Italy Metals Report Q1 2012

Includes 3 FREE quarterly updates

The Italian steel industry continues to enjoy one of the strongest performances in the EU, contributing a fifth of overall EU growth in output. However, we have a cautious view on the future of the sector, in line with our below consensus views on eurozone economic growth, which we expect to dip into recession in 2012.

In the first eight months of 2011 Italian crude steel output grew by 5.5% year-on-year (y-o-y) to 17.2mnt (mn tonnes), representing 19% of the increase in EU steel output over the period. Output is set to rise further through the rest of 2011 following the restarting of No.4 blast furnace, operated by Riva Group subsidiary Ilva, in Taranto in April 2011. The blast furnace has been completely rebuilt with new technology, reducing its energy consumption and coking coal needs thereby raising profitability. The rebuild cost is estimated to be EUR240mn.

The state of the Italian metals industry will mirror that of the overall industrial sector. Italy has thus far been unable to counter the losses in production endured during the global economic crisis, unlike Germany, which has enjoyed somewhat of an industrial renaissance on the back of strong demand from emerging markets.

Longs consumption appeared to hold up in Q111, with output and imports both up, although growth remained stronger in the flat segment. A lacklustre performance in the construction sector will continue to weigh on Italian steel consumption. Italian metal production has some way to go before recovering to previous levels and is likely to lag behind domestic consumption, with imports benefiting from any growth in the market. As such, there is still plenty of potential for the domestic metals market to grow.

The Italian economy remains anchored on the road to recovery, but a return to previous trend growth rates seems unlikely for now. The Italian economy continues to distance itself from recession, although the latest data highlight the weakness of the recovery with growth rates lower than trend growth before the global financial and economic crisis and compared with the recovery from the recession in the mid-1990s. Clearly this time around the Italian economy is struggling to regain momentum. As such, we believe the economy will grow at a tepid 1.1% in 2011. Consequently, we see Italian consumption of steel moderating in H112, although a downturn is unlikely. Political uncertainty may hinder steel production as the new government has yet to announce any stimulus plans for the steel sector. Indeed, the new government's austerity measures will probably lead to a lack of capital for the steel sector and may restrict growth opportunities.