Germany Metals Report Q2 2010 - New Market Report Published

New report provides detailed analysis of the Industrial market

The German steel industry will return to growth in 2010, but government spending will encourage a focus on construction steel, while flat steel products and aluminium will continue to suffer from declines in the automotive industry and lacklustre activity in the eurozone market, according to this latest Germany Metals Report.

In 2009, Germany produced 32.67mn tonnes (down 28.7% year-on-year (y-o-y) )of crude steel according to the World Steel Association (WSA). This was 480,000 tonnes less than we had forecast and 330,000 tonnes less than the output forecast by the Wirtschaftsvereinigung Stahl (WV Stahl, the German steel industry association).  Hot-rolled production was down 25.7% y-o-y to 31.33mn tonnes in 2009. Meanwhile, primary aluminium production slumped 32% to around 383,000 tonnes. The declines come on the heels of the German economy's worst post-World War II real GDP growth outturn, seeing a contraction of 5.0% in 2009. Germany's exit from recession in Q209 led to steady month-on-month (m-om) growth in crude steel until December when output fell 14.4% m-o-m to 3.03mn tonnes, although this was still 23.7% up y-o-y. However, results in early 2010 suggested this downturn was a temporary blip as orders rose again.

The economic decline was led by exports and we estimate that steel exports dropped by nearly 30% yo- y to 22.28mn tonnes, while aluminium exports fell by nearly 39% to 1.3mn tonnes. According to our research, as the sector is strongly pro-cyclical, metals fell faster than other export sectors with total exports down 14.7% in 2009. This was the first time since 1993 that the German export sector was a drag on the wider economy, as it had been the prime driver of the economy during the pre-boom 'good years'. By contrast, however, the domestic economy had a very strong year. Total final domestic consumption was up 0.9%, the strongest figure posted since 2006, and was achieved though the strongest growth in real government spending (2.7%) since 1994. This managed to take the edge off the decline in the steel industry, although finished steel consumption fell 15.2% y-o-y to 38.17mn tonnes according to our estimates.

While construction steel should be boosted by government investment in infrastructure, flats production will suffer most from the poor prospects for the retail, consumer goods and auto sectors, which are more dependent on exports to a lacklustre eurozone market. WV Stahl has forecast a 10-15% rise in crude steel output to 36-38mn tonnes in 2010. We are a little more optimistic, predicting a 15.7% rise in crude steel to 37.81mn tonnes.

The steel sector should follow the trends seen in the construction, automotive, machinery, packaging and other metals-consuming industries. We believe that the steel market should return to trend growth from 2011, with apparent finished steel consumption returning to pre-recession levels by 2014 at 45mn tonnes. However, domestic production will be increasingly focused on the German market. By 2014, crude steel output will be 2.4% down on 2008 levels at 44.66mn tonnes and hot-rolled output will be down 3% to 40.87mn tonnes. Meanwhile, imports of semi-finished and finished steel will be down 15% to 28mn tonnes. We forecast that German steel exports will reach 30.17mn tonnes in 2014, down 4.9% over 2008.

The situation facing the aluminium industry is uncertain. In February 2010, Norsk Hydro indicated it may mothball a German smelter depending on energy costs and aluminium prices, highlighting the challenges still facing the sector. On the upside, the German aluminium market should benefit from increased demand for new applications as a lightweight substitute for steel, particularly in the automotive industry. On the downside, high electricity and environmental costs are undermining the long-term viability of German smelters, with Norsk Hydro reportedly considering closure of the country's largest primary aluminium producer. Consequently, 2014 primary aluminium output will reach around 528,000 tonnes, which is 7.4% below 2008 levels, while exports should reach 1.82mn tonnes. However, apparent aluminium consumption will surge to 3.52mn tonnes from an estimated 2.61mn tonnes in 2009, with most of the increase supplied by imports which will increase to 3.93mn tonnes.