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United Kingdom Metals Report Q3 2009
Business Monitor International, July 2009, Pages: 43
United Kingdom Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on the United Kingdom's metals industry.
British metals producers are in serious trouble with drastic cuts in capacity and workforce expected as they struggle to cope with falling prices and rising costs at a time of exchange rate volatility and restricted credit conditions, according to this latest UK Metals Report.
In the first five months of 2009, British crude steel output fell 42.6% year-on-year (y-o-y) to 3.55mn tonnes. In May, output was up nearly 15% month-on-month (m-o-m) but was still down 42% y-o-y at 773,000 tonnes. While the British steel industry may have reached a trough, it is not seeing any signs of a sustained recovery in output. Furthermore, our steel output forecasts have been revised down as the UK economy sinks further into recession, with GDP set to shrink 4.2% in 2009 and to stagnate in 2010. The economy will not return to its potential growth level until well into 2011. A deep and long recession is already having a negative impact on UK metals production capacities, with Corus radically cutting back steelmaking production while aluminium smelters close their operations. While the UK is faced with the same problems as the rest of the world, it also suffers from poor payment performance and suppliers reluctant to extend credit without insurance. Struggling with flagging orders, suppliers are forced into high risk lending and exposure to bad debt. This could exacerbate the problems facing the industry over the medium term, particularly as closures are expected in the supply chain. By 2010, the steel and aluminium industries, along with distribution and consumption, are likely to be very different and quite likely a lot smaller.
A major risk factor is exchange rate volatility, with forecasts of a weakening of pound sterling towards the year-end. This will raise the cost of raw materials such as coking coal, iron and bauxite/alumina. With producers struggling to pass on cost rises to their customers, they will incur substantial operating losses in 2009 and into 2010, and that a significant amount of capacity will be taken offline, possibly permanently. An additional factor is the solvency crisis across British industry, combined with a lack of credit availability which will ensure that metals purchases will remain low until at least Q110.
Steel output is set to plunge to levels not seen since the 1970s as the country’s largest steelmaker, Corus, slashes output in response to the slump in the international steel market. Corus launched a restructuring programme involving capacity cuts in January. In Q109, Corus said it had 40% of its production capacity sitting idle in response to a 40% cut in orders. In May, Corus’s lenders agreed to reset the terms and conditions of a GBP3.7bn (US$5.6bn) loan that was taken at the time of Tata Steel’s acquisition of Corus, although this will not ensure future financing. Meanwhile, UK Prime Minister Gordon Brown has personally intervened in the campaign to save Corus’s Teeside Cast Products (TCP) plant and the jobs of its 3,000 workers. The plant’s woes are related to the cancellation of orders by a four-member international consortium led by Italy’s Marcegaglia, which tore up a 10-year contract signed in 2004 to take nearly 78% of the plant’s output up to 2015. Marcegaglia and Dongkuk signed a MoU to buy TCP in January, but by June had yet to announce their intentions with the plan thrown into doubt by the drastic cut in orders. The decline in steel output in 2009 will total around 35%, with 8.77mn tonnes of crude steel produced. The aluminium industry will also fare badly with a 43% fall in output to 185,000 tonnes. The planned closure of Rio Tinto Alcan’s Anglesey smelter in September 2009, in response to a lack of long-term supply of cheap electricity, will reduce primary aluminium production capacity to 221,000 tonnes per annum (tpa). This development, along with projected cuts in output, will drag primary aluminium production down to 185,000 tonnes in 2009, a 42% y-o-y fall.
Output will not reach full capacity until 2013, but without Anglesey it will still be 40% down on 2007 levels. Additionally, there is a reduction in secondary aluminium capacity, with aluminium alloy producer F E Mottram (Non Ferrous) Ltd going into voluntary administration in June. The company had smelting capacity of 25,000 tpa and was one of the largest secondary aluminium producers in the UK. Most of its customers are in the automotive industry, such as Nissan, Honda and Toyota.
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