NEW YORK (TheStreet) -- We are surprised and impressed to see May global steel production decline 1.2% from April; this is the quickest supply/demand response in the history of the industry!
Because of an extra day in the month, total May production posted a 2.1% increase to reach a new monthly record of 124.2 million tonnes (mt). However, because steelmaking is a 24/7 proposition, the number of days in a month can greatly influence the monthly total, but the relevant metric is always the daily production because of the random number of days per month. So this decline was meaningful.
Chinese Production Declining From Peak Levels
The decliners in the month included China, Taiwan and the Middle East offset by increases in Japan, South Korea and Europe. While Chinese production pulled back 1.9% to 1.81 mtpd after reaching a new high in April of 1.85 mtpd the annual pace is still coming close to around 675mt or up over 20% from last year's record production level. Japanese steel production rose 4.7% in May to reach its highest level since October 2008; strength was equally evident from South Korea, up 4.2% and the EU, which rose 2.4%.
Higher Raw Material Costs Mean Quicker Production Cuts
Clearly production cuts are coming faster and faster relative to peaking steel prices driven off of an increasingly greater proportion of variable costs in steelmaking. It stands to reason that Chinese/Asian production cuts would come soonest to the extent that the region buys proportionately more of its raw materials than most other regions. Japanese production cuts will lag because the Japanese economy is just beginning to pick up so the mills are feeding local demand; we suspect the U.S. will also have a slower production-cut response for a similar macroeconomic reason.
We expect to see still further production cuts from Asia and then the EU and then the U.S. in coming weeks. In the prior decline, Chinese production had declined in the months ahead of the crisis due to the Olympics; so China actually did very little cutting in late 2008 and in fact was raising production from December 2008 onwards. This time the demand-slowing is coming from China, so there will be no choice but to cut production or ramp up exports into the West -- and there are very few places in the world today that will be tolerant of a temporary surge in high cost steel from China. So we expect to see China bring the globe back to equilibrium in the next quarter through a combination of production cuts and continued strong economic growth.
Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.