Metal industry faces bleak perspectives

The optimism generated by the good results obtained in 2010 faded a year later, as local crude steel production was unable to maintain a stable growth rhythm

After the sharp 45% y/y decline in 2009, the industry had a 35% comeback in 2010, based on the gradual recovery of the Euro zone, where Romania exports most of its metal products. However, the growth lost steam in 2011 and slowed down to only 2.9%, up to 3.8mn tons.


The slight increase of Romania’s medium export prices for steel products, up to USD 1,054 per ton in 2011, contributed to the positive evolution of the industry, shows Steel Producers’ Union in Romania (UniRomSider) data. Yet, prices were still below the USD 1,094 per ton recorded in 2008. 


The situation worsened in 2012, when prices and demand for steel, which represent a barometer for the economy evolution, reached their minimum levels within the last three years. Spot iron prices went down to USD 87 per ton in September, which was almost 30% below this year’s high of USD 149.4 per ton. Steel was traded at USD 344 per ton on the London Metal Exchange (LME) in October, close to the minimum recorded in 2009, of around USD 300 per ton.


In Romania, crude steel production decreased by 7.51% y/y in the first nine months of 2012, down to 2.62mn tons, according to World Steel Association (WSA) data.


“The metal industry is still deep in crisis and I expect it will not get out of it in 2013 either,” said Mircea Budur, executive director of UniRomSider.


The WSA forecasted in October that the global apparent steel use will increase by 2.1% in 2012, which is considerably lower than the 6.2% growth achieved in 2011 and the 3.6% forecasted in April. The association lowered its growth expectations for 2013 as well, from 5.6% in April to 3.2% in October.


The higher growth forecast earlier this year was based on some signs of recovery after the slowdown in the last quarter of 2011. However, the ongoing uncertainty generated by the debt crisis in the euro zone and a slower growth in China, which is both the world’s largest steel producer and consumer, deteriorated the economic situation in the second quarter of this year. The moderate growth expectations for 2013 can be achieved only if the euro zone controls the crisis, the US manages to deal with its fiscal tightening due next year and if the economic stimuli measures show their effects in China.


“In 2012, the world has realized that China's economy is slowing down well beyond initial expectations. That is a structural event which is going to maintain negative pressures on the metals markets in 2013,” said Mihai Nichisoiu, international market analyst at Tradeville brokerage firm.


Steel demand in China is expected to increase by 2.5% in 2012, up to 639mn tons, down from the 6.2% growth in 2011, according to the WSA. China has been the main engine of global economic growth for the last few years, and a significant part of its economic growth comes from real-estate and infrastructure projects. The government’s stimulus measures are likely to slightly improve the country’s economic situation and apparent steel use could increase by 3.1% in 2013.  


“Global demand for industrial metals is poised to calm down further over the longer-term since developed economies like the US and the Eurozone will continue to record sub-par growth rates,” said Nichisoiu.


Statistics show that the European Union countries produced 129.6mn tons of crude steel in the first three quarters of 2012, down by 4.6% compared to the same period of 2011. Overall, the apparent steel use in EU 27 is expected to decline by 5.6% in 2012.


Tough decisions


Steel demand is tightly connected to the evolution of the real economy, since it is used in capital-intensive industries such as shipbuilding, car manufacturing, air industry and constructions. As long as these sectors lag behind new orders, demand for steel is unlikely to increase.




Pundits warn that the stimulus measures on the global market have reached their limits and that the current measures are no longer efficient. As a result, the negative market evolution forced the largest steel producers in the world to take drastic measures to cut their losses.


It is the case of the Russian group Mechel, owned by the Russian billionaire Igon Zyuzin, which announced in September it put up for sale 14 of its worldwide assets for USD 859mn, less than half of their acquisition price. The group had USD 605mn loss in H1 2012, compared to USD 501mn profit in H1 2011, mostly because the steel and mining markets went down and because of the currency rate evolution. The company intends to obtain USD 150mn from selling four of its five production capacities in Romania – Mechel Targoviste (USD 46mn), Mechel Campia Turzii (USD 33mn), Laminorul Braila (USD 32mn) and Ductil Steel (USD 39mn).


The largest steel mill in Romania, ArcelorMittal Galati, faces problems selling its production that is less than half the level of 2008. The plant currently operates with only one furnace, compared to the four that were functional before the crisis, and started a program of voluntary layoffs for 1,300 workers. At an international level, the company, led by Indian billionaire Lakshmi Mittal, decided to permanently close furnaces in France, Belgium and Spain.


The difficult international market conditions reflected also into the financial results of Alro, the largest aluminum producer in Central and Eastern Europe. The company decreased its net profit by 92% y/y in H1 2012, down to USD 4.5mn, while reducing its primary aluminum production by 4.5%, down to 125,000 tons. “Lower demand and price for aluminum in the first half of this year, to which added the energy deficit, affected the company’s results,” said Marian Nastase, vice-president of Alro’s board.


The Romanian aluminum industry reported a recovery in output in 2011, with Alro’s total casted aluminum production of approximately 261,000 tons, up from 241,000 in 2010. However, the international aluminum market started to deteriorate this year. Aluminum prices decreased by almost 20% between January and September 2012, down to USD 2,030 per ton. World aluminum production is expected to grow faster than consumption, leading to stock increase from an estimated 8.6 weeks at the end of 2011 to 11.7 weeks at the end of 2012. 

On top of all these problems, the heavy industry in Romania and in Europe will be confronted, starting with 2013, with significant cost increases generated by emission certificates. UniRomSider, the Steel Producers’ Union in Romania, warns that energy-related for steel producers costs will double between 2013 and 2020 because of the new emission trading scheme. The association tries to convince the Economy Ministry to compensate a certain quota of producers’ electricity expenses, to avoid relocation risks created by higher costs.


“The metal industry is still deep in crisis and I expect it will not get out of it in 2013 either” - Mircea Budur, Executive Director of UniRomSider