Browse the complete Report on: Ukraine Metals Report Q3 2010
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The Ukrainian steel and aluminium industries are entering a period of heightened uncertainty, with tenuous growth revealing inherent structural weaknesses – namely a lack of integration – while predatory Russian investors are aggressively pursuing controversial acquisitions.
In the first five months of 2010, Ukrainian crude steel output grew 24.8% year-on-year (y-o-y) to 14.11mn tonnes, in line with BMI’s expectations. Ukrainian crude steel output stabilised at around 2.8- 3.0mn tonnes per month in Q210, while rolled output was around 2.7mn tonnes with little movement in terms of month-on-month (m-o-m) growth.
Growth comes from a very low base, with output at least 75% below the industry’s full potential. Growth appears to being spurred more by domestic consumption than exports, with flat products leading the way. Tubes are also providing a boost to output. In the first five months of the year, Ukrainian tubes production was up 9% y-o-y to 639,000 tonnes with tube plants increasing output by 6.7% to 542,400 tonnes and steel works by 26.5% to 97,000 tonnes. The recovery of the automotive industry, which collapsed in 2009, is shoring up flats growth, but a full recovery would require an increase in demand from the construction industry, which is currently in stagnation.
Based on the trends observed in H110 in both crude output data and within steel-consuming industries, BMI forecasts 12.9% growth in crude steel output to 33.6mn tonnes in 2010 and 13.2% growth in hotrolled output to 27.4mn tonnes. However, domestic output will struggle to keep up with market trends in 2010, with industry sources expecting a 16% growth in domestic hot rolled steel consumption. Structural constraints within the industry, coupled with policy flux and uncertainties regarding future sector consolidation, will militate against the domestic industry to the benefit of imports. The decline in the value of the euro and a fluctuation in steel prices are contributing to increasing uncertainty in the industry and holding back output.
Notable problems include a lack of access to high quality iron ore and coking coal at a competitive price. In addition, merger and acquisition activity by secretive front companies associated with Russian oligarchs is causing alarm and controversy within the industry. The Ukrainian steel industry is in critical need of consolidation and looks set to follow the global trend in which steelmakers are seeking integration with raw material suppliers to cut costs and bolster profitability. The choice for the industry is largely between being controlled by Ukrainian or Russian oligarchs. Russian oligarchs have snapped up control of the Industrial Union of Donbass (ISD), the Alchevsk Metallurgical Plant and other downstream mills, while System Capital Management, the holding company of Ukraine’s richest man, Rinat Akhmetov, which owns Ukraine’s Metinvest, is seeking to consolidate its hold on the Ukrainian steel industry.
Although the election of Viktor Yanokovych as president marks a turn towards a more pro-Russia foreign policy, it is still unclear to what extent the new president will tolerate Russian acquisitions in the Ukrainian steel industry. Prime Minister Mykola Azarov reportedly indicated in June 2010 that the government would seek to protect Ilyich Iron and Steel Works from a take-over by a Russian group of investors. Yanokovych also called for an investigation after a group of unnamed Russian investors registered in Cyprus claimed that it had actually acquired Ilyich by buying a 90.41% stake, despite the company’s board chairman Volodymyr Boyko protesting that the acquisition was illegal. He has called for Illyich to be merged with Akhmetov’s Metinvest, as he is politically allied with Yanokovych. The merger would create one of the world’s top 20 steelmakers by volume and makes commercial sense: more than 70% of Ilyich’s ore supplies and a quarter of its coke are already supplied by Metinvest.
Consolidation also makes sense amid a national financial crisis. The Zaporizhstal steel plant has also been a target for acquisition by another group of unknown Russian businessmen financially backed by the Russian government’s Vnesheconombank. Its bid appears to have muscled out a take-over move by Akhmetov, who was seeking a partnership with South Korea’s POSCO. The Ukrainska Pravda news agency said in May 2010 that the deal amounted to US$1.7bn but gave no further details.
Meanwhile, although we expect a full recovery in aluminium by 2014, it is dependent on RusAl maintaining operations in Ukraine. RusAl indicated even before the financial crisis that it may close the 130,000 tonnes per annum (tpa) Zalk smelter as it was unprofitable to keep it running. With output falling 56% y-o-y to 50,000 tonnes in 2010 – the worst performance in the RusAl group – and the debtridden company already facing severe financial problems, it may consider a permanent closure and sale.
If RusAl can find a way to improve efficiency, BMI believes the smelter can be returned to full capacity after the recession, assisted by a recovery in supplies to the automotive industry. However, until RusAl announces that it will close Zalk, BMI will forecast a return to full capacity within five years.

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Browse the complete Report on: Germany Metals Report Q3 2010
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German metals producers will be dependent on external demand for growth in 2010, making them vulnerable to the volatility of Asian markets.
The German steel industry witnessed a surge in output in the first five months of 2010, with the upward trend steady throughout the period. In May, crude steel output totalled 4.07mn tonnes, a rise of 87.7% year-on-year (y-o-y) and 5% month-on-month (m-o-m), according to the German steel federation Wirtschaftsvereinigung Stahl (WV Stahl). In the January-May period, output reached 18.89mn tonnes, rising 66.9% y-o-y. According to WV Stahl, after the sharp declines in 2009, production has reached approximately the level of mid-2008. Hot-rolled output grew 79.5% y-o-y to 3.19mn tonnes in April, including 2.03mn tonnes of flat products (up 91.4% y-o-y) and 1.16mn tonnes of long products (up 61.9% y-o-y). Growth was welcomed by the industry following 2009, a year which marked the German economy’s worst post-World War II real GDP growth outturn and led to a 28.7% y-o-y fall in crude steelmaking and a 25.7% decline in hot-rolled output.
Domestic metals end markets are showing significant improvements. Notably, the German construction industry has shown excellent recovery from its precipitous decline at the start of 2009. A decrease of 4.5% in y-o-y growth over 2009 represents an anomaly in otherwise sustained growth, rather than a trend towards collapse. Growth is expected in the sector up until the end of the forecast period in 2014. Meanwhile, the 2009 vehicle scrappage scheme in Germany had benefited both domestic and foreign carmakers, with their respective sales increasing 16% and 40% y-o-y. Despite the growth seen so far this year due to exports to emerging markets, BMI believes that weak consumer demand in the EU will be the main deterrent to the recovery of Germany's auto exports (and hence production) in 2010 and for the rest of the forecast period. Moreover, given that the delivery of vehicles under the scrappage schemes in Western European markets ended in H110, we are concerned that this export growth may not be sustained, thereby putting pressure on domestic demand for flat steel and aluminium products. The market situation will also be affected by rising raw material costs and increasing risks in the difficult and uncertain financial markets. While growth rates have surged back into positive territory, the absolute level of output remains well below peak level, reflecting the weakness of the demand recovery in the US and key trading partners in Western Europe. Growth in the German metals industries will be weighed down by low overall industry capacity utilisation, poor demographic trends, fiscal austerity and weak wage growth. As a result, we expect long-term German growth to lag, restraining the rate of output growth both in the short and long term. Although we have revised up our 2010 crude steel growth forecast from 15.7% to 23.5% due to the strength of output growth in H110 and in the context of 2.0% GDP growth, the sector will be driven almost entirely by external consumption, inventory re-stocking and statistical base effects. Aside from the current market downturn, the main risk factor facing German aluminium smelters and to a lesser extent the steel industry – principally in electric arc furnaces, which comprise around a third of German steelmaking capacity – is the high price of electricity, which makes up more than 40% of the cost of primary aluminium production.
In 2010, exports of semi and finished steel products should grow 30.5% to 26.3mn tonnes, while aluminium exports should rise 29.3% to 1.54mn tonnes, although this rate will not be repeated over the following four years and will slow markedly in 2011 as the market adjusts to increased capacity and the effects of an expected double-dip slowdown from late 2010.
In the aluminium sector, BMI sees primary aluminium output growing 23.4% in 2010 to over 502,600 tonnes, with long-term prospects set to be bolstered by the growing number of applications for aluminium as a lightweight substitute for steel. On the downside, high electricity and environmental costs are undermining the long-term viability of German smelters, with Norsk Hydro reportedly considering the closure of the country’s largest primary aluminium producer. Consequently, 2014 primary aluminium output will reach around 570,000 tonnes, which is 6% below 2008 levels, while exports should reach 1.73mn tonnes. However, apparent aluminium consumption will surge to 3.5mn tonnes from an estimated 2.41mn tonnes in 2009, with most of the increase supplied by imports which will rise to 3.5mn tonnes in addition to domestic recycling.
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Browse the complete Report on: Canada Metals Report Q3 2010
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Canadian steel and aluminium producers are witnessing a steady, but as yet unspectacular recovery determined largely by trends in the US economy, according to BMI’s latest Canada Metals Report. In the January-May period, Canadian crude steel output was up 56% year-on-year (y-o-y) to 5.43mn tonnes, with monthly output consistently above 1mn tonnes – a level not achieved since October 2008. However, capacity utilisation remains at around 75-80% and BMI believes the situation will not change significantly over H210, with the automotive and construction industries unlikely to rally any further. Nevertheless, this should be enough to bring total crude output to 12.94mn tonnes, up 15.6% y-o-y and an upwards revision from the 10.3mn tonnes we forecast in the previous quarter.
The recovery in demand is coming sooner than we had anticipated and we expect apparent finished steel consumption to reach 12.50mn tonnes in 2010. Canadian steel product shipments grew 23.3% y-o-y in May to 463,000 tonnes, bringing for total for the first five months to 2.36mn tonnes, up 14.4% y-o-y. Month-end steel product inventories totalled 1.39mn tonnes, up by 23.9% y-o-y and equal to three months’ supply. Aluminium is likely to follow a similar trend. In May, Canadian metals service centre shipments rose 11.6% y-o-y to 11,200 tonnes of aluminium products, according to the Metal Service Center Institute’s Metals Activity Report. This brought shipments for the first five months of the year to 56,000 tonnes, up 3.9% y-o-y. Inventories at the end of May were up 6.0% y-o-y to 32,800 tonnes, equal to 2.9 months’ supply. However, 2011 should mark a slowdown in growth before a further surge in 2012, as the anticipated slowdown in the US economy has knock-on effects on the Canadian industry.
North American steel prices are likely to decline in H210, which, coupled with the massive rise in raw material costs, will undermine profitability. Although mill output has improved considerably compared with 2009, a lack of optimism over the sustainability of Canadian consumption as well as fears of a slowdown in the US is holding back purchases. Hot-rolled plate demand in Canada has been sluggish, with growth largely in wind energy and bridge construction sectors leading to resistance to price growth. In contrast, cold-rolled coils have seen transaction values rise, while domestic producers have managed to compete effectively against imports, although it is unlikely that prices will rise further in H210. Growth in the North American automotive industry and among manufacturers of domestic appliances has helped fuel a recovery in coated coils, but only hot-dipped galvanised coil has seen a significant increase in prices, while other transaction values have been slow to rise due to foreign competition. Tight supply in wire rod on the US market could help Canadian producers’ bottom lines, offsetting poor domestic performance. Prices are also static in other construction-related products such as sections, beams and rebar.
Prospects are subdued, with progress expected to be modest throughout 2010. The steel industry will emerge from the current crisis increasingly focused on the emerging economies for growth. In terms of aluminium market demand, rising automotive sales within the North American market and increasingly stringent import and export laws over the last quarter will certainly ease the pressure on Canadian manufacturers; however, much has yet to be done to reach the levels witnessed within the aluminum markets only two years ago. Yet BMI does not believe there will be a return to pre-recession levels, with some capacity likely to come offline permanently. As such, crude and hot-rolled output will be 4.0% and 3.5% down on 2008 levels at 14.52mn and 13.85mn tonnes respectively by 2014. At the same time, domestic finished steel consumption should return to the levels more typical of those seen before the recession, at around 15.2mn tonnes.

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Browse the complete Report on: Brazil Metals Report Q3 2010
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The Brazilian steel industry has made a rapid turnaround and is set to sustain growth as capacity expands, but the country could cease to be self-sufficient in aluminium unless energy prices fall sufficiently enough to attract investment in new primary aluminium smelting capacity.
Brazilian metals industries are recovering at a fast pace due to the rapid rebound of the domestic economy. In the first five months of 2010, crude steel output rose 56.9% year-on-year (y-o-y) to 13.5mn tonnes, while rolled steel production grew 64.5% y-o-y to 10.8mn tonnes. Production growth was sustained throughout the period, indicating a long-lasting strong recovery. In May 2010, Brazilian crude steel output was up 5.5% month-on-month (m-o-m) and 50.8% y-o-y to 2.9mn tonnes while rolled production grew 5.2% m-o-m and 42.4% y-o-y to 2.3mn tonnes. The domestic market has supported growth in the Brazilian steel industry, with sales of 8.8mn tonnes in the January-May period, up 57.5% yo- y. Apparent consumption of steel was 11mn tonnes, up 70.5% y-o-y. Export growth was more subdued and largely due to low base effects rather than a return to trend growth. Over the first five months, exports totaled 3.5mn tonnes valued at US$2bn, a 28.9% increase in volume and 21.5% in value. Meanwhile, imports soared 149.1% to 2.3mn tonnes, helping to narrow the country steel trade surplus. BMI forecasts crude output reaching 33.7mn tonnes in 2010, up 27.1%, while hot rolled output should climb 25.0% to 23.3mn tonnes.
Interest in the Brazilian steel industry has surged as the economy has recovered. In June 2010, the ThyssenKrupp CSA Siderúrgica do Atlântico (26.9% Vale, 73.1% ThyssenKrupp) steel mill at Santa Cruz, Rio de Janeiro, was inaugurated. It has a production capacity of 5mn tonnes per annum (tpa) of high quality low cost slabs. The partners have indicated that slab output could be expanded to 6mn tpa in the future. In June 2010,the state government of Bahia announced that South American Metals, an association between the Brazilian group Votorantim and Chinese companies Honbridge and Xin Wen Mining Holdings Group, would build a US$2bn steel plant in the state with capacities including 7mn tpa of iron pellets. In May 2010, ArcelorMittal announced plans to invest US$1.2bn in Brazilian steel operations, including at its Joao Monlevade facility, thereby increasing production capacity to 2.4mn tpa by mid-2012. In April 2010, it was reported that Chinese steelmaker Wuhan Iron and Steel Co (WISCO) and Batista EBX Investment, owned by Brazilian industrialist Eike Battista, signed a joint venture (JV) deal worth up to US$5bn to establish a 5mn tpa steel mill at the Acu Port complex in Rio de Janeiro. The steel mill, which will serve Brazil’s automotive, shipbuilding and oil industries, as well as serving the Chinese market, is expected to be put into production within three years.
While steel production strengthened, primary aluminium production remained stagnant. The Associação Brasileira do Alumíni (Brazilian Aluminium Association, Abal) reported May monthly primary production of 130,900 tonnes, an increase of 1.4% y-o-y. For the first five months of 2010, primary aluminium output was 634,600 tonnes, down 1.6% y-o-y. The situation was exacerbated by the closure of the Valesul smelter, as well as significant reductions in output at Novelis’s Aratu smelter and Albras’s operations. However, these declines were mostly offset by Alcoa’s 23.1% increase in output at its Poços de Caldas smelter and a smaller 1.2% increase at its São Luís plant. The poor performance in the Brazilian aluminium industry contrasts with the 24% y-o-y rise in consumption of aluminium sheets, foil, extruded products and wires and cables.
In the aluminium industry, there are growing concerns that the country could become a net importer of aluminium by 2014, when consumption is likely to exceed installed capacity of 1.6mn tpa. ABAL forecasts that domestic consumption will rise 21% in 2010 to 1.2mn tonnes with imports set to rise 47% to 236,900 tonnes and exports declining 19.3% to 743,200 tonnes. Even at rates of consumption growth half the level expected in 2010 over the following four years, the country will become an importer of aluminium and with consumption expected to rise to 2mn tonnes by 2018 there is a pressing need for more smelter capacity. Increased recycling can only mitigate the problem, not solve it due to the rates of demand growth. In order to address the problem, the government will need to respond to companies’ demands for a reduction in energy costs and the tax burden to make new investments feasible. Primary aluminium producers complain that energy supply is the biggest challenge, with costs far higher than in other countries.

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