China’s economic deceleration was hit hard in 2015 when the stock market floor suddenly fell out and Chinese indexes lost more than 30% in three weeks before trading was temporarily halted. Commodities hit rock bottom prices as demand fell and the global economy stumbled in the wake of the huge gap left behind by China.
The collapse of oil prices only further exacerbated the issue, and the world waited with bated breath to see whether global growth would continue or if a major correction was imminent. Since oil is one of the main commodities that tell investors what future demand looks like, there were concerns that the economy was heading south. But oil prices weren’t an indicator of the economy so much as a battleground between OPEC and other oil producers.
The steel industry, on the other hand, has no such excuse. Its performance is a good indicator of what the global economy looks like, which could help investors gauge what’s next.
The Brittle Steel Industry Today
Steel is vital to the health of the global economy. It’s used in almost every facet of the market, from energy infrastructure and manufacturing, to aerospace and mining, and many others. Unfortunately, the steel industry is caught in the midst of its worst downturn in half a century.
China is the largest consumer of steel in the world and also happens to be the biggest producer of steel. But now even China is facing oversupply issues and calling for cooperation to curb the problem. They’re working hard to reduce steel production, cut back on government subsidies for the industry and lay off millions of workers.
Because most of China’s steel factories are state-owned, they’ve been heavily subsidized instead of relying on fundamental market forces. The oversupply led to only 67.5% of the steel produced last year actually having been used. In 2014, Chinese steel production hit 823 million tons, accounting for half the world’s total.
According to the World Steel Association, China’s steel demand fell 3.5% in 2015 and is expected to fall again this year. In the fourth quarter alone, steel prices in the US fell 39%; meanwhile, China’s steel production hit an all time high in March. US Steel recently announced that it was laying off 25% of its salaried employees to compensate for falling steel values.
China is both the problem and the solution to the global steel glut. But there are bright spots on the horizon. AK Steel Holding Corporation’s (AKS) price target was recently doubled, and the stock jumped 10% on the news. But the stock is down this morning. Many steel companies have been undervalued and hit bottom, meaning there could be a bounce back soon. While the steel industry still has a long way to go, China’s cutbacks along with worldwide cooperation could bring the industry back into balance in the next few quarters.