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Australia Metals Report Q4 2011
Business Monitor International, Sep 2011, Pages: 60
H111 saw a broad continuation of the trends in Q111, whereby production and consumption of refined metals continued to rebound. However, we note that growth in general has started to slow accross production in the industrial metals complex, with steel and zinc production contracting in recent months. BMI continues to expect moderate growth in the production and consumption of refined metals across most sectors in Australia over the forecast period to 2015.
Recent production data suggests the the Australian steel market is struggling, with steel output collapsing in over the past few months, and as such, we have revised down our forecasts to 6.67mn tonnes in 2011, from 7.02mn tonnes in 2010. Indeed, during the period from May to June, steel output fell by a monthly average of 18% year-on-year (y-o-y), with a 27% decline in July alone. The recent decline in production saw output for the first seven months of the year fall by almost 3%, which suggests a decline for the full year, particulary given the news that trading conditions remain weak. The poor performance in recent months has two main implications. First, there are serious risks to the recovery of the domestic steel market, and this will lead to continued overcapacity. Second, it will take longer for output to surpass precrisis levels over the forecast period, which we only see happening after 2015. Moreover, BlueScope Steel Ltd's board anounced a major restructure of Australian operations following the continued losses.
Indeed, the restructure, according to a company press release, includes the shutting down of the No.6 Blast Furnace at Port Kembla and the closing of the Western Port Hot Strip Mill. Graham Kraehe, Chairman of BlueScope argued that these moves will help the company align its steel production with that of Australian domestic demand and will see BlueScope exit the Australian export business. Despite a rebound in Q111 zinc output, increases have faded somewhat, with the World Bureau of Metals Statistics (WBMS) reporting no change y-o-y in production for the first half of the year. Indeed, the 8% y-o-y increase in output at at the Hobart smelter in H111 was offset slightly by a 13% decline in production at Port Pirie. The remainder of the decline must have come from Sun Metals' townsville smelter (owned by Korea Zinc), although data has not yet been released. Given these dynamics, we have revised down our forecasts for 2011 to 521kt, from 528kt previously. Over the forecast period the increase in supply will be driven by Nyrstar, which plans to raise output to respond to growing demand from China. The second major refiner, Sun Metals, stated that it plans to slowly expand output over the coming years, but has not revealed any figures.
Australian refined aluminium declined marginally in 2010 to 1,928 thousand tonnes (kt). Despite the 0.6% decline from 2009 levels, we expect output to increase marginally in 2011 to 1,986kt and over the forecast period to 2,149kt as higher prices and still-strong demand, particularly from Asia, offers production and export incentives to refiners operating in Australia. Moreover, despite the floods in Queensland, which temporarily affected Rio Tinto Alcan's output from Boyne Smelters Limited, transport operations have returned to normal.
Despite strong production at BHP Billiton's Nickel West smelter, according to the World Bureau of Metals Statistics (WBMS), output in the first six months of the year was down 7.6%. This poses significant downside risks to our 2011 forecasts of 111kt. That said, we continue to forecast an annual average growth rate of 4.0% from 2011-2015. Growth will be driven by several expansion plans as higher prices provide producers with incentives to increase output. This growth will mark a trend change from the static output of refined nickel seen over the last five years.
Latest data from the World Bureau of Metals Statistics (WBMS) suggest that Australia's refined lead production contracted by 16.1% y-o-y in the first six months of the year, despite a small bounce in Q111. This decline in output follows from the 20.5% decline registered in 2010, and we now see a contraction of 8.0% to 171,000 tonnes for the full year in 2011. Indeed, Nyrstar's Port Pirie reported a decline of 11.0% y-o-y in the the first half of the year. While the company claimed that performance issues have now been resolved, we are less confident.
The majority of Australia's refined metal output is for export, with Asia and particularly China accounting for the largest share. We therefore assign downside risks to our forecasts on the back of an expected slowdown in Asia's economic growth in 2011. Domestic demand for Australia's refined metal production is dependent on the country's economic growth rate, and we forecast modest growth until 2015 as the economy gradually recovers from recession. However, any reduction in the growth rate would have a detrimental effect on consumption levels for metals.
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