Economic and Steel Market Outlook

Transcription

1 Economic and Steel Market Outlook Q Report from EUROFER s Economic Committee 1) 21 st April 2016 EU macro-economic overview (y-o-y change in %) EUROFER Forecast April 2016 EU (f) 2017 (f) GDP Private consumption Government consumption Investment Investment in mach. equip. Investment in construction Exports Imports Unemployment rate Inflation Industrial production = estimate (f) = forecast I. EU Macro-economic overview Indicators headed down in early 2016 Hard data were actually quite positive No rebound investment growth in 2016 Bright prospects private consumption Export outlook weakening How long will the euro be able to resist? EU recovery expected to continue But downside risks have intensified In the final quarter of 2015, economic activity in the EU continued to grow at a modest pace. GDP increased by 0.3% quarter-on-quarter in the euro area and by 0.4% in the EU28. This steady but unspectacular growth rate underpins that the economic recovery failed to gain momentum towards the end of the year, whereas a slight acceleration had been expected. The overall growth performance was negatively affected by a drag from net trade due to slower global demand growth weighing down on exports. Meanwhile, firm domestic demand continued to support GDP growth. The breakdown of fourth quarter data shows a rather strong expansion of gross fixed investment accelerating from 0.4% year-on-year in Q3 to 1.1% in Q4 as well as a slight increase in government consumption expenditure. In contrast, private consumption growth slowed from 0.6% year-on-year to 0.4% in Q4. The growth pace among the major EU economies remained broadly unchanged in the final quarter of last year, with Spain showing the strongest dynamics and Italy the weakest. 1) Based on information available as of 19 th April, 2016

2 2 On balance, EU28 GDP rose 1.9% in 2015, in line with expectations. Indicators headed down in early 2016 Most confidence indicators surveying consumers and businesses weakened over the first months of The March 2016 business and consumer survey conducted by the European Commission shows that economic sentiment fell for the third consecutive month, coming from a multi-year peak at the end of The deterioration in confidence was due to weaker sentiment among consumers, in services and the construction sector. Meanwhile, confidence in industry and the retail sector improved somewhat. global growth are clouding export prospects. Hard data were actually rather positive Conversely, actual activity data remained rather positive in the first months of 2016, suggesting that fundamentals in support of domestic demand are remaining quite robust. Markit s Flash Eurozone PMI Composite Output index regained some momentum in March, having fallen over the preceding two months. The improvement was largely driven by the services sector, whereas manufacturing continued to lag behind, although also this sector saw a mild acceleration of growth of output and new orders. The weakening of confidence can be largely attributed to financial markets getting off to a turbulent start in 2016, reflecting concerns about the economic health of China and other emerging economies and the renewed plunge of oil prices in the early stages of the year. Fears of slower than anticipated Industrial production surged in January, jumping by 2.7% year-onyear; February registered a more modest 0.8% year-on-year rise. The increase was characterised by a strong increase in capital goods production, but also output in the energy sector as well as consumer goods edged up. Retail sales increase again in January and February, suggesting that the slowdown in household consumption growth in Q may have been only temporary. The continued strength of car sales in the first two months of this year appears to confirm that view. No rebound investment growth in 2016 Although investment growth picked up steam at the end of 2015, there is little evidence that this trend will continue at a similar speed over the course of Ongoing uncertainties with regards to the strength of global economic growth and the negative impact from recent financial market turbulence on stock markets, exchange rates and credit spreads could prevent investment from

3 3 emerging as a key driver of economic growth in the EU. Depending on their exposure to international trade, companies may decide to postpone or even cancel existing investment plans. Particularly weakening demand from oil producing countries is expected to curb export growth in some EU countries. Nevertheless, domestic fundamentals appear to support the expectation of continued albeit rather modest growth of investment. Favourable financing conditions, steadily rising capacity utilisation rates and lower commodity and energy prices in combination with improving domestic demand in the EU will continue to lend support to investment spending. While growth of investment in machinery and equipment could slow somewhat over the period, construction investment growth is expected to accelerate moderately owing to improved attractiveness of residential property investment - reflecting rising household incomes and low interest rates - and improving framework conditions for publicly and privately financed non-residential and infrastructure projects. On balance, total investment is foreseen to increase by 2.5% in In 2017, growth of investment is forecast to accelerate to 3.3%. Bright prospects for private consumption Prospects for consumer spending are seen remaining bright. Private consumption will continue to be the primary growth driver in 2016, supported by the expected improvement in real disposable incomes due to rising salaries as a result of improving labour market conditions, low interest and inflation rates and low energy costs. Private consumption is foreseen to increase again by around 2% in 2016 before the pace of expansion falls back slightly in 2017 due to an expected rise in inflation. Also support from public investment Public investment contributed more positively to total investment growth in 2015 than expected. Overall growth amounted to 1.4% last year, which partly reflects increased government spending to provide basic support to refugees, including food, shelter, basic income support, language training and schooling as well as medical care. Over the forecast period, the main destination countries such as Austria, Germany and Sweden will most likely need to increase spending related to the management of the inflow of asylum seekers. The fiscal stance also became somewhat more supportive to growth last year, in line with improving government deficits in several EU economies. For 2016 and 2017, this trend is seen broadening across the EU, on a par with the continuation of the economic recovery. This could provide a welcome boost to public investment in infrastructure as well as non-residential projects. Government consumption is seen growing by around 1% per annum over the period. Export outlook appears to be weakening Prospects for export growth in 2016 and 2017 have become less positive over the past few months. Growth of international trade slowed to the weakest pace since 2009 during the second half of last year, reflecting the muted performance of the Chinese economy and commodity exporting countries in the emerging regions. Available data at the start of 2016 appear to suggest that global trade growth will remain rather sluggish for the time being. Moreover, the appreciation of the euro since early 2016 undermines the

4 4 competitive position of Eurozone exporters and as a consequence their EU supplier base. With imports expected to grow faster than exports, net trade is forecast to act as a drag on economic growth, particularly in Some improvement is pencilled in for 2017 as global economic activity gains momentum and international trade picks up. How long will the euro be able to resist? The euro averaged in March on average at around US$1.11 and firmed further in early April to US$1.14, coming from an exchange rate of US$1.09 at the start of the year. Rather than exerting downward pressure on the euro, the announcement of the ECB to introduce several new stimulative measures resulted in the euro gaining strength since the second half of March. Increasing deflationary pressures, weaker than expected growth data for the EU as well as the global economy data and concerns about the health of the EU banking sector triggered this round of further easing measures, The ECB cut interest rates to record lows, introduced a new round of targeted longer-term refinancing operations (TLTROs) and expanded the size and scope of its monthly purchases under the asset purchase programme (APP). The confirmation of the ECB that its stance will be geared towards unconventional measures rather than pushing interest rates further down and the cautious tone of the Federal Reserve in the US pushed the euro above US$1.14 in early April. With inflation in negative territory in both the EU and the euro area in the first quarter, the ECB decided once again to lower its inflation outlook for 2016 and Since its sharp depreciation in the second half of 2014, the euro has been trending sideways, with no clear direction in recent months. Going forward, further upward pressure on the euro appears to be limited in the expectation of further widening spreads in interest rates between the EU and US. Any signs of another interest rate hike in the US could push the euro below US$1.10 again. EU recovery expected to continue Early 2016 indicators and actual data present diverging indications on the most likely course of EU economy going forward. The key question is whether domestic tailwinds will be strong to offset external headwinds. Domestic demand appears to be holding up well, with again rather strong support from private consumption. Investment will continue to grow moderately but the rate of expansion - particularly in is not expected to be strong enough for investment becoming the prime growth driver. Stuttering global economic activity and particularly bleak prospects for demand from China and commodity producing countries in the emerging world will limit export growth and result in net trade acting as a drag on GDP growth. On balance, the April 2016 outlook from EUROFER s Economic Committee foresees EU GDP growing by 1.8% in 2016 and 1.9% in This implies that the recovery will continue amid heightened risks.

5 5 Downside risks have intensified With regards to a more coordinated EU policy approach on migration and asylum some progress has been made in recent months. The EU-Turkey action plan aims to stem migration flows into the EU. Turkey agreed to accept the rapid return of all migrants not in need of international protection crossing from Turkey into Greece and to take back all irregular migrants intercepted in Turkish waters. Turkey and the EU also agreed to continue stepping up measures against migrant smugglers and welcomed the establishment of the NATO activity on the Aegean Sea. Swift action will be required to reduce the flow of asylum seekers. If this goal is not achieved within reasonable time limits, the Schengen agreement will be at stake, with potentially serious repercussions on economic growth in the EU. A Brexit would first of all imply major costs for the UK, due to lower confidence levels, internationals possibly reviewing investment plans for the UK and less favourable trade agreements with the EU. Secondly, some EU countries will be more exposed to Brexit than others: particularly the Netherlands, Ireland and Cyprus have strong economic and financial ties with the UK. Finally, a leave vote could set a precedent for other countries. While current account deficits have improved across the EU, public and private sector indebtedness remained high. Since the ECB has more or less reached the limits of conventional policy actions, a prolonged period of deflation could seriously hamper economic growth. External risks to EU and global economic growth in 2016 and 2017 have intensified over the past few months. The latest activity data for China, Brazil, Russia and other oil and commodity producing countries in the emerging world appear to have deteriorated, thereby increasing the risk of slower than anticipated global economic growth in This could further undermine the stability of financial markets and exacerbate the volatility of global capital flows. This would clearly be to the detriment of emerging market economies relying on short-term capital to finance current account deficits and could possibly weaken their already vulnerable economic situation. The weakness of the Chinese economy is still subject of concern. While a managed and soft landing is the most likely scenario owing to fiscal stimuli and the continuation of monetary easing, the transition from an investment driven economy to a consumption driven one will remain bumpy. The outcome of the presidential elections in the US is another uncertainty factor, in case it would imply a significant change in governance with potentially a major impact on confidence and financial markets. All in all, downside risks to the global economy have risen over the past few months. However, there are still several upside risks as well. It is not to be excluded that low interest rates and easier access to finance, low oil and commodity prices combined with a potentially stronger depreciation of the euro against other currencies could lead to a stronger momentum of EU internal demand than currently foreseen, particularly if this would coincide with higher productivity growth as a result of structural reforms implemented in recent years in the EU.

6 6 USA GDP rose 2.4% in 2015 Early 2016 indicators are muted Activity data are more positive Private spending key growth driver in 2016 External headwinds and US$ strength will curb exports GDP grew at an annualised rate of 1.4% in Q4-2015; major drags on growth were net exports, inventory reductions and business investment, whereas private consumption posted a modest increase. All in all, GDP grew by 2.4% over the whole of Indicators and activity data available for Q show a mixed picture. The Markit Flash US Manufacturing PMI signals continued weakness in manufacturing, reaching just 51.4 in March and fractionally up compared with February. Also the weak rebound of the index for the services sector in March points to the weakest quarterly growth in Q since Meanwhile, continued labour market gains, improving residential property markets and robust vehicle sales suggest that private consumption held up well in the first months of this year. This trend is expected to remain intact over the coming quarters, with low interest rates and real disposable income growth supporting personal spending as well as private residential investment. The outlook for business investment and exports remains obscured by the strength of the US dollar, the continued slump in oil sector investment and weak global growth perspectives. While government spending should be supportive to growth in 2016 with infrastructure as key beneficiary the outlook for 2017 is less clear due to uncertainty around federal fiscal policies after the elections in November. Given the Fed s cautious stance towards further monetary tightening, interest rates should remain low, along with inflationary pressures. GDP growth is expected to slow to 2.2% in 2016 and increase again to 2.4% in Key emerging regions China on course for a managed slowdown Recession to continue in Brazil and Russia in 2016 India bucks the trend China's GDP grew 6.8% in Q4-2015, resulting in 6.9% growth over the year as a whole, the lowest rate in 25 years. Recent data suggest that fiscal easing and monetary policy support is starting to feed into the economy. Investment is picking up and house prices rose in February. Industrial production grew 5.4% y-oy over the January-February period. Nevertheless, economic conditions will remain challenging for China, with the risk of necessary reforms - such as the reduction of overcapacity in industry and the overhaul of state-owned enterprises - being sacrificed in favour of stronger short-term growth. GDP growth is forecast to slow to 6.2% in 2016 and to 6% in India s economy advanced rather strongly in 2015, with GDP growth rising to 7.3% from 7% in Key drivers were private consumption and investment. Manufacturing and services output grew robustly. The recovery looks set to become more broad-based in 2016, with support from domestic demand as well as net exports. GDP growth could again average 7.3% per annum over the period. Brazil remained mired in recession in Q4-2015; GDP fell by 3.8% over the whole of Prospects continued to worsen. External headwinds such as low commodity prices, slow global growth and financial market turmoil are exacerbated by fiscal deterioration. GDP is expected to fall again by around 3% before returning into positive territory in Russian GDP fell 3.7% in 2015, due to a sharp drop in private consumption. Key factor was the sharp weakening of the rouble and high inflation, which pushed real wages 10% down. Stabilising oil prices should give support to the rouble in The economy is expected to stagnate in 2016 before returning to growth (+1.6%) in 2017.

7 7 II. The EU Steel Market Overview Steel Using Sectors Development of the main steel using sectors EUROFER forecast April 2016 % change year-on-year in the SWIP (Steel Weighted Industrial Production) index 1) % share in total Consumption Year 2015 Year Year Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q Construction Mechanical engineering Automotive Domestic appliances Other Transport Tubes Metal goods Miscellaneous TOTAL Q4 15 activity growth gained traction; total growth 2015 at 2% Solid prospects 2016 Stronger support investment in 2017 SWIP to grow by 2.9% In line with expectations, growth of activity in the EU steel using sectors strengthened moderately in the final quarter of Output expanded by 2.9% y-o-y; total growth over the year 2015 amounted to 2%. Activity in the fourth quarter of last year - and in fact over the year as a whole - was predominantly boosted by sectors which rely to a significant extent on the growth trend in private spending. Continued robust private consumption growth translated into strengthening demand for passenger cars and electric domestic appliances as well as new residential housing. This compensated for an overall weak performance of the more investmentdriven sectors such as mechanical engineering and the steel tube sector. Prospects for 2016 are relatively positive, with sustained but slower growth in the automotive and the electric domestic appliances sector. Construction activity is expected to gain some momentum, as the recovery of demand becomes more broadbased. Tube and mechanical engineering sector activity will stop acting as a drag on total growth in the steel using sectors. In 2017, investment is forecast to gain further momentum; this will support capital goods demand and nonresidential and infrastructure and construction projects. Sectors exposed to global trade are expected to benefit from a mild improvement in global growth. The SWIP index is forecast to rise by 1.9% in 2016 and by 2.9% in ) As of 2013, steel structures is no longer a separate sector but is included in the construction sector. Shipbuilding activity is now included in other transport which includes all non-automotive transport equipment such as railway material, air & spacecraft and motorcycles

8 8 Construction Acceleration Q4 15 activity growth EU output grew 1.3% in 2015 Robust prospects Key driver: residential activity But also non-residential and civil engineering outlook improving Construction output rose by 2.4% y-o-y in the final quarter of 2015, thereby keeping the mildly accelerating trend in quarterly activity growth seen since the start of last year intact. Output growth was particularly strong in Spain, Sweden, Slovakia and Poland, whereas activity in France, Italy, Belgium, Austria and the Czech Republic continued to decline. Total construction over the whole of 2015 rose by 1.3%. This somewhat lower growth rate than previously foreseen stems from final quarterly data for 2015 having been revised downwards. The key driver of activity growth in the EU construction sector remained improving demand for residential property, fuelling both new private and public projects as well as renovation and modernisation work. Improving demand fundamentals have been supported by higher levels of consumer sentiment, low interest rates and easier access to finance and rising wages. The increasing appeal of residential markets - with bright prospects for rental prices and property values - is attracting institutional investors, also from abroad. Activity growth in the non-residential and civil engineering sectors remained rather slow in most EU countries and generally geared towards renovation and modernisation work. Poland was the main exception in 2015, being the main beneficiary of EU financial support for infrastructural projects. The outlook for 2016 and 2017 is rather positive. Construction activity is steadily seen gaining momentum, as the rebound is expected to become more broad-based. Residential activity will remain a key driver of growth, owing to the continued robust outlook for residential property demand, particularly in metropolitan areas. This trend is underpinned by urbanisation effects and fiscal support for first-time house buyers. But also prospects for civil engineering and non-residential work appear to be brightening. In several countries, large publicly-funded infrastructure projects - aimed at removing traffic and transport bottlenecks - will be starting up during the forecast period. Also investment in energy networks and telecoms as well as commercial property is expected to improve. All reporting EU countries expect construction activity to grow over the forecast period Total EU output is forecast to rise by 2% in 2016 and by 2.5% in 2017.

9 9 Automotive 2015 output rose 8.3% with again strong growth in Q4 EU automotive market started 2016 on a high note: sales up EU demand will continue to boost output Uncertain prospects for exports The EU automotive market started 2016 on a high note. Passenger car registrations rose 8.2% year-on-year in Q Italy and France posted double-digit gains, but also the other key markets recorded robust growth. Commercial vehicle registrations rose sharply over the first two months of Total sales grew 15.4% y-o-y, with particularly a strong rise in demand for medium and heavy trucks. All major markets posted significant gains. Recent data on overseas car exports from the premium segment manufacturers in Germany and the UK signal a stabilisation in German exports and a continued rise in UK exports. The continuation of recessionary conditions in Russia is supposed to be a drag on car demand. Q automotive sector output increased by a staggering 10.3% yearon-year, contributing to a better than expected growth of total automotive output of 8.3% over the whole of The outlook for 2016 and 2017 is positive, but a repeat of the strong output growth recorded in 2014 and especially in 2015 is not on the cards. The positive trend in EU demand for passenger cars is expected to continue over the forecast period. Consumer sentiment is boosted by healthy labour market conditions and rising wages, whereas low fuel prices and historically low interest rates translate into lower operational costs of car ownership. Both private replacement and fleet owner demand are expected to benefit. The outlook for car exports is rather uncertain, however. Markets such as the US - which contributed in recent years to the strong performance of premium segment exports - could be nearing a sales plateau. Government initiatives aimed at stimulating demand in China and Korea will pull forward automotive sales in 2016, but could backfire on demand in Demand in Russia looks set to remain depressed for the time being, with domestic output - as in China - gaining market share. The ongoing economic recovery in the EU and lower cost of fuel is expected to stimulate road transport activity, which in turn will drive demand growth in the commercial vehicle segments. Fuel economy, road safety and a lower carbon footprint will continue to drive innovation in this market segment. Total EU automotive output - including parts and components - is forecast to rise by 3% in 2016 and by 3.8% in 2017.

10 10 Mechanical Engineering 2015 output fell 0.4% - weak Q4 2016: headwinds from external demand but domestic demand seen growing Brighter outlook for 2017 as EU and global demand for machinery strengthens Output in the mechanical engineering sector declined by 1.2% y-o-y in the final quarter of This basically reflects the continuation of difficult market conditions, both in the domestic and export markets. In line with previous estimates, total output contracted by 0.4% over the whole of In the EU, the business climate remained clouded by risks and uncertainties, which prevented investment growth from shifting into a higher gear and becoming a key growth driver. Also external weakness remained a key factor of the lacklustre performance of the EU mechanical engineering sector in Slowing economic growth in several emerging markets had a negative impact on the export performance of Eurozone machinery manufacturers in general, but particularly affected business activity in Germany and the UK. Germany suffered from weakening demand from China and Russia, whereas the performance of the UK mechanical engineering sector was badly affected by the strength of pound sterling. Low oil prices depressing international demand for oil sector equipment has had also a negative impact on activity in the sector in general. Production activity in the other EU countries reported modest gains over the whole of The outlook for 2016 is rather muted. Although on balance total activity in the EU mechanical engineering sector is expected to increase moderately over this period, growth will not be strong enough to offset the losses incurred in the preceding years. With the main headwinds in 2016 expected to come from external demand, the modest improvement in EU capital goods demand will just about suffice to lead to marginal growth (+0.5%) in output. Once more, the outlook for Germany and the UK is subdued, which will also affect their supplier base in the EU. Somewhat stronger growth is foreseen for The expected modest upturn in global demand in combination with the expectation of a still benign euro exchange rate and further improvement in the domestic investment climate should lead to activity growth of almost 3%.

11 11 Tubes 2015 output fell by 6.1%; most countries in decline Outlook moderately positive Market conditions for large welded tubes remain uncertain EU steel tube production contracted by 6.7% y-o-y in the fourth quarter of 2015, a still significant but - as expected - a less sharp reduction in output than in the preceding quarter. The steel tube sector in Germany, France, the UK, Spain and Sweden suffered from a double-digit drop in activity. Similar to the market situation in the first three quarters of 2015, the factor dragging down tube output in the EU was lower investment in the oil and gas sector due to the sharp decline in oil prices over the past two years. This affected both pipeline demand as well as oil country tubular goods. Producers specialising in automotive and engineering qualities have generally speaking recorded a rather satisfactory performance - at least volume-wise - in Global overcapacities and slowing demand resulted in increasing supply pressures and fierce competition in especially the commodity tube market segments, thereby fuelling protectionism and the launch of anti-dumping procedures. Total tube output in 2015 fell by 6.1%; a majority of the reporting EU countries registered a decline in output. The outlook for 2016 and 2017 is moderately positive. Output in most EU countries is expected to return to growth over this period. Domestic demand for small welded and seamless tubes is expected to improve, supported by the continuing recovery of the EU economy and expanding production in the key user segments of these types of tubes such as the automotive industry, construction, metal goods, offshore wind applications and mechanical engineering. Market conditions for large welded tubes looks set to remain uncertain. Prices temporarily climbed to around US$40 per barrel on optimism that global oversupply will start to abate this year, but fell back again in early April. Key producers, including Saudi Arabia and Russia, have pledged to limit their production. Pipeline project and drilling business will largely depend on the future direction of prices. EU output is expected to rise by 2% in 2016 and by a further 3.1% in 2017.

12 12 Domestic Appliances Strong Q4 activity pushed up 2016 output growth to 4.1% Key drivers: rising private consumption and improvement residential property markets Prospects for remain satisfactory Production activity in the electrical domestic appliances sector in the EU gathered further speed in the final quarter of 2015, growing by a healthy 6.4% y-o-y, the strongest quarterly growth post crisis. Output in France and Poland registered double-digit growth. Total output in 2015 expanded by 4.1% over the whole of The electrical domestic appliances sector is one of the key beneficiaries of the current growth trend in private consumption and the upswing of residential property markets in the EU. With improving labour markets translating into real wage rises and household income also supported by low inflation and lower fuel bills, consumers demand for white goods has been rising over the course of Meanwhile, supported by historically low interest rates and easing access to mortgage lending, demand for existing and new residential property has been rising, thereby boosting demand for electrical domestic appliances. Prospects for 2016 and 2017 are seen remaining rather satisfactory. The outlook for private consumption in the EU is positive, supported by an expected acceleration in disposable household income growth, as a result of higher real wages, low inflation and low oil prices At the same time, the residential property sector in the EU is forecast to gain further traction. Demand for housing continues to outstrip supply, despite some pick-up in construction activity. The imbalance between supply and demand will continue to exist in most of the markets in the EU where demand has been strengthening lately. The number of new housing starts is still well below the annual totals needed to address the shortfall in the metropolitan areas in Germany, the UK and the Netherlands. The sector will remain characterised by fierce competition, not only between producers but also in the supply chain to the final customer. Output of the EU household appliances sector is forecast to grow by 2.6% in 2016 and by 2.2% in 2017.

13 13 Real Consumption Period Year 2015 Forecast for real consumption - % change year-on-year Q116 Q216 Q316 Q416 Year 2016 Q117 Q217 Q317 Q417 Year Rebound real consumption in Q4 15 owing to accelerating activity growth in sectors relying on private consumption Real consumption 1.7% up in 2015 Further growth in 2016 and 2017 In the final quarter of 2015, EU real steel consumption grew by 4.5% compared with the year earlier level, reflecting a positive trend in overall activity growth in the steel using sectors in the EU. Accelerating activity growth in the construction sector, the automotive and other transport equipment industry as well as the electrical domestic appliances and metal goods sector more than compensated for the lacklustre performance on the other sectors. This trend largely reflects the strength of consumer-related demand in On balance, total real steel consumption rose by 1.7% over the whole of The outlook for 2016 and 2017 is for continued growth of final end-user consumption. Production activity in the steel using sectors in the EU is expected to grow rather modestly in 2016 due to external headwinds weighing down on net trade. As a consequence, real steel consumption is forecast to increase by 1.1% this year. Market conditions are seen improving in Activity growth in the steel using sectors should gain some momentum, in the expectation of a further improvement in domestic economic fundamentals as well as a modest rebound in global economic growth and international trade. In the EU, investment is predicted to become more supportive to economic growth. The impact of steel intensity on real steel demand is foreseen to remain negative for the time being. As a consequence, EU real steel consumption is forecast to increase by 2.5% in ) steel intensity is the ratio of steel consumption to steel weighted production in the steel using industries (SWIP)

14 14 Apparent Consumption Period Year 2015 Forecast for apparent consumption - % change year-on-year Q116 Q216 Q316 Q416 Year 2016 Q117 Q217 Q317 Q417 Year EU Apparent Consumption in million tonnes per annum (f) (f) 154 Oversupply via imports distorted stock cycle H EU steel demand rose 3.5% in 2015 but EU mills lost market share Stock overhang and weak real consumption growth cloud 2016 demand outlook Some improvement in 2017 EU apparent steel consumption grew 5.7% y-o-y in Q In line with the normal quarterly stock cycle pattern, end-users and distributors reduced inventories during this quarter. However, due to the year-on-year growth of apparent demand outpacing growth of real consumption, the stock change was lower than in the same period of A similar phenomenon was seen in the third quarter of The sharp rise in imports in H is the key factor in the explanation of this trend. Imports growing by almost 30% y-o-y in Q3 and even by almost 50% y- o-y in Q distorted normal supply conditions in the EU steel market. Oversupply via the import channel could not be fully absorbed by the rise in final consumption and ended up in stocks, thereby leading to a lower stock reduction in H2 than seen under more normal market conditions. Despite the overall 3.5% rise in EU steel demand, domestic producers did not gain and saw EU deliveries falling slightly compared with The outlook for the EU steel market in 2016 is dull. Muted real steel consumption growth and the stock overhang at the start of the year will result in apparent steel consumption stabilising around the year earlier level. Trade data for the first quarter of 2016 signal a further y-o-y rise in imports, stoking concern of another year of market distortions and EU producers losing market share. Apparent steel demand in 2017 is expected to grow mildly, supported by a more pronounced rise of real steel consumption and an overall more balanced stock cycle. However, global overcapacity and sluggish prospects for global steel demand could easily translate into continued supply distortions and derail this modest recovery.

15 15 Imports Available 2016 data signal further y-o-y rise in imports Q tonnage 4% up on Q China remained largest exporter of steel products to the EU Final data for 2015 show steel imports from third countries into the EU rising by 22.5%. Available data for the first months of 2016 signal a continuation of this yearon-year growth trend. Total imports - including both semis and finished products - rose 30% y-o-y over the January-February period; while semis imports grew by 42% y-o-y, finished product imports increased 26% y-o-y. Preliminary customs data for March signal another 18% y-o-y rise of finished product imports. This brings the total rise over the first quarter of 2016 to 23% y-o-y; flat product imports increased by 23% and long product imports by 24%. In terms of actual tonnages, finished product imports over the first quarter of 2016 are 4% up on the tonnage recorded in Q4-2015, with slightly higher volumes for flat products and slightly lower tonnages for long products. With only three months of trade data available, it is difficult to identify relevant trends in imports at this point of time. With regards to the main countries of origin for steel imports into the EU, China remained the most important exporter of finished products to the EU, followed by the Russian Federation, the Ukraine, South Korea and Turkey. Together these countries accounted for 65% of total imports over the January- March period. Imports from Turkey showed the strongest year-on-year increase, with flat product imports rising by 257% y-oy and a 20% increase compared with the monthly average of Q Imports from China also were higher than a year ago but were lower than in Q Imports from South Korea and the Ukraine were both up on the same period of last year and higher than in the preceding quarter. Little change was seen in imports from Russia. It remains to be seen whether weak domestic steel demand prospects and the European Commission s investigations into steel dumping practices will be sufficient to limit the tonnage of imports coming into the EU. The EU steel industry will remain extremely vulnerable to supply distortions from abroad.

16 16 Exports January and February export data signal sharp drop exports EU trade deficit in finished products widened significantly : weak global demand prospects fuel uncertainty Final data for steel exports from the EU to third countries reveal a 9% drop in total exports, with finished steel products falling 5%, due to a 7% drop in long product exports and a 3% contraction in long product exports. So far into 2016, only January and February data for exports are available. As such this represents anecdotic information rather than presenting evidence of a trend to be expected over Nevertheless, the first signs are far from positive. Total exports fell 20% y- o-y over the first two months and finished product exports decreased by 13%, owing to a 14% reduction in flat product exports and a 11% drop in long product exports. In comparison with the monthly average of Q exports, the actual January-February tonnage shipped abroad was 15% lower. Taking into account imports were on a rising trend in the first months of 2016, it does not come as a surprise that the EU remained a net importer of steel. The total trade deficit over the January- February period amounted to 1,074,000 tonnes per month, compared with a deficit in Q of 656,000 tonnes per month. The increase in the deficit was the result of a strongly widening deficit in finished products, whereas the semis deficit slightly declined compared with Q situation. The trade deficit in flat products rose from 432,000 tonnes per month in Q to 601,000 tonnes per month over the January-February period. Meanwhile, the trade surplus in long products narrowed from 402,000 tonnes per month in Q to 237,000 tonnes per month. The available data for 2016 underpin the uncertain outlook for exports. The stuttering economic performance of several key emerging markets implies that also global steel demand will be rather depressed this year, but potentially might see a rebound in With so far limited signs of global supply being curtailed sufficiently, further distortions of the EU supplydemand balance by third country exports should be expected. Other headwinds such as export limitations for EU rebar announced by Algeria will aggravate market conditions for EU steel producers.

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