Global Steel Production Declines in August 2023

Analysts from UBS noted a significant setback in global steel production as of August 2023, with a year-over-year decline of 7%.

Key Highlights:

China's Production: Production in China dropped by 13% year-over-year, reflecting weakened demand and negative profit margins, leading to more downtime for steel producers.
Outside China: Globally, steel production outside of China increased slightly by 2% year-over-year, with modest growth observed in the European Union, the UK, and South America, despite it being a typically weaker time.
North America: In contrast, North America experienced a drop in production compared to last year.
Global Utilization Rates: UBS estimates a 5 percentage point decrease in global steel utilization, falling to around 70% in August from 75% in July.

China and the US: Prices for hot-rolled coils (HRC) remained robust, increasing by 7% in China and 4% in the US month-over-month due to factors like higher mill prices and steady demand.
European Market: The EU faces challenges as HRC prices fell by 7% month-over-month due to low demand and competition from cheaper imports.
Raw Material Costs: While coking coal prices declined by 7% month-over-month and iron ore prices fell by 1%, the US saw a 9% rise in spreads over these raw materials, contrasting with the EU's decline.

UBS analysts indicated a recovery in US steel prices to $720 per ton from July's $645, motivated by fewer maintenance outages and increased mill prices. However, major players like Nucor and Steel Dynamics provided disappointing guidance for Q3 2024, citing declining prices.
The European market continues to suffer from weak demand and lack of price increase catalysts.
UBS anticipates that a declining interest rate environment and increased federal spending could stimulate demand and pricing by 2025.

UBS favors several steel companies including ArcelorMittal, SSAB, JFE Holdings, BlueScope Steel, Steel Dynamics, Nucor, and Commercial Metals Company, all receiving buy ratings. Conversely, POSCO was rated as a sell due to weak indicators.

Investment opportunities are present, but challenges such as unpredictable steel prices and potential global trade restrictions remain. The cyclical nature of the industry poses risks of oversupply that might threaten price expectations and earnings forecasts.