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United Kingdom Metals Report Q4 2009Product Type: Market Research ReportPublished by: Business Monitor International Published: October 2009 Product Code: R302-8489 Description British primary aluminium production faces complete and permanent closure due to EU regulations,while the steel industry is unlikely to recover to pre-recession levels over the medium-term, warns BMI’slatest UK Metals Report.In the first eight months of 2009, British crude steel output fell 39% year-on-year (y-o-y) to 5.99mntonnes. In August, output was down 1.8% month-on-month (m-o-m) and down 30.3% y-o-y at 816,000tonnes. BMI believes that while the British steel industry may have reached a trough, signs of a sustainedrecovery in output are yet to be seen. Furthermore, our steel output forecasts have been revised down asthe UK economy sinks further into recession, with GDP set to shrink 4.2% in 2009 and to stagnate in2010. The economy will not return to its potential growth level until well into 2011. The recovery in the British economy is likely to be stronger than previously expected, with BMI’scountry risk team upgrading the GDP growth forecast for 2010 from 0% to 0.6%, although it still lagsbehind those of key European peers France and Germany in exiting recession. Growth in H209 isexpected to be around zero, with a full-year forecast of -4.2%. The UK’s manufacturing sector will beable to take advantage of a better global trade climate, but the destocking cycle is coming to an end andfavourable base effects should start to come into play. This should improve demand for finished steel andprimary aluminium in the UK, which BMI forecasts will rise 7.8% and 13.3% to 9.35mn tonnes and716,615 tonnes respectively. While BMI expects the UK’s steel and aluminium markets to return to around 2007 levels by 2013, thismay not be enough to ensure the recovery of domestic producers. Aluminium smelting is particularlyvulnerable with some commentators predicting the end of primary aluminium production due to theclosure of power plants under European Union (EU) directives. The closure of Rio Tinto Alcan’sAnglesey smelter in September 2009, in response to a lack of long-term supply of cheap electricity, willreduce primary aluminium production capacity to 221,000 tonnes per annum (tpa). BMI does not expectoutput to reach full capacity until 2013, but without Anglesey it will still be 40% down on 2007 levels. Additionally, there is the reduction in secondary aluminium capacity, with aluminium alloy producer F EMottram (Non Ferrous) Ltd going into voluntary administration in June. In September it was operatingat 50% capacity and was not selling output on the spot market. Rio Tinto Alcan’s Lynemouth smelter isalso in danger as its captive coal-fired power station may also have to close under the EU’s LargeCombustion Plants directive. Smelter closures are unfortunate given the British aluminium industry’sreputation for being highly efficient. The closure of capacity would invariably increase the UK’s relianceon imported aluminium as well as boosting demand for recycled aluminium. Steel output is set to plunge to levels not seen since the 1970s as the country’s largest steelmaker, Corus,slashes output. In 2008, output was down 5.8% to 13.56mn tonnes, and BMI estimates that the decline inoutput in 2009 will total around 27%, with 9.89mn tonnes of crude steel produced. This is an upwardsrevision from the 35% decline forecast in the previous quarterly report, due to the stabilisation ofproduction witnessed in Q309 and evidence that the economy was moving towards exiting the recession. Output should climb by a further 5% in 2010, outstripping demand as the industry feels the benefits of aweak pound sterling exchange rate and imports continue to fall off. Nevertheless, a return to pre-recessionlevels of crude steel output is unlikely over the medium term, with BMI predicting capacity closure and aslow recovery in demand. Much will depend on the construction industry, which has driven growth in thesteel industry in recent years. Table of Contents
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