Author: Michael Pooler
Posted on: Financial Times | Tuesday 9th January, 2018
After years in the sick ward, Europe’s steelmakers are returning to health.
Some producers on the continent are grinding out their best performances since the 2007/8 global financial crisis, suggesting a deep wound from which the sector had long struggled to recover is finally healing.
Europe’s demand for steel collapsed during the economic downturn that followed, leading to a painful period of factory closures and tens of thousands of job losses as companies such as ArcelorMittal, Tata Steel and ThyssenKrupp sought to cut costs.
These troubles were compounded by China, which makes half the world’s steel. As a construction boom cooled, it unleashed a torrent of cheap imports on to international markets in 2015, driving down the commodity’s value.
On top of this, European companies have complained that the financial burden imposed by EU environmental policies puts them at a further disadvantage.
But a combination of higher global prices for the metal, strengthening demand in the region and protectionist moves by Brussels are fuelling a revival.
Together with internal measures and investments by companies to improve efficiency and offer higher-quality grades and products, the prospects are looking brighter for the industry.
“Financially, things are definitely improving,” says Andrew Zoryk of Accenture, the consultancy. “Is there a fundamental change or is it just cyclical?” he adds. “That’s the $64,000 dollar question.”
Evidence of the recovery came in the most recent earnings season.
Austrian steel and engineering group Voestalpine described its half-year results in November as the best “since Lehman”, a reference to the investment bank’s demise in September 2008 that foreshadowed a deepening of the financial crash.
ArcelorMittal, the world’s biggest producer by output, posted its highest third-quarter core profit figure for its European operations since it began reporting them together in 2014. And Germany’s second-largest steelmaker Salzgitter also celebrated its best nine-month result since 2008.
Analysts reckon there is more road to run.
Across the European steel sector, profitability hit $100 of earnings before interest, tax, depreciation and amortisation per tonne in the third quarter, according to the brokerage Jefferies.
That was well above the post-global financial crisis average of $75/tonne and close to the long-term average of $105/tonne.
“We believe [profit] margins will expand further in the first half of 2018, the rationale being that because of the lag effect in contracts you still haven’t seen the full impact of robust spot market trends,” says Seth Rosenfeld of Jefferies.
Investors appear to agree, as shown by a rally in several European steel stocks throughout 2017. Shares in ArcelorMittal gained more than a quarter, while Voestalpine was up by some 30 per cent and Salzgitter 40 per cent.
“We think the outlook for European steel equities in 2018 is perhaps as positive as we have seen for a long time,” wrote Michael Shillaker of Credit Suisse last week.
Confidence among Europe’s steelmakers has been displayed by a string of investments, such as Voestalpine’s decision to build western Europe’s first specialist steelworks since at least the 1980s at a cost of up to €300m.
A helping hand in the industry’s turnround has come from the EU. Brussels has slapped tariffs on various forms of steel from outside the bloc judged to be dumped — meaning sold below home market prices or the costs of production — or illegally subsidised.
Imports have shown signs of reversing, and the measures are also credited with helping to boost regional selling prices.
Yet more important for steelmakers than prices are so-called spreads: the difference between raw material costs and the prices they recoup. Moody’s says it expects the recovery in European spreads to last, remaining above the 2016 average and supporting profits, although lower than last year’s level.
“Our 2018 outlook for the steel sector in Europe is stable on the back of expected growth in steel demand from the construction and auto industries,” says Gianmarco Migliavacca, senior credit officer at the rating agency.
Mr Shillaker adds: “The global supply/demand balance is healthy with demand strong and constrained output keeping steel spreads high.”
But with China exerting a pivotal influence on dynamics in what is a highly global market, industry figures say that events there will ultimately have a strong bearing on the fortunes of European steelmakers.
A push by Beijing to close unneeded factories, known in industry parlance as ‘excess capacity’, coupled with stronger domestic demand has led to a sharp fall in Chinese steel exports. However, some have questioned whether the pace and depth of shutdowns is sufficient to restore balance in the long term.
A final piece in the puzzle will be the outcome of long-awaited merger and acquisition deals in the European steel industry.
The theory is that fewer players in the market would result in more constrained supply, anchoring prices and so making imports less attractive for buyers.
However, with none of the players involved in the mooted deals indicating any intention to close plants, some analysts believe the benefit for the wider sector may be limited.
India’s Tata and ThyssenKrupp of Germany are in the process of merging their European steel activities into a joint venture, but talks have dragged on for more than a year-and-a-half.
Meanwhile ArcelorMittal’s deal to purchase the continent’s largest steelworks, the Ilva plant in southern Italy, has run into a political storm and is subject to an in-depth EU competition investigation.
“Consolidation is very important,” says Mr Zoryk of Accenture. “Things need to happen to continue to stabilise the industry and strengthen its pricing position against automotive and construction companies.”