A strategic resource European metals industry hit by global overcapacity

A STRATEGIC RESOURCE

The European metals industry has been hit hard by global overcapacity, but it still has a vital role to play in the wider economy. Sean Milmo reports.

The European metals sector is facing huge challenges at the moment, the outcome of which could dictate its longterm future within the region’s economy.

A major problem is the impact of production overcapacity in China, which has led to a flood of low-priced imports, particularly of steel and aluminium, stemming from a growth slowdown in the country

This may be resolved over the next few years as Chinese domestic demand picks up to provide a more equal balance between supply and demand. However, in the longer term competition on the global arena from the metals industries of China and other emerging markets could potentially be a severe threat.

In addition, European metals producers face difficulties at home from continued high energy costs – which put them at a competitive disadvantage internationally – and the effects of climate change measures from the European Union.

Much of the European metals industry’s troubles – from imports and issues like energy costs – are affecting the bulk end of the sector the most. This has prompted commentators and even politicians to urge the industry to concentrate less on defending its commodities businesses and more on the added value and higher tech sections.

Industry representatives are stressing the importance of the sector maintaining a strong commodity segment to provide a crucial support for a series of value chains which in their entirety can be world leaders. While metals are crucial materials in sectors like transport, engineering and construction, they are also vital to technologies in high tech segments, such as electronics and aerospace.

The industry also believes that it can make a massive contribution to Europe achieving its ambitious aims on climate change. The European copper industry reckons that its sector alone can make substantial cuts to CO2 emissions through the supplies of its metal to downstream industrial, residential and service sectors.

“It is not a pipe dream,” says the European Copper Institute (ECI) in a recent report on the decarbonisation of Europe. “By 2050, copper can reduce the European Union’s carbon emissions by 25 per cent – more than 1100 million tonnes per year. With proper investment in this oldest of mined metals, copper can help to achieve the decarbonisation goals of the European Commission.”

The steel, aluminium and copper industries feel they have a big role to play in enabling the European Union to establish circular economies in which the resource value of products are retained as long as possible. The industry’s message is that this is essential not only to combating global warming but also to making the best use of resources which are often scarce.

“A strong and innovative steel sector is key to meeting the EU’s objectives for a prosperous, sustainable, resource-efficient

and low-carbon European economy,” says Robrecht Himpe, president of the European Steel Association (Eurofer).

Metal products are especially suitable for reusing, refurbishing and recycling. Some copper products are still being reused decades after they were first placed on the market, while aluminium products have been recording some of the highest recycling rates of any sector in Europe.

“The retention of the (aluminium) industry’s value chain offers the biggest potential in terms of growth and employment along with climate and environmental objectives,” Roeland Baan, chairman, European Aluminium Association, told a conference late last year in Rome.

Radical market changes

Yet most of the main metals sectors in Europe have been taking a battering over the past 1–2 years from the effects of radical changes in the global metals market. This has raised doubts about their long-term survival as industries covering a full range of products from the bulk to the top premium categories.

The biggest influence behind the changes has been China, which has been rapidly expanding metals manufacturing capacity – particularly in steel and aluminium but also smaller segments like nickel pig iron.

A relatively sudden decline in the country’s fast growth has led to excess metals output which has been diverted into export markets, particularly those in Europe. Chinese exporters have been able to take advantage of state subsidies and export rebates to slash their prices so that metal prices have been tumbling across the globe.

Furthermore, the slowdown in China has hit other emerging economies which have also been left with surplus output. A lot of this has been sold off in Europe as well, putting additional pressure on prices.

A fall in steel prices last year has continued into 2015, reflecting a sharp drop in prices for iron ore and scrap steel. Global prices of the two main sources of steel raw materials have dived by around 65 per cent since last year to below $50 per tonne.

Aluminium prices have plummeted by around 30 per cent in the past year to levels similar those in the 2008 financial crisis. Prices of copper have dropped by around 25 per cent in a year so that they are now close to half of what they were five years ago.

Nickel prices are nearly 40 per cent below those of a year ago and close to three times lower than five years ago. Zinc prices have gone down by around a third in a year but unlike most other major metals are still higher than they were after the 2008 debacle.

While prices have been going down, imports into Europe, especially of steel and aluminium, have been increasing sharply. Steel imports into Europe are predicted by Eurofer to rise by 10 per cent this year, after a 12 per cent increase in 2014. In the second quarter of this year imports spiked by 16 per cent.

Chinese producers accounted for a large proportion of the imports as the country’s total steel exports are now at levels four times higher than they were in 2009. Imports have also been increasing, although to a lesser extent, from Russia and Ukraine. Steel imports from all three countries into Europe amount to 60 per cent of the total.

The EAA warned this summer that Chinese exports of aluminium products to Europe had risen by almost 30 per cent since the beginning of 2015. In addition, in most market segments the growth of these exports to Europe was 2–3 times larger than the growth of Chinese aluminium exports to the rest of the world.

The combination of falling prices and rising imports, not just in Europe but across the world, are now at levels which are dragging large proportions of commodity metal producers into the red.

However, in most sectors there is little sign of sufficient capacity cutbacks to bring supply and demand into closer balance to bring about a recovery in prices.

“In aluminium, we have the all-in price showing that around 60 per cent of the Chinese smelters are loss making at current price levels,” Julian Kettle, vice-chairman of

metals and mining research at the UK-based analysts Wood Mackenzie, told a LME Week meeting in London in October. “But in China, state support and the need to generate VAT receipts and power cross-subsidies will mean that cutbacks will be a long time coming.”

In nickel 55 per cent of the global industry is loss making on a cash basis at current price levels. “But there appears to be little appetite to cut capacity with just 30,000 tonnes of production cutbacks so far,” said Mr Kettle.

Of all the major metals, zinc is probably the best positioned in terms of supply/demand balance with only 10–15 per cent of zinc miners losing cash at current price levels, according to Mr Kettle.

Lower prices for bulk metals have been benefiting metal product manufacturers further up the value chain, who are paying less for their raw materials. Cheaper metals are also helping to boost demand for metal products among end-users.

Overall steel demand has been increasing in Europe, even in the UK which is one of the few countries to be hit by steel capacity closures. Steel consumption in Europe is forecast by Eurofer to go up by 2 per cent in 2015 and close to the same level next year.

Demand for aluminium has been growing in segments like transport, packaging, engineering and other sectors where low volume and low weight materials are required. “The full potential of reducing weight with aluminium (in automobiles) remains untapped,” said Gerd Goetz, EAA director general.

However the surge in imports of lower grade metals has generated tensions along value chains in Europe, particularly after the European Commission has taken anti-dumping actions against products to increase prices of imported steel products.

Eurofer welcomed a decision in October by the European Commission to impose Minimum Import Prices (MIPs) for grain oriented electrical steel (GOES), used to make transformers. The imports come from China, Japan, Korea, Russia and the US.

“The European Commission found evidence of severe dumping of GOES on the EU market,” said Axel Eggert, Eurofer’s director general. “The severe dumping has resulted in significant losses for EU producers and has damagingly undermined (by the sourcing dumped products) the EU’s GOEStransformer value chain.”

T&D Europe, representing electricity transmission and distribution equipment manufacturers, expressed in a statement its disappointment regarding the antidumping since “it does not represent a fair and balanced outcome.” It claimed that the introduction of MIPs would “create an unnecessary market distortion to the detriment of the EU transformer industry.”

Most analysts are predicting continued low metal prices amidst further rises in cheap imports into Europe and other developed regions for a few more years at least.

Associations like Eurofer and the EAA are warning that the imports, particularly from China, are already making inroads into added-value segments. The volume of finished Chinese steel products soared by 40 per cent year-on-year. There have been similarly large increases in imports of Chinese semi-finished aluminium products.

There is a danger that as exporters like China move into higher grade products, established European value chains will become disjointed and EU ambitions to set up sectors based on circular economies will be undermined. n