Basic iron and steel in Italy - Industry Analysis

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BASIC IRON AND STEEL IN ITALY – ANALYSIS

HEADLINES

  • Basic iron and steel market in Italy grew by 1.1% due to slow performance of automotive and construction industries in Italy
  • Number of building permits issued for the construction of new dwellings decreased by 35%. Despite government incentives, further diminished the market of basic iron and steel products in 2014
  • A 3.4% decline in electricity prices for industrial users in Italy in 2013 increases competitiveness of basic iron and steel industry in the European Union market
  • Ilva production plant (the main Italian and European steel producer) closed due to suspected bribery and consistent pollution exceeding allowed and reported levels
  • Production of basic iron and steel is expected to grow by CAGR of 4.4% during 2013-2019 driven by recovery automotive industry in Italy as construction industry will be lagging behind.

MARKET TRENDS

  • Basic iron and steel market in Italy grew by 1.1% to the total value of EUR32.3 billion during 2013 and continued to grow by 1.7% compared to 2013. The industry recorded marginal growth due to weak performance of automotive and construction industries which are the main buyers of steel products in Italy.
  • Construction industry remained weak during the period of 2013 – 2014. Turnover in construction sector continued to decreased by 8.8% and 7.3% accordingly. Though the government abolished the IMU tax (Imposta Municipale Unica) on first homes from the start of 2014, the number of building permits issued for the construction of new dwellings decreased to 53,463 in 2013 recording a 34.8% decline. Tight credit conditions for firms and households, coupled with high uncertainty and new fiscal rules aimed at reducing tax evasion, acted as a drag on the construction as well. Contraction in construction industry negatively affects the market size of basic iron and steel in Italy.
  • Automotive industry in Italy faced a decrease of 0.7% to the value of EUR36.52 billion in 2013 . The decrease was due to 3.3% decline in demand of vehicles in Italy in 2013 as exports increased by 5.2%. Heavy tax burden and other operating costs led to increasing outsourcing of car production to foreign countries, such as Poland. As a result, vehicle production in quantity in Italy declined by 2% in 2013. Capacity utilization of vehicle production is already low, as FIAT utilizes 55% of its capacity, Peugeot-Citroen - 66%, Renault-Nissan - 77%. Meanwhile, German vehicle producers enjoyed over 80% capacity utilization in 2013. Weak production of vehicles negatively affects the demand of basic iron and steel in Italy.
  • Prices in steel sector were under negative pressure due to increasing competition from China, declining raw material costs as well as low demand growth caused by poor macro-economic conditions and slow growth in Asia. Global export prices of HRC steel decreased by 7.4% in 2013 though recovered by 3.3% in 2014 to an average price of US$558.2 per tonne. Market size of basic iron and steel in Italy is negatively affected by lower steel prices as oversupply forms.
  • Imports value of basic iron and steel in Italy decreased by 2.3% to the value of EUR16,273 million in 2013. Italy mainly imports basic iron, steel and ferro-alloys – primary products that are used in further manufacturing process in order to make other products. Basic iron, steel and ferro-alloys imports declined by 2.1% due to increased competition worldwide as China increases its exports of basic iron and steel products.
  • Currently active antidumping duties on Chinese wire rod were to expire on August 2014 when Eurofer (European Steel Association) filed a query . Eurofer suggested a charge of over 20% for Chinese wire rod in order to protect EU producers from dumping. The new query will prolong the duty by approximately 15 months until the answer is given.
  • To address the issues of struggling EU market of iron and steel industry, an EU-wide plan named Commission Communication Action Plan for a competitive and sustainable steel industry in Europe was created on June, 2013. Currently, the plan is offering to reduce or remove electricity feed-in tariffs related to renewable electricity on energy-intensive industries to make them more competitive internationally.

PRODUCTION TRENDS

  • Italy hosts some of the biggest European steel producing plants; as a result Italian companies are heavily reliant on export and overall European demand of steal. Basic iron and steel production decreased by 3% in 2013 and continued to fell by 0.2% in 2014. The decrease was driven by declining exports in 2013 as demand growth in domestic market slowed down to 1.1%. During 2013, exports of steel production decreased by 9.8% accounting for 52% of turnover.
  • Italian producers of basic iron and steel are facing serious issues. Most production facilities lack investments in new equipment that is more energy efficient and produces less pollution in the process and Italian steel production sites are oversized for current market structure. Due to struggling domestic demand and issues in the infrastructure, companies are divesting from steel industry, e.g. ThyssenKrupp is trying to sell the largest stainless steel factory called Acciai Speciali Terni.
  • Pollution is a serious issue in the industry as its reduction requires high investments though important for companies operating in EU due to strict requirements. Largest Italian steel producer in Europe Ilva is under special administration for 36 month period, enabling the government to take control and ensure implementation of an environmental clean- up till August, 2013. Ilva Co is controlled by the rules imposed by the AIA and involving the authorities of the Puglia region. All environmental cleaning works will cost about EUR2 billion and should be paid by Ilva.
  • Corruption in Italy plays a major role in comparison to other EU countries. According to corruption perceptions index, Italy ranks 69th out of 177. High corruption level in Italy affected the biggest steel producer Ilva in case of high environmental pollution of the Ilva plant. Ilva’s executives paid bribes to local politicians and business people to hide the pollution of the plant. According to health ministry figures, deaths from cancer are 15% above the national average in the south region of Italy. Due to these reasons, Ilva closed its largest factory in July, 2013.
  • Coal is a primary input in production of basic iron and steel products from iron ore. Australian coal prices declined by 12% in 2013 and 17% in 2014 due to increasing supply of coal, slowing down economy growth in China and coal substitution by shale gas in US. Lower prices of coal relieve some pressure on costs of basic iron and steel industry in Italy.
  • Though average annual iron ore price increased by 5% in the world during 2013, its price plummeted by 28% to US$96.4 per tonne in 2014. Iron ore prices decreased as three major iron ore miners Rio Tinto, BHP Billiton and Fortescue Metals Group increased ore supply. The new price level is expected to remain low, as these companies increased output in response to high gross profit margin of iron ore production in their mines. In result, costs related to iron ore is declining, decreasing the pressure on basic iron and steel industry in Italy.
  • Meanwhile, costs related to refined petroleum products are on decline as producer price index of refined petroleum products in Italy contracted by 3.8% in 2013 and by 6.3% in 2014. The prices decreased due to overcapacity and increasing large-scale refineries in countries as US, China and Saudi Arabia. As a result competition in refined petroleum products affected positively basic iron and steel market as a decrease in production costs.
  • Electricity prices in Italy for industrial users declined by 3.4% in 2013 but still was one of the highest in Europe and reached EUR0.172 per kWh, while the average price in Europe was EUR0.126 per kWh. . Meanwhile, baseload electricity price declined by 16.6% in 2013 to EUR0.063 per kwh as supply of hydropower, solar and wind energy increased by 25%, 11.1% and 13.9% in 2013. Production of electricity in thermal plants declined by 11.5% and its share declined to 66%. The declining natural gas price also had some influence on lower energy baseload prices as gas accounts for 58% of thermal electricity production in Italy. Contracting electricity prices relieved cost pressure though remained above average EU level..

COMPETITIVE LANDSCAPE

  • Gruppo Rivais an Italiansteel producer consisting of two companies, Riva Acciaio and Ilva. This group works in the field of long rolled products. In 2013 Production of Gruppo Riva was 2% lower compared to 2012 reaching 7.6 million tonnes of steel in total due to Ilva plant closure. The plant was partially closed in July 2013 after an inquiry into damaging environmental reports that showed pollution rates of the plant are consistently above the allowed norms. In the begining of 2015, Ilva SpA was declared insolvent with almost three billion euros in debt.
  • Marcegaglia SpA, a subsidiary of Marfin SRL, is an Italian company that produces basic iron and steel. In the end of 2014, Marcegaglia sold its plant in the Puglia region to the Otlec group. The company opened a new production line for insulated building panels in Pozzolo Formigaro, Italy in 2015.
  • ThyssenKrupp is a German multinational corporation which consists of 670 companies worldwide. ThyssenKrupp’s products range varies form machines and industrial services to steel production and shipbuilding. Italy is the no. 5 foreign market for ThyssenKrupp. There are two main branches in Italy by ThyssenKrupp – Group Acciai Speciali Terni S.p.A and Berco S.p.A. In 2014, due to difficult market environment and structural problems, the company presented a restructuring plan for stainless steel plant Acciai Speciali Terni (located in Italy) that entailed cutting about 550 jobs and EUR100 million in annual costs.
  • Ferriere Nord SpA, a subsidiary of Gruppo Pittini SpA. It is an Italian company engaged in manufacturing of basic iron and steel. Primary sites of operations are located in Italy. The company is centred on an electric arc furnace, a rolling mill for wire rod and another for reinforcing bars. Furthermore it is fitted with plants destined to the production of electro welded girders, meshes and reinforcing structures for the building industry. In 2013, the Pittini Group increased its capacity by acquiring BSTG Drahtwaren Produktions- und Handels-GmbH plants names Linz and Graz in Austria and Hungary.
  • Dalmine SpA a subsidiary of Tenaris SA is an Italian company that manufactures steel seamless pipes for the mechanical, oil, chemical, and petrochemical industries, as well as for structural uses and energy production. The parent company employed 2,352 employees in Italy as of 2014 12 31. In 2013, the parent company, Ternium SA and Tecpetrol International SA announced that they have entered into a memorandum of understanding to jointly build natural gas-fired electric power plant in Mexico.

PROSPECTS

  • Production of basic iron and steel is expected to grow by CAGR of 4.4% during 2013-2019 period reaching a total turnover of EUR36,856 million in 2019. The growth will mainly be driven by recovery automotive industry in Italy as prospects for construction industry continues to be pessimistic.
  • Production of motor vehicles, trailers and semi-trailers is expected to recover and grow by CAGR of 1.4% during 2013-2019 period. The recovery of the industry will be driven by both domestic demand and especially recovering German and US markets that together accounts for 28% of Italian automotive exports. The restructuring of the vehicles production industry and investments in new models is also expected to positively affect the automotive production industry in Italy increasing demand of basic iron and steel during the forecast period.
  • Constructional industry in Italy is expected to continue contraction though at slowing down pace and a negative CAGR of 2% during 2013-2019. Newly established Renzi‘s reform programme might lead to lower credit spreads and might encourage domestic firms to expand and invest in this sector. Uncertainty regarding Italian labour market, high mortgage rates and the difficulty families encounter getting credit will continue to hamper the performance of the residential housing construction sector over the forecast period. In result, demand growth from domestic construction industry for basic iron and steel is doubtful.
  • Slowing down growth of Chinese economy and steel consumption created overcapacity in the world negatively affecting prices as competition increases. The situation negatively affects Italian producers of basic iron and steel as companies are having issues to compete with Asian producers due to pricier energy resources as well as higher environmental requirements. Persisting oversupply in the world market will prevent prices to increase.

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