World steel production upbeat in Jan

World crude steel production was a record 1,548 Mt in 2012, outperforming the 2011 level by 1.2%. Production in Asia improved 2.7% to 1,012 Mt. China retained its leadership position, yielding almost 46% of the global output at 716.5 Mt. Production in Japan, the second largest producer, remained flat year over year at 107.2 Mt. The United States held the third position, producing 88.6 Mt of crude steel, up 2.5% annually and accounting for 6% of the total global output. Production in Europe and South America were sombre, declining 2.7% and 3.1%, respectively.

In January 2013, world crude steel production edged up 0.8% annually to 125 Mt. China’s crude steel production was 59.3 Mt, up 4.6% year over year. Japan produced 8.9 Mt of crude steel, an increase of 2.7%. The U.S produced 7.3 Mt of crude steel in Jan 2013, a 5.8% year-over-year decline.

Industry capacity & demand/consumption dynamics

The average capacity utilisation ratio in 2012 was 78.8% compared to 80.7% in 2011. World crude steel capacity utilisation ratio further decreased to 71.2% in Jan 2013 from 73.2% in Dec 2012, and also dipped 5.5 percentage points from Jan 2012.

Global apparent steel consumption increased 1.7% in 2012, down sharply from 7.4% growth in 2011. Region wise, apparent steel consumption decreased 9% in Europe, edged up 2% in China and increased 7% in the United States in 2012 on a year-over-year basis.

Steel prices

Steel prices are generally volatile, in line with the highly cyclical nature of the global steel industry. Rising raw material prices have a direct impact on steel prices as higher raw material prices induces a corresponding increase in steel prices.

However, in the wake of lower demand, it becomes increasingly challenging to pass on raw material price hikes to consumers. Overcapacity, glut in cheaper Chinese steel imports, economic conditions, shifts toward other substitutes significantly impact steel prices.

Steel prices improved in the first half of 2012, but declined in the back half due to a glut in imports, oversupply in the market from zealous steelmakers, weak demand in Europe and tempering growth in Asia. A sustained downside in steel prices will materially and adversely affect margins of the steel companies.

The overall negative tone of Zacks Industry Rank for the Steel industry reflects this underwhelming earnings outlook. We believe that the eventual pricing recovery will need a reviving economy, stabilisation in the Euro-zone and a rebound in construction activity in the developing countries, in particular China, India and South Korea.