Deutsche Bank: Steel Production To Remain Sluggish In Europe

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Production in the European Union's all-important steel industry will remain sluggish in the coming years, a report released by Deutsche Bank said Friday. The German firm also stressed the need for innovation in the steel making industry, in order for Europe to remain competitive against the booming rise of the Asia as a steel producer.

Steel production is one of the key industrial sectors in the European Union. Across the EU-27, the steel industry currently accounts for around 6% of total industry turnover. Each year, the sector produces around 200 million tonnes of crude steel and currently employs roughly 400,000 people in the EU-27.

From 1998 to 2007, the annual crude steel output in the EU-27 inched up by a mere 1% per annum to about 199 million tonnes, a rate of increase well below the world steel market average of 6% per annum. This nominal growth is because of the already high level of production in Europe and the declining importance of steel-intensive sectors. Per capita consumption in the EU-27 of around 370 kg is the highest in the world, as against a global average of 190 kg.

The current situation in the steel industry makes for a grim reading. As the international financial crisis deepened in September 2008, the international steel industry spiraled into an abrupt decline. In the first-half of 2009 crude steel output in the EU-27 was down 43% on the previous year as demand plunged.

Industries such as automotive production, mechanical engineering and construction - on which steel production is heavily reliant - all contracted drastically. European carmakers' production crumbled by almost 40% year-on-year, while mechanical engineering was down 20%. The shipbuilding and construction industries declined 10% each.

Considering the close links between crude steel output, GDP and industrial production, the report projects expansion in crude steel output to be sluggish over the medium term for the EU-27. The firm said demand for steel will be dominated by the construction, automotive and mechanical engineering sectors which together use almost 60% of all steel produced in the European Union.

Development in the construction industry is likely to be very moderate in the coming years, with the number of housing completions expected to slump in Western Europe. In the automotive industry, the property and financial market crisis has dimmed the medium term outlook for European carmakers. Motor manufacturers have responded to the waterfall drop in sales by slashing their production down by about 30% from the high unit figures of 2007. In the mechanical engineering sector too, rates of expansion are expected to be no more than moderate.

Overall, the firm expects crude steel production in the EU-27 to contract around 25% on year for the whole of 2009, but predicts growth of 10% in 2010 as a result of restocking effects. Further, the report said that the European Union's share of world crude steel output will fall to 11% by 2015 and a meager 8% by 2020, from a share of 15% in 2008.

The fall in share is not because of declining production volume, but a rise in output from emerging markets. The firm projects Asia's share of crude steel production to soar to 72% by 2015 from a share of 56% in 2008.

However, a window of opportunity for the European steel industry is that demand for special steels in the highly-developed countries is increasing. Also, the effects of climate change and the measures companies will have to take to reduce carbon emissions could trigger greater investment in the steel industry. For example, alternative methods of generating electricity could offer a huge advantage to steelmakers. At present, more than 100 offshore wind farms are under construction in Europe, each requiring about 3000 metric tonnes of steel.

The European Union must brace itself for tougher competition in the future, with the emergence of Asia, and China in particular, as a major competitor. As well as developing and modernizing their downstream activities, the major challenge for steelmakers in Europe is to prevent the gap to low-cost suppliers in Asia from widening too much if they want to remain competitive, the report said.

Production in the European Union's all-important steel industry will remain sluggish in the coming years, a report released by Deutsche Bank said Friday. The German firm also stressed the need for innovation in the steel making industry, in order for Europe to remain competitive against the booming rise of the Asia as a steel producer. (Market News Provided by RTTNews)