Chinese steel production is expected to fall in coming months due to the impact of the 2019 novel coronavirus (Covid-19) outbreak, halting last year's strong performance that had extended into January, analysts said.
Output from the world's top steel producer climbed 7.2% last month year on year despite Lunar New Year celebrations and restrictions imposed to contain the coronavirus.
"Steel trader inventories have increased to record levels and China steel mill profitability plunged. We expect this to result in curtailments over the next few weeks," UBS analyst Myles Allsop said in a note.
China's biggest steelmaker China Baowu Steel Group, expects output to fall 5% in the first quarter of 2020 due to coronavirus disruptions, it said on Saturday.
Crude steel production in China rose to 84.3 million tonnes in January compared to the same month last year, helping the global figure increase by 2.1% to 154.4 million tonnes, data from the World Steel Association showed on Tuesday.
The rest of the world outside of China saw output slip by about 3%.
Part of the reason Chinese steel supply was still strong in January, was because it takes time to adjust production in blast furnaces, Allsop said.
Another driver was the build up of raw materials such as iron ore, said Kieran Clancy, assistant commodity economist at Capital Economics.
"Transport restrictions within China have led to a rapid depletion of stockpiles, and a cyclone in Australia has made it even more difficult for steel producers to source raw material," he wrote in a note.
"Overall, there are plenty of signs that steel production is set to fall in the months ahead. China will suffer most, and output there could even contract in 2020 for the first time in five years."
Other major steel producers reported declines in production with India down 3.2%, Japan falling 1.3% and European Union shedding 4.9%.
U.S. output rose 2.5%, helped by seasonal influences and mild weather but is also at risk from supply chain disruption from the virus, Allsop said.