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Czech Republic Metals Report Q1 2011
Business Monitor International, Jan 2011, Pages: 49
Business Monitor International's Czech Republic Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Czech Republic's metals industry.
The Czech steel industry will be hit by a downturn in demand for semi-finished and finished steel products in its key export market Germany, a situation that will be exacerbated by the expected appreciation of the koruna, according to this latest Czech Republic Metals Report from BMI.
In 2010, Czech crude steel output was up by an estimated 13.5%% y-o-y to 5.22mn tonnes. Although output in August reached its lowest level since October 2009, with production falling each month from March, there was a recovery from September that led to growth exceeding the 9.2% we forecast in the previous quarter. Nevertheless, BMI believes that export weakness, both for semi-finished products and key steel-using industries, such as the automotive sector, are dragging down the recovery of the Czech steel industry. Industry growth will be heavily linked to eurozone demand (particularly that from Germany), given that exports make up 72% of the country’s overall GDP, with almost one third sent to Germany and 57% to the eurozone as a whole. As a highly trade-integrated economy, the Czech Republic is heavily exposed to fluctuations in final demand, with Germany's deep recession and concomitant collapse in industrial orders having a substantial impact on the Czech steel industry. This is in stark contrast to neighbouring Poland, where a more internal, demand-driven growth model (and analogously a lower degree of trade integration), has kept the economy ticking along during the global downturn, preventing outright recession.
As long as the German industrial machine continues to power ahead, Czech exporters will stand to gain. However, we are firmly of the opinion that Q210 marked the peak in Germany's economic recovery cycle, and that its growth will slow through H210 and 2011 due to cooling global demand and fiscal austerity within Germany. Such an outlook does not bode particularly favourably for Czech exporters since Germany is the single largest destination for steel, industrial and consumer goods by a considerable margin. Germany's 31% dominance of the Czech export market is far ahead of the 8% of shipments bound for Slovakia, and we therefore highlight that the slowing of German economic growth that we expect, from 2.8% in 2010 to 1.6% in 2011, will weigh heavily on Czech export growth.
Furthermore, with the eurozone set for a period of austerity there will be little scope for other nations to step in with compensatory demand growth. Indeed, eurozone autos demand (the single largest Czech export as well as a major consumer of Czech steel output) is unlikely to be impressive while eurozone households are under pressure from fiscal austerity and generally tepid labour market recoveries. Another downside risk for Czech steel production is the appreciation of the koruna; we expect the central bank to allow some modest upside in the koruna over the course of 2011, with some scope for currency appreciation being deployed in order to combat import-cost driven price inflation. This casts a shadow over hopes of a revival in exports of Czech steel and products that utilise steel products, and will force players in the sector to diversify their markets. It will also influence decisions by domestic metals consumers that can easily source from neighbouring Poland and Slovakia.
While prospects may seem gloomy, BMI believes restocking and a modest recovery will lead to a 3.9% rise in crude steel output to just over 5.4mn tonnes in 2011 and a 2.7% rise in hot-rolled output to 4.5mn tonnes. However, the recovery will be a drawn-out process, with dampened demand in the eurozone set to ensure no speedy pick up in steel output growth rates until 2012. Nonetheless, by 2015, we believe output will be climbing to new highs.
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