Czech Republic Metals Report Q1 2013

BMI's Czech Republic Metals Report for Q1 2013 assesses the impact of the eurozone crisis on steeloutput in the months ahead, as well as how it will influence corporate growth and risk managementstrategy over the medium term. The report also examines steelmakers' responses to domestic industrialtrends, particularly in the context of falling exports and the impact of a sluggish construction industry onlong steel output.

In the first 10 months of 2012, Czech crude steel output declined by 7.1% year-on-year (y-o-y) to4.33mnt. Monthly output was volatile throughout the period, in line with market uncertainty. It peaked at487,000 tonnes in May but fell to 360,000 tonnes by October. Due to its external vulnerabilities, theCzech steel industry has been unfavourably affected by the economic downturn across Europe, which hashit heavy industry and construction. The temporary shutdown of Evraz's steel production line in theCzech Republic, Evraz Vitkovice Steel, in October had an impact on BMI's estimated crude steel outputfor 2012, which was revised down from 5.25mnt to 5.08mnt. Poor performance in 2012 wipes out thegains made in 2011. Evraz's decision was made due to low demand and the company's efforts to run downits raw materials inventory. The Vitkovice steel mill is a key customer of the Czech unit of ArcelorMittalwhich supplies it with raw materials, and its closure will affect the supply line.

Over the last quarter BMI have revised the following forecasts/views:

In terms of the domestic market, the downturn in the construction industry continues to erodelong steel consumption levels; long steel represents two-thirds of Czech steel output. In 2012,the construction sector contracted 2.3%, following a decline of 7.2% in the previous year. Webelieve the Czech Republic's construction industry value will tentatively enter positive territoryin 2013 as the European environment picks up.

Exports are likely to be the main stimulant in the Czech steel industry over the foreseeablefuture. It will take until 2016 before domestic consumption levels reach and exceed pre-2008levels.

While crude output is forecast to stabilise at around 5mnt in 2013, BMI does not rule out areturn to the lows seen in 2009 when output fell to 4.6mnt. Eyes will be on ArcelorMittal's plans,with potential for further production cut-backs at its Czech facilities - in line with trends seenelsewhere in Europe.

Due to sluggish and over-supplied markets, BMI has revised down output forecasts over themedium term with output reaching 6.4mnt by 2017, which is still lower than the pre-crisis norm.This will be sustained by less than 6% growth in the Czech automotives industry and an averageof just 2.4% growth in construction.