Global Steel Production Faces Significant Setback in August 2023: UBS Analysts
In a recent note, analysts from UBS revealed that global steel production suffered a 7% year-over-year decline in August 2023. The most substantial drop was seen in China, where production plummeted by 13% year-over-year. This decrease reflects a broader trend of weakening demand in the sector, leading steel producers to take more downtime than usual due to negative profit margins.
However, while overall global output saw a decline, steel production outside of China actually experienced a slight 2% year-over-year increase. Key markets like the European Union, the UK, and South America showed modest growth in steel production, despite typically being a weaker time of year. On the other hand, North America saw a production decrease compared to the previous year.
UBS estimates that global steel utilization dropped by 5 percentage points from the previous month, reaching approximately 70% in August, down from around 75% in July.
Looking at price trends, the steel market displayed varying patterns across regions. Prices for hot-rolled coils remained strong in China and the United States, with increases of 7% and 4% month-over-month, respectively. These price hikes can be attributed to factors such as higher mill prices, reduced maintenance shutdowns, and steady demand.
Conversely, the European market faced challenges, with HRC prices falling by 7% month-over-month due to low demand and competition from cheaper imports.
Despite pricing difficulties, raw material costs have been on a downward trend, with coking coal prices dropping by 7% and iron ore prices decreasing by 1% month-over-month. Interestingly, while European HRC spreads over iron ore and coking coal declined by 7%, US spreads increased by 9%.
Looking ahead, UBS analysts identified various factors that could impact the steel market. In the United States, steel prices have rebounded from previous lows, driven by mill price increases and fewer maintenance outages. However, leading players like Nucor and Steel Dynamics issued guidance for third-quarter earnings per share below market expectations due to declining selling prices and reduced fabrication volumes.
In contrast, the European market continues to struggle with weak demand and cheaper imports, hindering potential price increases in the near term. Nonetheless, UBS anticipates that a falling interest rate environment and increased federal spending could boost demand and pricing in 2025.
UBS recommends several companies in the steel sector, including ArcelorMittal, SSAB, JFE Holdings, BlueScope Steel, Steel Dynamics, Nucor, and Commercial Metals Company, all of which have buy ratings. Conversely, POSCO has been rated as a sell due to weaker leading indicators.
While there are investment opportunities in the steel sector, UBS highlights key risks such as the unpredictable nature of steel prices and the potential for global trade restrictions. The industry’s cyclical nature poses a threat of early oversupply, jeopardizing price expectations, earnings forecasts, and valuations.
Ultimately, the steel sector is susceptible to various political, financial, and operational challenges that could significantly impact overall performance.