London, 24 November 2011: Reuters

Global steel production is now starting to mirror the faultlines running through the macro manufacturing landscape. Annualised production in October was 1.46 billion tonnes, the lowest global run-rate so far this year, while year-on-year growth slowed for the third consecutive month to 6.2 percent, according to the World Steel Association (WSA).

The two main points of weakness in the sector are China, where production growth is fast losing momentum, and Europe, where growth has turned negative for the first time in five months. The WSA's monthly update is "look-back" by nature, meaning that in both cases these are still early-stage trends.

Forward-looking economic indicators suggest further pain ahead, albeit to very differing degrees. The main bright spot is the surprisingly robust performance of the North American steel sector, which so far at least shows no sign of significant slowdown.

CHINA SLOWDOWN

Chinese steel production was 54.67 million tonnes in October, equivalent to an annualised 643.73 million tonnes, the lowest rate seen so far this year. While year-on-year growth was a healthy 9.7 percent, it still marked a sharp slowdown from the double-digit rates recorded over the prior four months.

The latest figures from the China Iron and Steel Association (CISA), covering the first 10 days of November, point to further short-term weakness. Daily production slipped to 1.66 million tonnes, the lowest level since November 2010. What is happening in China's steel sector is symptomatic of the broader picture of slowing economic and manufacturing growth, albeit from a high level.

This morning brought further evidence of that trend in the form of the HSBC flash purchasing managers index, which tumbled to 48 in November from 51 in December. There remains a broad consensus among analysts that Beijing is still on track to engineer a soft landing for the Chinese economy and that is reflected in broadly benign views of steel demand and output beyond the next month or so.

Analysts at Macquarie Bank, for example, are looking for a re-acceleration in steel production from December onwards, arguing that inventory build is reversing and production cuts now look overdone.

Standard Chartered is forecasting Chinese steel demand to slow only marginally to 6 percent in 2012 from 8 percent this year, thanks primarily to continued strength in the all important construction sector.

EURO MELTDOWN

European steel production, meanwhile, is now starting to contract and, unlike China, there is not a lot of optimism of any turnaround any time soon. October's production of 15.27 million tonnes was 1.1 percent lower year-on-year. That headline figure masks highly divergent trends within the 27-nation European union.

Among the region's largest steel producers Germany and Spain registered year-on-year declines of 4.2 percent and 6.3 percent respectively last month. Growth remained positive in both France and Italy to the tune of 2.8 percent and 9.6 percent respectively,

For how long is a moot point, given the growing list of capacity shutdowns, most of which are going to feed into the WSA figures only in November and December. Austrian products maker Voestalpline has just joined that list with a planned 10-percent reduction in the current quarter.

Forward-looking signals, meanwhile, are deteriorating. The flash manufacturing PMI out this morning slid to 46.4 in November, the lowest print since July 2009. Euro zone industrial orders slumped by 6.4 percent in September from August in what was the deepest fall since December 2008.

All of which suggests that steel production is set to contract sharply over the next couple of months with dimming prospects of any swift turnaround.

US RESILIENCE

Steel production weakness is not confined to China and the euro bloc. Japanese production has been running below year-earlier levels ever since the tsunami in March. So too has that in Africa due to the economic turmoil that has accompanied the political upheavals in North African countries.

Set against these trends, though, is the continued resilience of North American steel production, particularly that in the U.S. The country's production growth re-accelerated to 11.5 percent and is now running at a faster pace than that of China. While the stuttering nature of the U.S. economic recovery continues to unsettle financial markets, manufacturing output is still holding up surprisingly well.

The strength in steel demand, like that of other industrial metals, appears to be coming from niche sectors such as oil and gas extraction products, components for trucks and railcars and the ship construction sector.

CONTINENTAL DRIFT

With a lagging effect steel production trends are now capturing the divergence in regional manufacturing performance, namely underlying strength in North America, contraction in Europe and slowdown in China. And as with the "bigger picture", it is the latter that holds the key to global steel production over the coming period.

There is no reason yet to expect any collapse in U.S. steel production. Nor is there any reason to expect anything other than further deterioration in Europe. As for China. The soft/hard landing debate will continue. November's steel production figure is going to be weaker. Of that there is little doubt, given the decline in output in the first 10 days of the month.

It's what happens in December that will be more telling, not just in the steel sector but across the industrial metals space.

Ends --

By Andy Home, Reuters market analyst – for Commodities Now with permission.

The views expressed here are his own.