European Metals Market Filled with Caution and Short on Credit

In the first week of October at the annual congress of the World Steel Association (Brussels, Belgium) in Washington, D.C., Karl-Ulrich Kohler, Executive Board Chairman of ThyssenKrupp Steel AG (Duisburg, Germany), a subsidiary of ThyssenKrupp AG (FRA:TKA) (Dusseldorf, Germany), expressed confidence that emerging markets would keep the steel boom alive, even as economic growth slowed, according to a report by Industrial Info Resources (Sugar Land, TX). At the same time, the International Herald Tribune cited a report of the Credit Suisse Group (Zurich, Switzerland) that stated, "Steel equities are pricing in a total collapse in the steel price … the August-September performance has so far been the worst in 35 years."

Kohler, while saying that ThyssenKrupp Steel's performance in the 2008 fiscal year would not match the record pre-tax profit of 2007, reaffirmed that his confidence was based on the continued favorable outlook for the global steel markets, with demand from Asia, the Near East and the Commonwealth of Independent States increasing at an above-average rate in the coming years.

In mid-October, Tata Steel Limited (Mumbai, India) announced that it was cutting production at its Corus operation in Europe by up to 20 percent (about one million tons) over the coming three months in response to a slowdown in the United Kingdom, southern Europe and export markets. But the company said there would be no change in production for its operations in Southeast Asia and India. In September ArcelorMittal (Luxembourg), the world's largest steelmaker, announced that it was cutting production by 15 percent.

A UBS (Zurich, Switzerland) research update provides general background for Europe's prospects for the coming year. It has lowered the forecast for the European Monetary Union's GDP growth from 0.6 percent to negative 0.3 percent. UBS sees inflation moderating to 2 percent in 2009 from 3.5 percent in 2008. Growth of the United Kingdom's GDP has been adjusted downward from 0.2 percent to negative 1.4 percent, with inflation dropping from 3.7 percent in 2008 to 2.5 percent in 2009. Additionally, China's GDP was revised down from 8.5 percent to 7.8 percent and Japan's 2009 GDP forecast was adjusted to 0.0 percent from 1 percent.

The Confederation of British Industry's (CBI) (London) quarterly survey showed business confidence within manufacturing industries falling in October to minus 60 percent from minus 40 percent. This is the lowest confidence reading since 1980. Manufacturing output fell at the fastest rate in 10 years with 29 percent of firms recording a drop in the last three months. For the coming three months, manufacturing output drew a 31 percent negative balance from companies surveyed. Domestic orders showed a 42 percent negative balance, and export orders brought a 21 percent negative balance. CBI expressed concern that constraints on capital now appeared to be affecting manufacturers in a way that had not been the case earlier. CBI hopes that the recent recapitalization of banks and interest-rate cuts will prevent a further credit squeeze in the European winter.

London Metal Exchange (LME) market commentators saw base metals prices probably going lower, but felt the general pessimism had been overdone. The World Steel Association expects 2008 and 2009 to be growth years for the industry. In a statement on the short-term outlook, Ku-Take Lee, Chairman of the World Steel Association and Chairman and CEO of South Korea's major steelmaker POSCO (Pohang), said, "We are in a period of high economic uncertainty. The impact on the steel market is becoming more apparent as we move into the later part of this year. We are currently reviewing our forecast for 2009, which had been prepared in summer before current events. However we continue to expect growth in steel demand in 2009 and for the medium-term, above the world GDP growth rate."

Central-Eastern Europe has developed a profile as the growing production heart of the European Union. The manufacturing sector is seen as the main driver of growth in 2008-09 on the supply side, with medium hi-tech sectors producing investment goods. A study made by UniCredit Group (Milan, Italy), prior to the full force of the credit crisis being felt, reported manufacturers of basic metals and fabricated metal products were doing best in Poland , Slovak Republic, Bulgaria, Hungary and Turkey, with the same countries scoring high in the manufacture of machinery and equipment along with Czech Republic and Russia.

In terms of value-added growth, the winning sectors for 2008-09 were manufacturing of investment goods and construction, and UniCredit saw the low added-value losers in the region being traditional manufacturing of consumer goods and agriculture. High-profile, world-branded companies have been moving into the winning categories in the region. In Russia, the machinery and equipment sector should benefit from the massive investment program for upgrading infrastructure in the utility sector and energy generation and transmission. Basic metals and machinery and equipment were also seen as high-growth sectors in southeastern Europe. The effect of the crunch on credit available for investment goods will necessarily scale down the growth rate in the top-performing metal-consuming sectors.

European base metals prices are set to continue to fall with surpluses of stock present in the market at least during the first half of 2009. Steel-industry consultants MEPS (International) Limited (Sheffield, U.K.) report that stainless steel sales and prices will fall. Nickel inventory levels held in LME warehouses soared to a nine-year high as stainless consumption fell. MEPS believe that the cash price of nickel will remain below $20,000 per ton due to lack of confidence in the market, but caution will prevent inventory build in the first part of 2009. A modest revival in transaction figures is forecast during the second quarter of 2009 as credit restrictions ease and a potential seasonal upturn takes effect.