The Australian steel industry is recovering from record lows in March, but the depth of the recession makes it unlikely that the industry will return to previous output levels until 2013, according to BMI's latest Australia Metals Report.

In H109, crude steel output fell 52% year-on-year (y-o-y) to 1.92mn tonnes. Output grew month-onmonth (m-o-m) from the March low of 238,000 tonnes (down 66% y-o-y), rising to 361,000 tonnes by June (down 45%). This came after a 3.9% fall in output to 7.63mn tonnes in 2008 when key markets, particularly China, as well as the domestic market, witnessed a steep decline in demand in Q408. Export markets appear to be reviving as stimulus programmes in China and the US begin to take effect. Meanwhile, domestic confidence is growing. Australian steelmakers Bluescope and OneSteel both reported improvements in Q209. Recovery is slow but will be stimulated by the budget unveiled in May 2009, which includes a multi-billion-dollar provision for infrastructure projects. Combined, the government has pledged more than US$45bn for infrastructure for 2009-2011. We now believe that real growth in Australia's construction industry will register a contraction of -0.8% in 2009, compared with our previous forecast (made last quarter) of -1.2%. In 2010, we believe the sector will undergo real growth of 0.3%, before accelerating to 1.8% in 2011. This compares favourably with our earlier forecasts of -1.1% in 2010 and 0.9% in 2011. As such, the biggest upward revisions apply to 2009 and 2010, when the impact of the new infrastructure package is likely to be most pronounced.

For 2009 as a whole, steel output should reach 4.72mn tonnes, down 38% y-o-y, while domestic finished steel use should total 5.61mn tonnes, down 35%. The gradual recovery should be led by exports, particularly to China, although there are downside risks associated with over-supply and volatile demand. In the event of a more pronounced recovery in privately generated domestic construction activity, the steel industry should be boosted accordingly. Australian exporters will seek to diversify markets and the Chinese downturn could provide new opportunities, particularly in Southeast Asia. With Chinese production likely to be more domestically-oriented over the short-to-medium term and its export tax on steel longs set to remain at 25%, China's share of the billet market is expected to drop, giving Australian producers the chance to exploit the situation. Aside from the downturn in demand, Australian metals production is faced with heightened risk from a stricter regulatory environment. Steel and aluminium producers have voiced their opposition to the government's proposed Carbon Pollution Reduction Scheme (CPRS), which they say will increase costs and put jobs and investment at risk. Based on these uncertainties and continuing lacklustre performance in the domestic market, BMI does not believe that steel output will fully recover to its 2007 peak within the next five years. By 2013, output should reach 7.05mn tonnes, 11.2% down on 2008. However, a projected improvement in steel prices should see production in value terms reaching US$6.31bn, a fall of 3.8% over 2008. Growth should be stimulated by exports as the Chinese market revives. Although export growth will be limited by Chinese surplus capacity, Australian semis and finished steel producers are generally more competitive than many of their Chinese competitors. The downside risk is the impact of costly environmental regulations. BMI believes exports will return to around 2008 levels by 2013.

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