The EU Steel Market Outlook 2015-2016

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The European steel association, EUROFER, has published its Q1 2015 report on the economic and steel market outlook for 2015 and 2016.

«Arab Metal» republish the Steel part.

 

Overview Steel Using Sectors

In line with expectations, Q3-2014 data for the EU steel using sectors show that activity growth was sluggish. The SWIP index rose only 0.8% y-o-y, coming from 1.7% in the preceding quarter. Activity was affected by rather weak domestic and export demand. While in some sectors the impact of Russian trade sanctions in the aftermath of the Ukraine conflict was felt, overall weak business conditions in EU core markets France and Italy and evidence of slowing growth in almost all large emerging economies acted as a drag on output growth.

Stabilising business sentiment in the fourth quarter of 2014 suggests that momentum in most steel using sectors remained slow. The assessment of production expectations showed no real improvement compared with the preceding months. Activity is foreseen to have grown only marginally in Q4-2014. SWIP growth over the whole of the year is estimated at 2.2%.

The outlook for 2015 and 2016 is for a gradual further expansion of output in the steel using sectors, on a par with the expected cautious economic recovery in the EU.

Lower oil prices and the weaker Euro support the scenario of both exports and domestic demand gaining momen-tum. This will support activity in the steel using sectors, whereas the divergence in performance between the manufacturing industry and the construction sector looks set to narrow. The SWIP index is forecast to rise by just over 2% in 2015 and 2.5% in 2016.

 

  % share in total Consumption  Q1 14  Q2 14  Q3 14  Q4 14  Year 2014  Q1 15  Q2 15  Q3 15  Q4 15  Year 2015  Year 2016
Construction 35 7.6 0.6 -1.4 -0.1 1.3 -1.5 1.7 2.9 2.4 1.5 2.3
Mechanical engineering 14 3.1 -0.3 1.7 0.5 1.2 1.7 2.5 1.8 2.3 2.1 3.1
Automotive 18 10.5 3.9 3.6 2.4 5 2.7 3.7 3.9 5 3.8 2.5
Domestic appliances 3 1.4 -1.7 -4.5 0.7 -1 0.5 1.2 4 2.6 2.1 2.1
Other Transport 2 2.3 -0.3 -0.2 -0.6 0.3 2.1 3 2.2 3.3 2.7 3.9
Tubes 13 5.4 5.1 2.8 -5.8 2 2.1 0.7 0.9 1.1 1.2 1.6
Metal goods 14 5.1 2.3 1.5 1 2.5 0.6 1.9 2.7 4.2 2.4 2.8
Miscellaneous 2 3.8 1.7 1.7 1.5 2.2 0.8 1.7 1.9 2.8 1.8 2.7
TOTAL  100 6.5 1.7 0.8 0.1 2.2 0.8 2.2 2.6 3.1 2.2 2.5

Development of the main steel using sectors – EUROFER forecast January 2015

% change year-on-year in the SWIP (Steel Weighted Industrial Production) index1)

1) As of 2013, “steel structures” is no longer a separate sector but is included in the construction sector. Shipbuilding activity is now included in “other transport” which 

 

Construction

EU construction output fell 1.4% y-o-y in the third quarter of this year, following positive growth in the first half of the year.

Sector performance at the country level continued to diverge widely. In most Eurozone countries activity weakened, whereas in the UK and Sweden growth remained rather vigorous. Output in Central Europe continued to grow, albeit at a significantly slower rate than in H1-2014 because of growth in Poland almost coming to a standstill.

Strongest dynamics in activity were again seen in the development of new and renovation projects in the residential and infrastructure sector.

Estimates for the final quarter of 2014 show output stabilising around the year earlier level. On balance, construction activity is projected to have grown 1.3% in the whole of 2014.

While H2-2014 activity data were rather uninspiring, confidence indica-tors continued to improve over this period, signalling that this sector could be heading towards a more broad-based recovery in 2015.

Due to a base year effect, output growth in the first quarter of 2015 is foreseen to show a negative trend compared with the same period of 2014, which was characterised by strong growth because of mild weather conditions. However, from the second quarter onwards, activity will improve across the EU.

Investment construction growth will pick up some speed, in line with the modest further recovery of the EU economy. The role of public funding could play a more prominent role than previously foreseen.

In addition to national initiatives in support of the construction sector already underway or starting from 2015 – such as in the UK and Germany – and EU funds boosting output in Poland and Hungary, the Junckers investment plan could have an impact which is not to be underestimated.

If properly managed and generating the expected spin-off effects, funding of national and cross-border construction projects should become easier. Infrastructure construction appears to be one of the main beneficiaries.

Despite continued weakness in France and Italy, EU construction activity is seen increasing by 1.5% in 2015.

Output is forecast to grow almost 2.5% in 2016 as the recovery encompasses all EU markets and underlying construction sectors.

 

Automotive

The EU car market continued to expand in the final quarter of 2014; passenger car sales grew 5.7% in the whole of 2014. With the exception of the Benelux and France, demand improved across the EU, most notably in Spain and the UK. Commercial vehicle demand weakened in November and December 2014 following vigorous growth of the market in the preceding months. Growth over the whole of 2014 was 7.6%.

Meanwhile, export demand for premium segment cars gradually came under pressure in the third quarter of last year. The economic slump in Russia is specifically being felt by German manufacturers, whereas also UK producers experienced the impact of economic uncertainty on demand in their key export markets.

Total automotive production including parts and components grew 3.5% y-o-y in Q3-2014, a minor slowdown in the growth compared with Q2. Output fell only in the UK, Sweden and Slovakia.

First estimates for Q4-2014 signal a further mild deceleration in the year-on-year growth in activity to around 2.5%. All in all, automotive production is projected to have risen 5% in the whole of 2014.

Prospects for 2015 and 2016 are for the recovery of the EU automotive sector to continue, albeit at a more moderate rate than registered in 2014. EU car sales are expected to benefit from improving consumer confidence and low oil prices and inflation boosting real household income. The outlook for car exports is however less benign. Car sales in Russia may fall sharply in 2015 and 2016 due to worsening economic conditions, with some analysts even citing a drop of around 30%. Market prospects are also clouded by the volatility of the rouble and restrictions in consumer credit. Slowing growth in other key emerging markets will also weigh down on automotive exports.

Also commercial vehicle demand is seen growing less vigorously than in 2014. Improving business confidence and the steady recovery of the EU economy should translate into a further modest rise of commercial vehicle sales.

Total automotive output is expected to increase by almost 4% in 2015. Output in Spain, Italy and in the Central European countries is seen rising rather strongly, whereas France will continue to struggle to stabilise output.

Automotive activity is forecast to rise by a further 2.5% in 2016.

 

Mechanical Engineering

EU mechanical engineering output increased 1.7% y-o-y in the third quarter of 2014. Activity in the sector finally gained again some momentum followed a two-year period of weak domestic investment in machinery and equipment and slowing export demand for engineering products. Growth in the UK was rather robust, reflecting overall healthy domestic demand and export orientation on the flourishing US market. Only Italy, Spain and Sweden posted negative growth.

Order intakes in Germany remained rather volatile in recent months. Bookings in November fell 10% following a mild growth in the preceding 5 months. The drop in domestic and export orders was rather similar. The economic slowdown in China and Russia weighed down on Germany’s export performance. Meanwhile, exports into the Euro area developed rather positively.

Activity in the fourth quarter of 2014 is expected to have risen by around 0.5% y-o-y. This results in a 1.2% growth in output over the whole of 2014.

The tentative recovery of mechanical engineering activity in 2014 looks set to gain further momentum in 2015 and 2016. Improving business conditions in the European market will support confidence and fuel investment in machinery and equipment following several years of underinvestment. In several EU countries the corporate can no longer postpone the necessary replacement of outdated and inefficient equipment. Provided access to finance improves as well, the release of pent-up demand could accelerate growth of capital goods investment in Europe to around 3% in 2015 and 4% in 2016.

Eurozone manufacturers will benefit from the depreciation of the Euro, particularly on the US market. US demand for engineering products is seen growing robustly over the coming two years.

Meanwhile, slowing economic growth large emerging markets such as China and Russia in particular could act as a drag on EU output growth. Particularly Germany is characterised by a high exposure of its mechanical engineering sector to the Russian and Chinese market. Moreover, Germany is also affected by EU’s ban on dual-use machinery exports which can be used in both military and civil sectors.

EU mechanical engineering output is forecast to grow 2.1% in 2015 and by around 3% in 2016.

 

Tubes

EU steel tube output rose by 2.8% y-o-y in the third quarter of 2014.

Similar to the activity trends seen in the first half, the performance at the country level diverged significantly in a reflection of product range, the balance between domestic and export end-user segments as well as the exposure to international competition.

Output in France and Spain and Sweden fell sharply, whereas particularly in Poland but also in Germany, Italy, the UK and Sweden production activity improved.

Market conditions are expected to have deteriorated in the final quarter of last year; this can be primarily attributed to new headwinds in the line pipe market.

Whereas output in Q2 and particularly in Q3 was boosted by construction work on the 1st stretch of the Southstream pipeline, Russia stopping the project and the subsequent suspension of tube deliveries is expected to have had a negative impact on Q4’14 tube output. EU tube production in the whole 2014 is expected to have increased 2%.

The outlook for the large diameter welded pipe market in 2015 and 2016 is also affected by the cancellation of the Southstream project. Although EU tube mills probably would not have been the major beneficiaries in terms of line pipe supplies, it would have alleviated competitive pressures in the international markets. Although there are several other projects in Eastern Europe, North America and the Middle East potentially coming on stream in the current year and in 2016, the drop in oil prices may cause significant delays or even cancelation of these projects. Generally speaking, lower exploration and production activity in the global oil and gas industry will act as a drag on demand for line pipe and oil country tubular goods.

Meanwhile, the outlook for the key user sectors of small welded and seamless steel tubes such as the construction, automotive and metal goods industry remained moderately positive and is seen lifting demand in the EU. Nevertheless, competition from abroad in the commodity segments will remain fierce.

EU production of steel tubes is expected to rise by around 1% in 2015 and 1.5% in 2016.

 

Domestic Appliances

Output in the electric domestic appliances industry in the EU fell 4.4% y-o-y in the third quarter of 2014.

Output declined significantly in several EU countries, more specifically so in France, Italy, the UK, Spain and Sweden. Prevailing business conditions remained overall difficult, reflecting sluggish demand and fierce domestic and international competition.

This sector has been characterised by low activity levels over the past years, structural overcapacity and as a consequence weakening margins which resulted in domestic appliances manufacturers relocating production facilities to low-wage countries and closing down operations in Western European locations.

Estimated activity data for the fourth quarter signal minor year-on-year growth in EU output, with little change in underlying market conditions.

As a result, total output in the electric domestic appliances sector contracted by 1% over in the whole of 2014.

Fundamentals for 2015 and 2016 are looking slightly more benign. Real household income is expected to improve owing to the positive effect of low oil prices and low inflation. Consumer confidence will also be supported by a mild further reduction in unemployment rates across the EU. Higher growth rates of private consumption should also translate into strengthening demand for home appliances, particularly if this would coincide with a more widespread recovery of the residential property market and easing financing conditions in the EU.

EU-imposed eco-design and energy labelling directives are generally seen by industry participants as potentially having a positive impact on the business environment. Consumers tend to cut down the cost of their utility bills by switching to more energy-efficient appliances. European appliance manufacturers are therefore increasingly putting their stakes on innovation and power-saving designs the industry. Meanwhile, price competition will remain fierce and increasingly driven by internet retailers. In 2015 and 2016, production in the EU is foreseen to increase by around 2%.

Best prospects are foreseen for Spain and most Central European countries.

 

Real Consumption

Real steel consumption in the EU increased by 1% y-o-y in the third quarter of 2014, in line with the moderate rise in activity in the steel using sectors. Growth in the automotive and engineering industry as well as in the tube sector outweighed the negative trend of production and as a consequence steel use in the construction sector.

Preliminary data for real steel consumption in the final quarter of 2014 suggest that this cautious growth trend continued up to the end of last year.

On balance, total real steel consumption in 2014 is estimated to have increased by 1.4%, mainly as a result of the positive base year effect in the first quarter and overall rather steady but dull market conditions in the remainder of the year.

The outlook for 2015-2016 is for a moderate gradual strengthening of final steel consumption. The steel using sectors look set for a mild expansion of activity, in line with the expected modest economic recovery in the EU.

The plausibility of this scenario has improved owing to the occurrence of lower oil prices and the weaker Euro. As a consequence, both exports and domestic demand are seen gaining momentum. Moreover, the construction downturn is expected to finally reverse into a modest upturn during 2015 which is seen gaining further momentum in 2016. Moreover, steel intensity is foreseen to have a less negative impact on real steel consumption in 2015 and 2016 than in the preceding years.

On balance, real steel consumption is forecast to increase by 1.7% in 2015 and 2.1% in 2016.

 

Apparent Consumption

Apparent steel consumption in Q3-2014 grew 4.4% y-o-y, a fairly similar growth rate as registered in the second quarter of last year. In line with the usual pattern of steel demand over the year, Q3 apparent steel consumption was 8% down on the average quarterly demand in H1-2014.

Total imports (including semis) rose 13.4% y-o-y in Q3-2014, while easing somewhat in comparison with the high import volumes that entered the EU in Q2. Meanwhile, deliveries from domestic mills on the EU market increased by just 1% y-o-y. As a consequence, predominantly third country steel suppliers benefited from the increase in EU steel demand in the third quarter.

Estimates for Q4-2014 indicate that growth in apparent consumption turned negative; the 2.5% y-o-y drop basically reflects the usual Q4 destocking. However, customs data signal the continuation of the rising trend in imports in Q4-2014. As a consequence, EU steel producers are expected to have suffered a drop in deliveries and a further loss of market share to third country suppliers.

All in all, apparent steel consumption is expected to have increased 3.3% in 2014.

The EU steel market is seen slowly but gradually strengthening further in 2015 and 2016, driven by the expected improvement of activity in the steel using sectors and the related need for a modest stocking up of inventories in the supply chain and at end-users. However, within this framework of moderately expanding steel demand in the EU, growth perspectives for EU steel producers will remain rather muted owing to the anticipated continuation of high imports arriving into the EU market.

Apparent steel consumption is seen growing by around 2% in 2015 and 2.5% in 2016.

 

Imports

EU steel imports grew again substantially in Q3-2014. The 13.4% rise y-o-y resulted from a 15% reduction in semis imports and a 30% increase in finished steel imports.

While flat product imports grew 28%, long product imports rose 34% y-o-y.

The latest customs data signal the continuation of the rising trend in imports in the final quarter of 2014. Finished product imports grew 10% y-o-y, with flat products rising by 12% and long product imports by 2% y-o-y. Semis imports remained at a high level in October and November 2014, rising almost 10% y-o-y.

Total 2014 steel imports are estimated to have increased by around 14%. The rise in finished imports amounts to 19%, with flat products 15% and long products 33% up on 2013.

The main countries of origin for flat products are China, Russia and the Ukraine, whereas Turkey, China and the Ukraine for long products. Russia and the Ukraine are the largest semis exporters.

Imports are projected to remain at an elevated level over the coming two years. Domestic steel demand in the emerging economies not growing as swiftly as anticipated in steel industry investment programmes will result in excess production being pushed into the international markets, thereby distorting traditional steel trade flows, fuelling competition and depressing steel prices and profit margins.

Particularly soaring imports from China gives reason for concern; to some extent the weaker Euro and long lead times may dampen the inflow of Chinese imports over the coming months. Meanwhile, Russian mills are expected to benefit from the sharp depreciation of the rouble against the Euro and target the EU market more intensively to compensate for falling domestic sales.

Third country exporters are foreseen to consolidate their improved market position in the EU steel market, with deliveries rising by on average 2% per annum in 2015 and 2016.

 

Exports

Total steel exports from the EU to third countries decreased by 1.6% y-o-y in the third quarter of 2014.

While semis exports decreased by 10% y-o-y, finished product exports stabilised around the year earlier level owing to a 5% increase in flat product exports and an 8% drop in long product exports.

Customs data for October and November signal a rising trend in exports. Due to the continued inflow of imports on the EU market replacing domestic deliveries, European steel producers were forced to find other outlets for their products. Exports of flat and long products increased.

Total exports in 2014 are expected to have increased by a marginal 0.5%. This hides a falling trend in semis and long products exports and a rising trend in flat product exports.

The EU continued to be a net exporter as in the preceding two years, but the trade surplus narrowed to 307,000 tonnes per month over the first 11 months of the year. Similar to the situation in 2012 and 2013, the trade surplus resulted from a trade deficit in semis (312,000 tonnes per month), a small surplus in flat products (102,000 tonnes) and a surplus of 517,000 tonnes per month in long products.

Rebar, wire rod and beams remained the most exported long steel products.

The key destination for EU exports of long products was Algeria, followed by Turkey, the United States and Switzerland.

The outlook for 2015 and 2016 is for a moderate rise of third country exports, supported by the weak Euro. As the current distortion of traditional trade flows most likely will persist over the coming two years, domestic EU steel producers will have to continue sell their products abroad in order to at least partly make up for the loss of market share on their home markets.