Czech Republic. Steel sector sees cautious gains

Czech Republic. Steel sector sees cautious gains. The Czech Republic's steel industry recovery remains "very fragile so far," a spokeswoman for Evraz Vítkovice Steel (EVS) told The Prague Post, a cautious forecast that reflects industry leaders' hopes for the next few years.
EVS' own operations in the country recently surmounted a pricing dispute that put its steelmaking facilities out of production for four months, as the company relied on ArcelorMittal Czech Republic for its liquid pig iron, the material needed to make steel. An agreement reached Nov. 1 laid out a contract that will supply EVS with 80 percent of its pig iron needs for the next five quarters, an annual minimum of 550,000 tons. The remaining portion will be provided by suppliers in Slovakia, Ukraine, Turkey and other countries.

With the agreement, EVS can resume operations at its steelmaking factory. EVS has a separate plate mill in the Czech Republic, where the company produces plates used in shipbuilding and construction, which acquired raw steel through other channels during the price dispute.

"We would rather refrain from providing these business details. It's important that the temporary shutdown of the steel [factory] had no impact on the operations of our rolling mills, which continued to meet demand from our customers," spokeswoman Lenka Mičková said.

The steel factory will resume operations Nov. 20, and is expected to reach its full capacity in December, she added.

Ups and downs.

The country's steel industry has had a rocky year. Though crude steel output was up 27.4 percent on the year to 3.12 million tons in the first seven months of 2010, production has fallen each month since March, and July's output was the weakest since October 2009, according to Business Monitor International's Czech Republic Metals Report. Total output of crude steel was 7.1 million, 6.4 million and 4.6 million tons in 2007, 2008 and 2009, respectively.

This year's growth is therefore being measured against a low baseline. Steel production dropped 27 percent on the year in 2009, and steel companies' sales dropped 38.7 percent, according to the Czech Steel Federation, whose members include ArcelorMittal Ostrava, EVS and Třinecké železárny. In the worst year for the steel industry since 2000, producers posted total losses of 4.1 billion Kč in 2009, following profits of 11.2 billion Kč in 2008.

Growth is even expected to weaken in the next months, and the report even forecasts a contraction in the final quarter of 2010 and into 2011 as demand wanes from the eurozone, where the Czech Republic exports the majority of its steel. Most crucially, demand is expected to weaken from Germany's industrial sector, the Czech Republic's biggest customer.

"Given our view that eurozone demand will remain weak through the medium term [with German growth forecast to fall to 1.5 percent in 2011, from 2.0 percent in 2010], we do not believe that the Czech Republic's steel industry will undergo a V-shaped recovery," the reports stated, citing low demand in the construction, automotive, industrial tools, machinery and consumer industries.

"The German consumer is going to remain highly subdued. This casts a shadow over hopes of a revival in exports of Czech steel, and products that utilise steel products."

In 2009, revenues from exports dropped 38.8 percent on the year, according to the federation.
The recovery remains shaky, but the Czech industry has already seen the bottom, according to Pavel Hlavinka of the Czech Association of Foundries, who said at a Brno engineering fair he expects the steel sector to grow about 5 percent in the next few years and return to pre-crisis levels in five to six years.

The success of the steel industry has diverged as demand for its products has fallen. Construction continues to lag coming out of the recession, and steel products produced for that market have outstripped demand. The Czech Republic's industry is relatively diversified compared with other EU members, who have seen greater collapse in their industries as a result of over-reliance in the construction sectors, said Peter Fish, managing partner of MEPS, a global steel-sector consultancy company based in London.

"I don't think the Czech Republic is so heavily dependent on construction," he told The Prague Post. "There's a fair amount, I would say with road building and things like that, but not to the same extent as other EU countries. The UK in particular went crazy, and Poland had a lot of government investment in construction projects."

With electricity and fuel prices expected to rise next year, steelmakers will also have to grapple with rising costs on top of demand that is rising only incrementally. A strengthening Czech crown will also mean tougher times for exporters, an MEPS report noted.

Investment activity on the steel market remains minimal, Fish added, the only mergers taking place are meant to cut costs and streamline operations.

"Now that the boom's gone away, mergers are more to do with cost-saving exercises and synergizing. It's difficult even to envisage investments at the moment," he said. "In the West, I think construction's starting to pick up, but it's picking up from a very low base, and I don't see many countries getting back to pre-crisis levels until 2014 or 2015."

Because steel is so tied to construction and industry, it tends to show the extremes of both the highs and lows of economic cycles, he said.

"This industry had a great time during the construction boom. Virtually all construction needs steel except for the very smallest houses. Apartments, factories, infrastructure and bridges all need lots of steel," Fish said. "But when the cutbacks came, it of course hit the steel industry the hardest."