Market and product

Swedish steel and aluminium producers should stage a strong recovery in 2010 following a disastrous 2009, but we warn that the risk of a double-dip recession in the eurozone and lagging demand growth in the automotive and construction industries will prevent a return to pre-recession output rates in 2011. In Q110, Swedish crude steel output grew 66% year-on-year (y-o-y) and 19.5% quarter-on-quarter (q-o-q) to 1.2mn tonnes. At 430,000 tonnes, March output was the highest monthly rate since September 2008 and marked a solid return to near pre-recession levels of output. This confirmed our forecast of 47.3% y-o-y growth in crude steel output to 4.13mn tonnes in 2010. This should also correct the 46.2% y-o-y fall in output to 2.80mn tonnes in 2009, which followed an 8.4% y-o-y drop in output to 5.2mn tonnes in 2008, when production was badly hit by the economic crisis. The growth rate will be bolstered by base effects, inventory restocking and global exports, but gross fixed capital formation and household demand will remain restricted.

Hot rolled production is also expected to grow 41.9% y-o-y to 3.67mn tonnes in 2010. However, we expect crude and hot-rolled output rates to plateau after 2011 as a result of saturated export markets and only fully return to pre-recession rates by 2014. Primary aluminium production should see a faster return to normal rates. After halving output in 2009 to 40,250 tonnes, we expect Sweden's only primary aluminium smelter Kubal to return to 2008 rates of output in 2010 at close to 82,000 tonnes and reach full capacity of around 100,000tpa the following year.

Poor performance in the automotive sector had depressed domestic industrial demand for flat products. In terms of consumption, a collapse in domestic industrial output and consumer demand led to a 40.2% drop in finished steel consumption to 2.60mn tonnes, while the aluminium market plummeted 58% to around 123,500 tonnes. This should be partly corrected in 2010, when finished steel consumption is forecast to grow 22.8% to 3.19mn tonnes and aluminium consumption is set to rise 61.2% to 199,100 tonnes. However, consumption levels will still be well below those typical of Sweden before the recession, due to the continued performance of key consuming industries, namely the automotive and construction sectors, which will lag slightly behind other sectors in the recovery phase.

With a strong export base, a relatively stable domestic credit market and a protracted fiscal stimulus programme, we believe Sweden is well positioned to take advantage of a tentative global recovery. We forecast semi-finished and finished steel export growth of 29.5% to 2.85mn tonnes and a 25.3% growth in aluminium exports to around 119,200 tonnes in 2010.

The risks facing the Swedish steel and aluminium industries are on the downside. With a likely hike in the repo rate in H210 to counter inflation, there is a danger of slower domestic private consumption and an appreciation of the kroner that would impact negatively on the prospects for a sustained recovery. Deleveraging and weak consumption remain key drags on demand in parts of the eurozone, which could depress exports in the event of a double-dip recession. In this event, the recovery process would be prolonged, resulting in years of below-trend growth.

(Source: http://www.companiesandmarkets.com)