October as production was hurt by technical issues across certain mills and lingering impacts of natural disasters. Production in South Korea went up 3.5% to 6.2 Mt. Consolidated output were up 7.6% to 110.5 Mt in Asia.

In North America, crude steel production shot up 10.5% to 7.6 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. Higher steel prices are driving the margins of U.S. steel makers including United States Steel Corp. X, Nucor Corp. NUE and Steel Dynamics, Inc. STLD.

The tariffs are also boosting production capacity of U.S. steel makers amid lower imports. U.S. steel industry capacity utilization is currently hovering above the 80% mark (the minimum rate required for the long-term viability of the industry), reflecting the impact of the tariffs.  

Meanwhile, output in Canada fell 14.6% to around 1.2 Mt in October. Overall production in North America was up 5.5% to roughly 10.5 Mt.  

In the Europe Union, production from Germany, the biggest producer in the region, edged up 1.4% to 3.6 Mt. Output rose 1.1% in Italy to 2.3 Mt while declining 3.5% to 1.3 Mt in France. Spain saw a 7.4% decline to 1.3 Mt. Total output inched down 0.8% in the European Union to 14.8 Mt.

Output in the Middle East shot up 9.6% to 3.1 Mt with Iran, the top producer in the region, seeing a 10.6% jump to 2.1 Mt. Africa recorded a 7.8% gain to 1.3 Mt in the reported month.

Among other notable producers, production from Turkey was down 4.3% to 3.2 Mt. Output from Brazil, the largest producer in South America, increased 3% to 3.1 Mt.

China Slowdown Weigh on Steel Sector

A slowdown in steel demand in China, the world’s top consumer, amid a cooling Chinese economy spells problems for the steel industry. Signs of weakness across the country’s major steel end-use markets – construction and automotive – as reflected by a slowdown in real-estate investment growth and declining car sales have clouded steel demand outlook.

China’s automobile sales dropped 11.7% to 2.38 million units in October, the fourth straight month of year-on-year decline, per the China Association of Automobile Manufacturers. Moreover, China’s property investment growth hit 10-month low of 7.7% in October, slowing from an 8.9% expansion in September, according to Reuters.

China’s economy grew at a slower-than-expected pace of 6.5% in the third quarter on a year-over-year basis, the weakest in nine years, amid escalating trade tensions between Beijing and Washington. International Monetary Fund (IMF), last month, cut China's GDP forecast for 2019 to 6.2% from its earlier view of 6.4% citing the ongoing trade war.

The WSA envisions steel demand in China to decelerate towards the end of 2018 and into 2019 due to continued economic rebalancing efforts and toughening environmental regulations. Real-estate stimulus and a strong world economy boosted steel demand in the country during first-half 2018. Ongoing trade tensions with the United States and a slowing global economy pose as downside risks for China, per the WSA. The trade body expects Chinese steel demand to rise 6% this year and remain flat year over year in 2019.

The Zacks Steel Producers industry currently carries a Zacks Industry Rank #167, which places it at the bottom 35% 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 EVRAZ plc EVRZF, Gerdau S.A. GGB and POSCO PKX. While EVRAZ sports a Zacks Rank #1 (Strong Buy), Gerdau and POSCO carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

EVRAZ has an expected earnings growth of 195.8% for 2018. Earnings estimates for the current year have been revised 4.4% upward over the last 60 days.

Gerdau has an expected earnings growth of 366.7% for 2018. Earnings estimates for the current year have been revised 7.7% upward over the last 60 days.

POSCO has an expected earnings growth of 20.7% for 2018. Earnings estimates for the current year have been revised 7.3% upward over the last 60 days.

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Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
United States Steel Corporation (X) : Free Stock Analysis Report
Nucor Corporation (NUE) : Free Stock Analysis Report
Gerdau S.A. (GGB) : Free Stock Analysis Report
POSCO (PKX) : Free Stock Analysis Report
EVRAZ PLC (EVRZF) : Free Stock Analysis Report
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