Global Steel Production Declines 7% Year-Over-Year in August: UBS

Analysts from UBS reported that global steel production faced a significant decline in August 2023, decreasing by 7% compared to the previous year. This downturn was particularly pronounced in China, where production fell by 13% year-over-year.

The reduction in output highlights a growing trend of weaker demand in the steel sector, leading producers to reduce their operating time due to unprofitable margins. While overall global production saw a dip, steel output outside of China actually increased by 2% year-over-year, with modest growth noted in key markets such as the European Union, the UK, and South America, despite this typically being a slower season for the industry.

In North America, however, production levels dropped relative to last year. UBS estimates that global steel utilization decreased by 5 percentage points from the previous month, reaching approximately 70% in August, down from around 75% in July.

Price patterns within the steel market vary by region. In both China and the United States, prices for hot-rolled coils remained strong, rising by 7% month-over-month in China and 4% in the US. This price stability can be attributed to increased mill prices, fewer scheduled maintenance shutdowns, and stable demand.

Conversely, the European market is facing difficulties, with hot-rolled coil prices declining by 7% month-over-month. This persistent drop in the EU is mainly due to low demand and increased competition from lower-priced imports, which is significantly impacting local price stability.

Despite the pricing challenges, raw material costs have been decreasing, with coking coal prices down by 7% month-over-month and iron ore prices dropping by 1%. Notably, while the spreads for hot-rolled coils over iron ore and coking coal in Europe have fallen by 7% month-over-month, spreads in the United States have risen by 9% month-over-month.

Looking ahead, UBS analysts identify several factors that may affect the steel market. In the US, steel prices have rebounded to $720 per ton from July’s low of $645 per ton, driven by mill price increases and fewer maintenance interruptions. However, leading companies like Nucor and Steel Dynamics have provided third-quarter 2024 earnings per share guidance below market expectations, mainly due to declining prices and reduced production volumes.

In contrast, the European market continues to struggle with weak demand and an influx of lower-cost imports, leaving little opportunity for price increases in the immediate future. Nonetheless, UBS anticipates that a decline in interest rates, increased federal spending from new legislative measures, and a recent 50 basis points rate cut by the Federal Reserve could support demand and prices in 2025.

UBS favors various companies in the steel sector, including ArcelorMittal, SSAB, JFE Holdings, BlueScope Steel, Steel Dynamics, Nucor, and Commercial Metals Company, all of which have received buy ratings. Conversely, POSCO has been rated a sell due to weaker leading indicators.

While opportunities exist in the steel sector, several risks must also be considered. UBS highlights challenges such as the volatility of steel prices and potential global trade restrictions. The cyclical nature of the industry, coupled with the risk of returning to oversupply, could threaten price expectations and impact earnings forecasts and valuations. The sector remains susceptible to various political, financial, and operational challenges that could significantly affect overall performance.