Germany Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Germany's metals industry.

German metals producers will be dependent on external demand for growth in 2010, making them vulnerable to the volatility of Asian markets.

The German steel industry witnessed a surge in output in the first five months of 2010, with the upward trend steady throughout the period. In May, crude steel output totalled 4.07mn tonnes, a rise of 87.7% year-on-year (y-o-y) and 5% month-on-month (m-o-m), according to the German steel federation Wirtschaftsvereinigung Stahl (WV Stahl). In the January-May period, output reached 18.89mn tonnes, rising 66.9% y-o-y. According to WV Stahl, after the sharp declines in 2009, production has reached approximately the level of mid-2008. Hot-rolled output grew 79.5% y-o-y to 3.19mn tonnes in April, including 2.03mn tonnes of flat products (up 91.4% y-o-y) and 1.16mn tonnes of long products (up 61.9% y-o-y). Growth was welcomed by the industry following 2009, a year which marked the German economy's worst post-World War II real GDP growth outturn and led to a 28.7% y-o-y fall in crude steelmaking and a 25.7% decline in hot-rolled output.

Domestic metals end markets are showing significant improvements. Notably, the German construction industry has shown excellent recovery from its precipitous decline at the start of 2009. A decrease of 4.5% in y-o-y growth over 2009 represents an anomaly in otherwise sustained growth, rather than a trend towards collapse. Growth is expected in the sector up until the end of the forecast period in 2014. Meanwhile, the 2009 vehicle scrappage scheme in Germany had benefited both domestic and foreign carmakers, with their respective sales increasing 16% and 40% y-o-y. Despite the growth seen so far this year due to exports to emerging markets, BMI believes that weak consumer demand in the EU will be the main deterrent to the recovery of Germany's auto exports (and hence production) in 2010 and for the rest of the forecast period. Moreover, given that the delivery of vehicles under the scrappage schemes in Western European markets ended in H110, we are concerned that this export growth may not be sustained, thereby putting pressure on domestic demand for flat steel and aluminium products. The market situation will also be affected by rising raw material costs and increasing risks in the difficult and uncertain financial markets. While growth rates have surged back into positive territory, the absolute level of output remains well below peak level, reflecting the weakness of the demand recovery in the US and key trading partners in Western Europe. Growth in the German metals industries will be weighed down by low overall industry capacity utilisation, poor demographic trends, fiscal austerity and weak wage growth. As a result, we expect long-term German growth to lag, restraining the rate of output growth both in the short and long term. Although we have revised up our 2010 crude steel growth forecast from 15.7% to 23.5% due to the strength of output growth in H110 and in the context of 2.0% GDP growth, the sector will be driven almost entirely by external consumption, inventory re-stocking and statistical base effects. Aside from the current market downturn, the main risk factor facing German aluminium smelters and to a lesser extent the steel industry principally in electric arc furnaces, which comprise around a third of German steelmaking capacity is the high price of electricity, which makes up more than 40% of the cost of primary aluminium production. In 2010, exports of semi and finished steel products should grow 30.5% to 26.3mn tonnes, while aluminium exports should rise 29.3% to 1.54mn tonnes, although this rate will not be repeated over the following four years and will slow markedly in 2011 as the market adjusts to increased capacity and the effects of an expected double-dip slowdown from late 2010.

In the aluminium sector, BMI sees primary aluminium output growing 23.4% in 2010 to over 502,600 tonnes, with long-term prospects set to be bolstered by the growing number of applications for aluminium as a lightweight substitute for steel. On the downside, high electricity and environmental costs are undermining the long-term viability of German smelters, with Norsk Hydro reportedly considering the closure of the country's largest primary aluminium producer. Consequently, 2014 primary aluminium output will reach around 570,000 tonnes, which is 6% below 2008 levels, while exports should reach 1.73mn tonnes. However, apparent aluminium consumption will surge to 3.5mn tonnes from an estimated 2.41mn tonnes in 2009, with most of the increase supplied by imports which will rise to 3.5mn tonnes in addition to domestic recycling.

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