Abstract
The Canadian metallurgical sector will experience a deep contraction in 2009,
but BMI’s latest Canada
Metals Report predicts a rapid return to
growth from 2010, with the country set to enjoy some of the
highest
post-recession growth rates in the developed world, provided US trade
protectionism does not get
in the way of recovery.
In the first five
months of 2009, Canadian crude steel output was down by just over 50%
year-on-year
(y-o-y) to 3.48mn tonnes as all the main consumers of
Canadian metals, notably domestic and US
construction and automotive
industries, witnessed steep declines in orders and high inventories. By
end-
Q209, the industry, along with the rest of the manufacturing sector,
was suffering from idle or shuttered
plants due to the global economic
downturn. In Canada, metals service centres shipped 375,500 tonnes of
steel products during May 2009, down 40.3% y-o-y. For the first five months of
the year, Canadian
shipments totalled 2.06mn tonnes, down 35.6% y-o-y.
End-May inventories of 1.12mn tonnes of steel
products were down 30.3%
y-o-y and equated to around three months supply.
Canadian metals output
will be helped by increased investment in infrastructure in H209 and 2010 as
a
result of the government’s stimulus plans. The government’s
CAD40bn fiscal plan will have a bit of an
impact on economic activity, but
not nearly as much as that of the US, which is nearly US$800bn. If
Canada
can secure some form of exemption from the ‘Buy America’ clause in
the US fiscal stimulus
package, the domestic steel industry could share in
the resulting increase in demand in the US. BMI
estimates that the US
represents 75-80% of Canadian steel exports, the equivalent of around 40%
of
output. The US downturn has therefore had a deleterious impact on
Canadian steel. Consequently, any
move towards trade protection in the US
would shut Canadian producers out of an economic recovery in
North
America. This could lead to the permanent closure of capacity for the sake of
protecting the less
efficient small- and medium-sized US producers that
had lobbied for ‘Buy America’. However, there
have been
encouraging signals from Washington, with US Secretary of State Hillary
Clinton stating that
the US will work with Canada to find a way to
alleviate concerns surrounding the Buy American policy
in the US economic
stimulus bill.
Recovery will depend on trends within key consuming
industries. Canada’s property market generally did
not see the same
level of over-extension as the US and while the housing boom is over, the
market has not
collapsed. A return to growth in construction is therefore
anticipated in 2010. While 15% steel output
growth is expected in 2010
with a similar rate of growth 2011, there are a number of medium- and
longterm
challenges facing Canadian metals producers. A rapid expansion in
global steel production capacity,
particularly in China, is a chief
concern for the Canadian industry. There are concerns about market
distortions resulting from alleged subsidies and dumping by China, but even if
these concerns were
addressed, Chinese production is becoming more
cost-effective as it expands. Canada’s dependence on
imported raw
materials, particularly bauxite, makes it highly vulnerable to escalating
input prices as the
world economy picks up. BMI believes consolidation is
necessary to meet these challenges, particularly
among mini-mills. Smaller
operations may close, the first of which will be Rio Tinto Alcan’s
52,000tpa
Beauharnois smelter, which was to close by end-Q209. The
declining domestic and NAFTA
manufacturing base will limit the size of the
industry and serve as a barrier to expansion. With these
factors in mind,
BMI doubts that annual crude steel production will exceed 16mn tonnes in
the
foreseeable future and will reach just 14.5mn tonnes in 2013. BMI also
expects imports to grow at a
faster rate than exports, with Canada’s
trade surplus with the US set to shrink and increased competition
on the
global market, particularly from Asia.
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