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World Steel Production Nosedives Amid Coronavirus Disruptions

Anindya Barman

Global crude steel production took a tumble in April as coronavirus-induced lockdowns and disruptions impacted production across the world and put a lid on demand for steel in major end markets such as automotive and construction. A modest rise in output from China — the world's biggest steel producer — was more than offset by declines across other major producers.

Per the latest World Steel Association (“WSA”) report, crude steel production for 64 reporting nations plummeted 13% year over year to 137.1 million tons (Mt) in April. Notably, output sagged in every region during the reported month.

China Output Nudges Up Post Virus Crisis

China’s steel production recovered in April after a decline in March as the country crawled out of the worst of the coronavirus impact. Production from China, which accounts for more than half of the global steel output, inched up 0.2% year over year to 85 Mt in April.

Output fell in March as steel mills in China scaled down production in the wake of a slowdown in domestic demand and a pile-up in finished steel inventories. Steel demand weakened in China as major end-user industries were put in partial shutdown to blunt the spread of the outbreak. The recovery in April came on the back of the restart of idled capacity and increased utilizations.

China’s overcapacity remains an overhang for the steel sector. Despite the decline in March, China’s crude steel production expanded in the first quarter of 2020, even though coronavirus ravaged domestic steel demand. Crude steel output from China rose 1.2% year over year to around 234.5 million tons in the first three months of the year, per China's National Bureau of Statistics (“NBS”).

How Other Major Producers Fared in April?

Among other major Asian producers, India saw a 65.2% plunge in production to 3.1 Mt in April. The nationwide lockdown to put a check on the spread of the coronavirus forced steel manufacturers in the country to cut production amid shortage of labor and raw materials. Disruptions due to the coronavirus crisis also hurt domestic steel demand.

Production in Japan dropped 23.5% to 6.6 Mt in the reported month. Japan's steel makers have been hit by softening demand in automotive and construction amid the virus crisis. Production in South Korea also fell 8.4% to 5.5 Mt. Consolidated output slipped 7.5% to 104.5 Mt in Asia.

In North America, crude steel production tumbled 32.5% to 5 Mt in the United States in April.

The U.S. steel industry is bearing the brunt of the pandemic. U.S. steel industry capacity utilization has plummeted to multi-year lows as the pandemic has decimated steel demand across major end-use markets. The coronavirus-led demand destruction has forced domestic steel mills to idle operations and scale down production.

The outbreak has also led to a downward spiral in U.S. steel prices amid ebbing demand. After gaining some momentum in late 2019 on the back of consecutive price hike actions by major U.S. steel mills and supply-side actions, domestic steel prices came under pressure during the first quarter of 2020. The benchmark hot-rolled coil steel prices tracked downward on concerns over the fast-growing pandemic in the United States and worries over demand slowdown amid production shutdowns by automakers. While U.S. steel prices have gained some ground of late on the back of steel mills’ price hikes, the current feeble demand situation does not look favorable for a significant rebound in prices over the near term.

American steel stocks also remained out of favor this year. The virus outbreak has triggered a selloff in major U.S. steel stocks. Shares of U.S. steel makers such as United States Steel Corp. X, Nucor Corporation NUE, Steel Dynamics, Inc. STLD and Cleveland-Cliffs Inc. CLF, which completed the purchase of AK Steel earlier this year, have tumbled roughly 30%, 26%, 24%, and 41%, respectively, year to date. Shares of ArcelorMittal MT, which is among the biggest steelmakers in North America and caters to a broad U.S. manufacturing base, are also down around 46%.

While United States Steel, Nucor and Cleveland-Cliffs currently carry a Zacks Rank #3 (Hold), Steel Dynamics and ArcelorMittal have a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, output in Canada slipped 24.4% to around 0.8 Mt while in Mexico it fell 12.1% to 1.5 Mt in April. Overall production in North America were down 28.3% to roughly 7.2 Mt.  

In the Europe Union, production from Germany, the biggest producer in the region, went down 10.7% to 3 Mt. Output dropped 30.7% in Italy to roughly 1.4 Mt. France also saw a 37.9% slump to 0.8 Mt while output skid 48% in Spain to around 0.7 Mt. All these countries have been badly hit by the coronavirus. Subdued demand in automotive and slowing construction is hurting steel consumption in Europe. Total output was down 22.9% in the European Union to around 10.7 Mt.

Moreover, output in the Middle East tumbled 22% to 2.6 Mt with Iran, the top producer in the region, seeing a 17.8% decline to roughly 1.8 Mt. Africa recorded a 55.7% decline to around 0.6 Mt in April.

Among other notable producers, output from Turkey slipped 26.3% to 2.2 Mt. Production from Brazil, the largest producer in South America, dropped 39% to roughly 1.8 Mt.

The WSA noted that due to the difficulties presented by the pandemic, many of the figures for April are estimates that may be revised with next month’s production update.

What Lies Ahead?

Crude steel production in China is likely to continue to rise as business activities in the country gradually pick up pace. Steel mills in the country are ramping up production on recovering profit margins and optimism that government stimulus measures will resuscitate domestic steel demand. However, this has stoked concerns that rising production would further add to China’s finished steel inventories which have already swelled due to coronavirus-led lockdowns. Continued build-up of inventories of steel products including hot-rolled coil and rebar coupled with muted steel demand will likely build pressure on steel prices in China and globally.

Moreover, a slowdown in steel demand in China, the world’s top consumer, is a major concern for the steel industry. Coronavirus has brought China's supercharged economy to a shuddering halt. The pandemic has slowed down activities in the construction space and put brakes on automobile production in China due to shortage of manpower and disrupted supply of auto part.

While China is gradually resuming economic activities, it would be a challenging task for Beijing to bring the economy out of its slumber as containment actions across the world amid the pandemic have crippled global demand. A slow recovery in China’s manufacturing sector amid weak global consumer demand is expected to be a deterrent.

Industrial activities in China are likely to remain far from normal over the near term due to labor and supply chain constraints. As such, a material recovery in the demand environment for steel is unlikely, at least through the first half of the year.

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