London, 25 January 2012: Reuters

If you were to take the World Steel Association's (WSA) summary of global production last year at face value, you would be forgiven for thinking that all is just fine in the ferrous sector. Global output hit an all-time record of 1,527 million tonnes in 2011. Growth was an impressive-sounding 6.8 percent and widely distributed.

Indeed, among the world's biggest producers only Spain and Japan saw any contraction, not entirely surprisingly given the collapse in the former's construction sector and the latter's slow recovery from the March earthquake and tsunami. So far, so good.

However, those 2011 headline figures mask a very sharp deterioration in production trends over the closing months of the year. Annualised production dropped by 11 percent over the second half of 2011 to 1,378 million tonnes, the lowest global run-rate since December the previous year. Moreover, production growth slowed from almost 13 percent in January to just under 2 percent in December.

And that slowdown was also widely distributed by major producing region with only North America, and the U.S. in particular, bucking the overall trend. The question is whether there is any reason to expect anything other than a continuation of the trend in the first part of 2012.

China was the world's largest producer of steel last year, its share of global production rising to 45.5 percent from 44.7 percent in 2010. Headline growth for the year was 9 percent but that growth rate braked sharply in the fourth quarter, tumbling from over 16 percent in September to under 1 percent in December.

True, December itself marked a stabilisation from November, when production actually fell year-on-year. That gives some grounds for optimism that the worst is now over and that run-rates will recover after the Lunar New Year holidays.

The problem for the Chinese steel sector, though, is its umbilical link to construction activity, which accounts for more than half of all the country's steel consumption. And Beijing is showing no sign of halting its campaign against property price inflation, even though average prices fell for the third straight month in December.

Every indicator in the sector is still pointing downwards. Total property investment growth slowed to 12 percent in December from 20 percent in November and newly-started construction turned negative. Sales are slowing but there is still a nagging suspicion that, to quote UK analysts CHR Metals, "there is a current very large surplus in the supply of housing".

Continued investment in "social housing" and other infrastructure can only partly offset the slowdown in a commercial real estate sector that has been the backbone of both the China growth story and the country's steel expansion. The China Iron and Steel Association is forecasting 4 percent steel production growth this year and even that may be optimistic if Beijing's engineered slowdown becomes a rout.

EUROPE TURNS NEGATIVE

European steel-makers would probably settle for growth of any kind. Steel output in the core EU-27 countries contracted year-on -year in the fourth quarter with annualized production slumping to 148 million tonnes, the lowest level since August 2010, an "outlier" month because of the normal seasonal weakness over the European summer holidays.

Even Germany, the powerhouse of European manufacturing, has not been immune. Its annualized production of 36 million tonnes in December was the lowest in two years. Italy was a rare bright spot last year with faster-than-trend production growth of 11 percent. The country has benefited from a combination of demand from the specialist steel sector and import demand from North Africa, where steel production has slumped in the wake of the economic upheaval that has accompanied political turmoil.

But even here the prognosis is for flat production at best in 2012, according to Giuseppe Pasini, chairman of Italy's steel industry body Federacciai. Moreover, weakness in the core European Union area appears to be spreading east with steel production growth in both Russia and Ukraine turning negative in the closing part of 2011.

U.S. STILL BOOMING

It's why North European hot rolled coil prices have been trading at a consistent discount to U.S. prices for the first time since 2006. That and the fact that the U.S. steel market stands out as a near solitary beacon among the world's biggest producers amid the descending gloom elsewhere.

While production weakened just about everywhere else as 2011 drew to a close, output growth in the country was still running at a brisk 9-percent clip in December. Those steel production trends are consistent with the broader macro picture of manufacturing recovery. And the outlook is still looking positive.

Both production and steel prices tend to follow the trend in the U.S. manufacturing PMI, a relationship caught in the chart below. With the PMI still in positive expansion territory and still trending higher, U.S. steel mills have a lot more to be optimistic about entering 2012 than most of their overseas counterparts.

Sure, there are other pockets of strength in the global steel picture.

Brazilian production, for example, was still running at double-digit growth in 2011, but declining demand, high imports and heavy stocks do not bode well for the short-term outlook.

GFEEANTEURRAEL NEWS

But the broad picture at the start of 2012 is one of U.S. expansion, European contraction and sharp slowdown in China. Which is a good reflection of the underlying tensions in the global economy right now.

Steel analysts remain broadly positive for growth this year. Peter Fish, managing director at UK consultancy Meps, for example, is forecasting 6 percent global growth this year. But current production trends suggest that there will be a lot more steel producer pain before any recovery.

Which might also be a reflection of the short-term macro dyanmics right now.

Ends --

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

The views expressed here are his own.