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Czech Republic Metals Report Q4 2011
Business Monitor International, Oct 2011, Pages: 49
Recent data show that the Czech steel industry has fared better than expected, but this latest Czech Republic Metals Report from BMI forecasts a less optimistic scenario as the German market slows and the industry loses competitiveness.
In the first seven months of 2011, Czech crude steel output grew 7.7% year-on-year (y-o-y) to 3.36mn tonnes, which followed a year when production was up 12.7% to 5.18mn tonnes. Although the Czech Republic has not experienced the same decline in monthly output seen elsewhere in Europe, the rate of growth is troubling for Czech producers, who will require higher rates of output to return to pre-recession norms. Production in March and April 2011 was down on the same months in the previous year, although it picked up and average monthly output was 20% lower than the level seen before the financial crisis hit the industry in 2008.
Despite the failure to return to full capacity, performance in Q211 was better than BMI had anticipated. As a result, BMI have raised their crude steel output growth forecast for 2011 from 5.7% to 8.9% with production at 5.64mn tonnes, up from 4.78mn tonnes. However, the anticipated downturn in the German market has prompted us to downgrade their output forecast for 2012 from 6.70mn tonnes to 5.79mn tonnes. Recent data releases out of Germany point to slowing economic activity and suggest that the sharp decline in business confidence witnessed in August has further to run.
Accordingly, BMI believe that Germany’s impressive growth dynamics in late 2010 and during the first quarter of 2011, which prompted a more optimistic medium-term forecast, have marked the peak of the economic recovery cycle. This year also signals the onset of fiscal austerity both in the Czech Republic and in many of its main export markets. This drive to rein in fiscal deficits will weigh on domestic demand at home and abroad, restraining growth in Czech industrial production. Surveys indicated that business confidence had dropped to low levels by Q211, with manufacturing growth at the lowest level for 15 months in May as new orders weakened. BMI see finished steel consumption growth falling from 22.5% in 2010 to 9.0% in 2011 and 2.0% in 2012. However, based on the World Steel Association’s newly published data for 2010 that showed stronger growth than BMI had estimated, BMIanticipate an earlier return to pre-recession consumption levels, despite the reduction in the forecast 2012 growth rate. Instead of taking until 2015 to exceed the pre-recession peak of 6.57mn tonnes in 2007, this level should be achieved by 2013.
BMI believes 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. As such, export growth is set to decline from an estimated 19.8% in 2010 to 6.6% in 2011. The central bank has indicated that it may start raising interest rates to combat inflationary pressures, which will limit domestic demand growth and put upward pressure on the koruna. BMI forecasts the currency will rise from CZK25.08/EUR at end-2010 to CZK23.60/EUR at end-2011, which will limit its export growth and further frustrate its bid to increase exports to the increasingly lacklustre German market. An increase in interest rates would both undermine domestic metals consumption and put upward pressure on the value of the koruna, thereby undermining competitiveness. The Czech steel industry’s dependence on longs production, which represents two-thirds of Czech output, means that it will mirror the flat-lining of the European construction industry.
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