London, 22 December 2011: Reuters

Global steel producers are now starting to slam on the brakes in response to dimming short-term prospects for demand. Annualised global steel output slumped to 1,405 million tonnes in November, the lowest level this year, according to the World Steel Association.

Year-on-year growth slowed sharply to just 1.1 percent from 6.2 percent in October, while capacity utilisation slid to a two-year low of 73.4 percent. Weak production trends have been evident for some time in Africa and Oceania, reflecting political upheaval across North Africa and a wholesale restructuring of Australian producer Bluescope's operations.

In Africa cumulative production fell 15 percent in January-November. In Oceania it fell 9 percent over the same period. But both are minnows in the bigger steel picture. The global trend is currently defined by the combination of a slowing Chinese economy and a European economy that seems to be sliding inexorably into renewed recession.

CHINA STILL SLOWING

Chinese steel production actually fell year-on-year in November. It was a marginal 0.2 percent drop but still the first time this year that annual growth has turned negative after racing ahead at double-digit speed as recently as September.

Moreover, the deceleration seems to be continuing, judging by the higher-frequency figures from the China Iron and Steel Association (CISA). Production in the first 10 days of December was running at an annualised 611 million tonnes, down from 615 million in the last part of November. Seasonality is in the mix, with Chinese producers lowering run rates ahead of winter and the Chinese New Year holidays in January.

But sliding steel output is primarily a symptom of the broader slowdown in the Chinese economy, specifically the squeeze on credit and Beijing's attempt to pop a speculative property bubble in its cities. Real estate development growth has decelerated from 33.6 percent in January-July to 29.9 percent in January-November.

Housing inflation is falling, with average new home prices dropping month-on-month in November for the second month in a row. That's good news for the longer-term health of the Chinese economy but bad news for the short-term steel outlook, given the sector's umbilical cord with the construction sector. Beijing's drive to build more affordable social housing may offer some relief to producers of long steel products but will not offset the broader trend of slowing residential construction activity.

With the government vowing to keep its restrictions in place, there is little immediate prospect of a significant lift in Chinese steel production, particularly when construction weakness is overlaid with a broader manufacturing slowdown and a darkening outlook for exports.

EUROPEAN WEAKNESS SPREADS

And talking of darkening outlooks. European Union steel production fell by 2 percent year-on-year in November, the second month of declines, reflecting the proliferation of capacity closures by European producers. There are still bright spots within the region. Italy is one notable stand-out. Production is still growing at double-digit speed, up 12 percent in the year through November.

Set against that is the fall in output in the region's largest producer, Germany. German output in November fell by 10 percent against year-earlier levels. Cumulative growth over the first 11 months of the year slowed to just 1.5 percent. Also registering negative growth last month were Austria, Belgium, Luxembourg, Slovakia, Slovenia, Spain, Sweden and the UK. European steel weakness also seems to be spreading to neighbouring producers such as Russia and Ukraine, where output fell year-on-year in November. As with China there is little prospect of any short-term bounce back.

There is a growing consensus that the European Union is heading for recession, if it hasn't already started. The only question is how deep it will be. And the answer to that question depends on whether Europe's political leadership can stop the spreading credit rot in the single currency area.

Answers on a postcard...

BEACONS OF LIGHT

With steel production now fully starting to reflect the twin points of global manufacturing weakness, China and Europe, it is worth stressing the bright spots within the spreading gloom. North America is the most important. Regional production growth was still a robust 12 percent in November, largely reflecting a resilient United States, where growth is still accelerating, up 7 percent in the first 11 months.

That ties in with the broader resilience of the U.S. economy. Recovery may be unfolding in fits and starts, but at least the country is still registering growth. Other important stand-outs are Turkey and South Korea, both major steel producers and both still recording doubledigit cumulative growth rates of just under 20 percent.

The question is how long any of these can withstand the global weakness emanating from Europe. It is worth remembering that steel production is a lagging indicator. No producer, particularly one using blast furnace technology, shuts capacity on a short-term whim. This is particularly true of Europe, where producers are being forced to react to declining order books as economic confidence crumbles.

With no sign of any magic bullet to cure Europe's fiscal ills, the worst of the current cycle may still be yet to come for the region's steelmakers. And with no signal that Beijing is going to reverse its crackdown on the property sector any time soon, the global steel picture could deteriorate further in the first months of the new year.

Ends --

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

The views expressed here are his own.