Steel: Europe Looking East For Growth


BMI View: The outlook for Western Europe's steel sector is bleak as low rates of economic growth and low steel prices disincentivise growth in consumption and production over the next five years. In contrast, we expect rapid growth in Russia and Turkey's steel demand on the back of large infrastructure projects.

Western and Eastern Europe's steel sectors will follow increasingly divergent paths over the coming years. Germany, France and Italy will see subdued growth in steel demand due to low GDP growth rates and a lack of construction activity, whilst production will remain muted on the back of low steel prices and the absence of expansion plans. In Russia and Turkey, the situation is almost diametrically opposed as the countries embark on significant infrastructure and construction development. Regarding production, both countries have significant projects on the horizon, despite low global steel prices and the presence of cheap Chinese steel exports.

Russia & Turkey To Increasingly Dominate Output
Europe - Incremental Steel Consumption Growth

Production: Bleak Outlook For Western Europe

The production outlook for Western Europe's metals sector is unpromising as overcapacity in the global steel sector will continue, thus reducing incentives to invest. Out of the major European steel producers, France has the most bearish outlook. Following ArcelorMittal 's decision to close the Florange steel mill in December 2012 , the government proposed a 'temporary nationalisation' and resale of the Florange facilities regardless of ArcelorMittal's protests in order to save jobs . Whilst this solution has since been ruled out t he uncertainty surrounding Florange and the government's public relations disaster over its future has negative implications for any further investment in French steelmaking. Indeed, in France, and much of Western Europe, there are no major projects as the outlook for steel prices remain s weak.

Turkey & Russia Lead The Pack
Europe - Real Growth In Construction Industry Value, % y-o-y

Russia and Turkey will be the main growth drivers in steel production in Europe over the coming years. We forecast Russia's steel production to increase by an average of 2.2% over the period to 2017 as Severstal and Magnitogorsk increase output. In Turkey, i n addition to several significant steel projects, the country also has relatively low capacity utilisation rates compared with other major steel companies. Producers can therefore increase production relatively easily to match growth in domestic demand.

Look East For Growth
Europe - Incremental Steel Demand Growth

Consumption: Turkey & Russia To Become Major Global Players

We expect Turkey to be the key growth driver of steel demand in Europe over the period to 2017. This bullish outlook is based on our expectation that the country's construction sector will see 6 .5% y-o-y real growth over the next five years, underpinned by a healthy project pipeline. These include; the re-launched tender for the North Marmara Highway project , the announcement of a third Istanbul airport, the completion of the Ankara to Istanbul high speed railway, and increased investment in the country's gas sector. A major urban redevelopment plan - which plans to offset the demolition of estimated 6.5mn buildings - will bolster the residential and non-residential sector. Overall we expect Turkey to become Europe's second largest steel consumer, at 42mntpa in 2017, marking average annual growth of 8.3%

Steel Demand To Reflect Macro Picture
Europe - Real GDP Growth % y-o-y

Russia will also see strong growth in steel demand, given the country's construction-heavy growth. S teel consumption will be boosted by the country being awarded a number of large-scale events to host in the country, which has brought with it substantial investment into construction. These events have included the announcement of Russia hosting: the 2018 FIFA World Cup, where 16 existing sports venues will be renovated and 13 new venues will be built, estimated to require more than 3mnt of steel; the 2014 Sochi Winter Olympic Games, which will see the construction of 15 modern sports venues; and the 2013 Summer Universiade Student Games, with 36 new sporting venues are to be built.

Declining Margins As Prices Weaken
Select European Steel Companies - EBIT Profit Margin (%)

Negligible Demand Growth In Western Europe

The divide between Eastern and Western Europe's metals sector is most stark in steel consumption. Whereas Turkey and Russia will see demand pick up, we forecast very modest growth, and slight declines, in consumption in Europe. Germany, currently Europe's second largest steel consumer, will see only modest growth as demand is dragged down by the country's wider economic malaise. Germany's economic outlook remains clouded by the continued risk of a eurozone break-up scenario, which would lead to an immediate collapse in fixed investment and hit external demand for German exports very hard. Even with this scenario remaining outside of our baseline view, uncertainty over the ongoing eurozone crisis will keep business and consumer confidence levels s ubdued, thus hurting investment not only in Germany but much of Europe. The outlook for the Spain, France and Italy is even more bleak, given our forecast for negligible real GDP growth and the lack of expansion the countries' respective autos sectors, a key source of steel demand.

Major European Steel Producers -Financial Data
Company Country Market Cap (Local Currency) Revenue (US$mn) Net Income (US$mn) Profit Margin (%) PE Ratio
Source: BMI, Bloomberg
Chelyabinsk Russia 16,283 113,971 496 0.4 30.8
BHP Billiton PLC UK 121,149 72,226 15,417 21.3 17.4
Rio Tinto PLC UK 66,893 50,967 -2,990 -5.9 na
ThyssenKrupp AG Germany 8,638 40,124 -4,668 -11.6 na
Evraz PLC UK 3,823 16,400 461 2.8 na
Severstal OAO Russia 281,055 14,104 762 5.4 12.8
Aurubis AG Germany 2,374 13,789 361 2.6 10.1
Mechel Russia 68,685 12,546 728 5.8 na
Eregli Demir ve Celik Turkey 7,076 9,570 424 4.4 19.1
Kardemir Karabuk Demir Turkey 1,461 1,586 185 11.7 7.3
Izmir Demir Celik Sanayi AS Turkey 1,189 1,424 53 3.7 48.3

Turkish Steel Producers Well Placed For Growth

Given our bullish outlook for steel demand in the country, we highlight Turkish steel producers as relatively insulated from weak prices and the flood of Chinese exports. Indeed, steel's relatively low value to volume ratio reduc es the attractiveness of long distance trade, thus making domestic producers more appealing. We highlight Erdemir and Eregli Demir as two of Turkey's largest steel producers, which have performed well of late, maintained relatively high margins and should benefit from Turkey's growth.

Europe - Steel Production & Consumption Forecasts (mnt)
Source: BMI, WSA
Production 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Global 1,165 1,363 1,444 1,438 1,484 1,528 1,569 1,612 1,652
% change y-o-y -12.8 17.0 5.9 -0.4 3.2 3.0 2.7 2.7 2.5
EU-27 123 155 159 156 156 158 160 161 162
Russia 60 67 68.7 70.2 71.4 73.2 74.8 76.6 78.2
Turkey 25.3 29.1 34.1 36.1 38 40.4 42.8 45 48.1
Germany 32.7 43.8 44.3 42.5 42.6 42.5 42.6 42.6 42.7
Ukraine 29.8 33.6 35.3 34.9 35.8 37 38.4 39.6 40.4
Italy 19.5 25.9 28.7 27.7 27.1 27.5 27.9 28.2 28.5
Spain 14.4 16.3 15.6 15.3 15.2 15.4 15.6 15.7 15.9
France 12.8 15.4 15.8 15.3 15.4 15.5 15.7 15.8 15.9
Consumption 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Global 1,079 1,250 1,314 1,346 1,387 1,432 1,471 1,510 1,551
% change y-o-y -11.8 15.8 5.1 2.4 3.0 3.2 2.7 2.7 2.7
EU-27 113 145 154 149 149 152 153 155 157
Russia 28.5 41.5 40.5 41.8 43 44.3 45.4 46.9 48.2
Turkey 19.2 25.1 28.7 30.2 32.7 35.3 38 40.3 42.9
Germany 29.4 41.1 42.7 40 40.1 40.9 41.6 42.2 42.9
Italy 19.5 26.6 28.9 28 27.3 27.7 27.4 27.5 27.7
France 12.3 15.5 16.3 16 15.8 15.9 16 16.1 16.2
Spain 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9
This article is tagged to:
Sector: Metals
Geography: Germany, Europe, Germany, Spain, France, Italy, Russia, Turkey, Europe, Europe

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