The worst may be over for the Spanish steel industry, but activity levels in the domestic housing market and a weak and faltering recovery in the automotive industry mean that the recovery will be slow and output will not return to pre-recession levels over the next five years, according to BMI's latest Spain Metals 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 the failure of the Spanish government's EUR4.1bn (US$5.3bn) stimulus package, intended to revive the domestic market and local automotive production. The Spanish market was one of the worst hit in Western Europe in H109, although most automotive output is exported. Residential construction was also very 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 within the Spanish steel industry. In September, ArcelorMittal restarted its Gijón steel mill after it had been shut down for four months, with some sources claiming it was operating at 70% capacity. The mill produces heavy plate, wire rod and rails. This was an encouraging indicator for the steel industry, since ArcelorMittal 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 onto customers 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 20mn tonnes per annum (tpa) of crude steel capacity coming back online across the European Union (EU) in H209, they will face competitive challenges and depressed prices. Much will depend on the strength of the French, German and UK markets, though recovery appears weak and faltering. Although the outlook for 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 the fall in automotive output and production of household appliances and other industrial consumers of flat products, BMI forecasts that hot rolled production will fall by more than 27% in 2009 to around 13.9mn tonnes, as cold rollers supplying the automotive industry cut orders. Meanwhile, the construction industry is in a state of collapse, with Spain's faring the worst in the EU. Consequently, BMI is forecasting a drop in rebar output of over 36% to 2.8mn tonnes. As output will fall to low base, we expect high rates of growth 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 to BMI's automotive team, vehicle output is set to decline by at least 20% in 2009 with only modest growth rates in subsequent years. At the same time production is likely to be mostly concentrated on small cars and to be limited to 1.90mn units by the end of 2013. This will in turn restrict domestic demand for steel and aluminium flat products. With key steel-consuming industries under pressure, BMI forecasts apparent crude and finished steel use in Spain falling 26% and 19% respectively in 2009, with the domestic market stagnating in 2010 before limping to recovery from 2011, as the impact of the recession on the Spanish economy lingers. More troubling for Spanish steel mills is their loss of competitiveness due to energy prices, and BMI forecasts sharper 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 the economic downturn. Domestic production will lose out to foreign imports, although these are likely to also fall by over 24% to 8.87mn tonnes in 2009. A Europe-wide recession and the still relatively strong euro will cause serious problems for the export sector. BMI does not believe the Spanish steel industry will return to 2008 output levels over the next five years, with Spanish producers continuing to face strong competition from Asian producers.
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