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Canada Metals Report Q3 2009
Business Monitor International, July 2009, Pages: 41
The Canada Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Canada's metals industry
The Canadian metallurgical sector will experience a deep contraction in 2009, but the author’s latest Canada Metals Report predicts a rapid return to growth from 2010, with the country set to enjoy some of the highest post-recession growth rates in the developed world, provided US trade protectionism does not get in the way of recovery.
In the first five months of 2009, Canadian crude steel output was down by just over 50% year-on-year (y-o-y) to 3.48mn tonnes as all the main consumers of Canadian metals, notably domestic and US construction and automotive industries, witnessed steep declines in orders and high inventories. By end-Q209, the industry, along with the rest of the manufacturing sector, was suffering from idle or shuttered plants due to the global economic downturn. In Canada, metals service centres shipped 375,500 tonnes of steel products during May 2009, down 40.3% y-o-y. For the first five months of the year, Canadian shipments totalled 2.06mn tonnes, down 35.6% y-o-y. End-May inventories of 1.12mn tonnes of steel products were down 30.3% y-o-y and equated to around three months supply.
Canadian metals output will be helped by increased investment in infrastructure in H209 and 2010 as a result of the government’s stimulus plans. The government’s CAD40bn fiscal plan will have a bit of an impact on economic activity, but not nearly as much as that of the US, which is nearly US$800bn. If Canada can secure some form of exemption from the ‘Buy America’ clause in the US fiscal stimulus package, the domestic steel industry could share in the resulting increase in demand in the US. The author estimates that the US represents 75-80% of Canadian steel exports, the equivalent of around 40% of output. The US downturn has therefore had a deleterious impact on Canadian steel. Consequently, any move towards trade protection in the US would shut Canadian producers out of an economic recovery in North America. This could lead to the permanent closure of capacity for the sake of protecting the less efficient small- and medium-sized US producers that had lobbied for ‘Buy America’. However, there have been encouraging signals from Washington, with US Secretary of State Hillary Clinton stating that the US will work with Canada to find a way to alleviate concerns surrounding the Buy American policy in the US economic stimulus bill.
Recovery will depend on trends within key consuming industries. Canada’s property market generally did not see the same level of over-extension as the US and while the housing boom is over, the market has not collapsed. A return to growth in construction is therefore anticipated in 2010. While 15% steel output growth is expected in 2010 with a similar rate of growth 2011, there are a number of medium- and longterm challenges facing Canadian metals producers. A rapid expansion in global steel production capacity, particularly in China, is a chief concern for the Canadian industry. There are concerns about market distortions resulting from alleged subsidies and dumping by China, but even if these concerns were addressed, Chinese production is becoming more cost-effective as it expands. Canada’s dependence on imported raw materials, particularly bauxite, makes it highly vulnerable to escalating input prices as the world economy picks up. The author believes consolidation is necessary to meet these challenges, particularly among mini-mills. Smaller operations may close, the first of which will be Rio Tinto Alcan’s 52,000tpa Beauharnois smelter, which was to close by end-Q209. The declining domestic and NAFTA manufacturing base will limit the size of the industry and serve as a barrier to expansion. With these factors in mind, the author doubts that annual crude steel production will exceed 16mn tonnes in the foreseeable future and will reach just 14.5mn tonnes in 2013. The author also expects imports to grow at a faster rate than exports, with Canada’s trade surplus with the US set to shrink and increased competition on the global market, particularly from Asia.
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