Global Steel Production Decline in August 2023

Analysts from UBS reported a significant drop in global steel production in August 2023, with a year-over-year decline of 7%. This decrease is especially pronounced in China, where production fell by 13% compared to the previous year.

The downturn in output is attributed to weakening demand in the sector, leading steel producers to increase downtime due to poor profit margins. However, outside of China, global steel production rose slightly by 2% year-over-year, with modest growth seen in markets like the European Union, the UK, and South America, despite typically weaker seasonal demand.

North America, on the contrary, experienced a decline in production compared to last year. UBS estimates that global steel utilization dropped by 5 percentage points from the previous month, settling at approximately 70% in August, down from around 75% in July.

Price Trends

The steel market displays varied pricing patterns across different regions. In both China and the United States, prices for hot-rolled coils (HRC) have increased—by 7% month-over-month in China and 4% in the US—primarily due to higher mill prices, reduced maintenance shutdowns, and stable demand.

Conversely, the European market has faced challenges, with HRC prices declining by 7% month-over-month, driven by persistently low demand and competition from less expensive imports.

Despite ongoing pricing challenges, raw material costs have decreased; coking coal prices fell by 7% month-over-month, while iron ore prices slipped by 1%. U.S. HRC spreads over iron ore and coking coal increased by 9% month-over-month, in contrast to a 7% drop in the EU.

Future Outlook

UBS analysts highlight several factors that may impact the steel market moving forward. Steel prices in the United States have rebounded to $720 per ton from a low of $645 per ton in July, driven by mill price increases and fewer maintenance outages. However, key players like Nucor and Steel Dynamics have provided third-quarter 2024 earnings guidance below market expectations due to falling selling prices and reduced fabrication volumes.

The EU market continues to face weak demand and lower-priced imports, with no clear indicators for near-term price increases. Nonetheless, UBS anticipates that a declining interest rate environment and increased federal spending may spur demand and pricing in 2025.

UBS supports several companies in the steel sector, including ArcelorMittal (AS:MT), SSAB (ST:SSABa), JFE Holdings (TYO:5411), BlueScope Steel (ASX:BSL), Steel Dynamics (NASDAQ:STLD), Nucor (NYSE:NUE), and Commercial Metals Company (NYSE:CMC), all rated as buys. In contrast, POSCO (KS:005490) is rated a sell due to weaker leading indicators.

While investment opportunities exist in the steel sector, UBS warns of various risks, including steel price volatility and potential global trade restrictions. Given the cyclical nature of the industry, a rapid return to oversupply could jeopardize price forecasts, potentially impacting earnings and valuations. The sector remains susceptible to a range of political, financial, and operational factors that may significantly influence overall performance.