Spain Metals Report Q4 2009

Countries covered: Spain

The worst may be over for the Spanish steel industry, but activity levels in the domestic housing marketand a weak and faltering recovery in the automotive industry mean that the recovery will be slow andoutput will not return to pre-recession levels over the next five years, according to BMI’s latest SpainMetals Report.

In the first seven months of 2009, Spain’s steel output fell 36.7% year-on-year (y-o-y) to 7.54mn tonnes.

Monthly output in July was 1mn tonnes, a decline of 24% y-o-y and down 14.5% month-on-month(m-o-m). As such, Spain has not been able to take full advantage of the growth in the automotive market,which was stimulated by car scrappage schemes implemented across Europe. This is largely due to thefailure of the Spanish government’s EUR4.1bn (US$5.3bn) stimulus package, intended to revive thedomestic market and local automotive production. The Spanish market was one of the worst hit inWestern Europe in H109, although most automotive output is exported. Residential construction was alsovery depressed, with home sales plummeting 34.9% y-o-y in H109.

By Q309, the worst of Spain’s recession was over and a sense of cautious optimism was building withinthe Spanish steel industry. In September, ArcelorMittal restarted its Gijón steel mill after it had beenshut down for four months, with some sources claiming it was operating at 70% capacity. The millproduces heavy plate, wire rod and rails. This was an encouraging indicator for the steel industry, sinceArcelorMittal Spain’s production rates fell by 35% or more for both long and flat products in H109.

However, Spanish producers have seen prices plummet and the best they can hope for is stability in H209,but at the same time scrap and billet prices are not softening. Attempts to push higher costs ontocustomers have largely failed, so profitability is still under pressure despite the stabilisation of the market.Steel mills remain dependent on exports for their recovery in the short- to medium-term. With 20mntonnes per annum (tpa) of crude steel capacity coming back online across the European Union (EU) inH209, they will face competitive challenges and depressed prices. Much will depend on the strength ofthe French, German and UK markets, though recovery appears weak and faltering. Although the outlookfor 2009 is broadly negative, BMI has revised up its forecast for the year to 13.73mn tonnes (down 26.1%y-o-y) from the 12.82mn tonnes forecast in the previous quarter (down over 30% y-o-y). As a result of thefall in automotive output and production of household appliances and other industrial consumers of flatproducts, BMI forecasts that hot rolled production will fall by more than 27% in 2009 to around 13.9mntonnes, as cold rollers supplying the automotive industry cut orders. Meanwhile, the construction industryis in a state of collapse, with Spain’s faring the worst in the EU. Consequently, BMI is forecasting a dropin rebar output of over 36% to 2.8mn tonnes. As output will fall to low base, we expect high rates ofgrowth in rebar production with a rise in new home starts expected from H210.

In the medium term, recovery is set to gather pace, although it will vary across sectors. According toBMI’s automotive team, vehicle output is set to decline by at least 20% in 2009 with only modest growthrates in subsequent years. At the same time production is likely to be mostly concentrated on small carsand to be limited to 1.90mn units by the end of 2013. This will in turn restrict domestic demand for steeland aluminium flat products.

With key steel-consuming industries under pressure, BMI forecasts apparent crude and finished steel usein Spain falling 26% and 19% respectively in 2009, with the domestic market stagnating in 2010 beforelimping to recovery from 2011, as the impact of the recession on the Spanish economy lingers. Moretroubling for Spanish steel mills is their loss of competitiveness due to energy prices, and BMI forecastssharper falls in domestic crude production in 2009. By end-2008 high energy costs had led to a 50-100%rise in electricity costs. Some producers claimed electricity tariffs were a greater problem than theeconomic downturn.

Domestic production will lose out to foreign imports, although these are likely to also fall by over 24% to8.87mn tonnes in 2009. A Europe-wide recession and the still relatively strong euro will cause seriousproblems for the export sector. BMI does not believe the Spanish steel industry will return to 2008 outputlevels over the next five years, with Spanish producers continuing to face strong competition from Asianproducers.

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