>Steel Picture Book (CITI)

World Steel Association Demand Growth Estimates Drift Lower

■ Inventory De-stocking Decelerates — CIRA anticipates a trough in demand in 2Q09, as inventory de-stocking abates, but underlying demand is expected to remain extremely weak in 2H09. Steel output in Europe dropped 43.8% in 1Q09 compared to 1Q08. North American steel production fell 52.1% YoY, whereas Asia’s steel production only fell 8.9% YoY.

■ WSA Growth Outlook — The World Steel Association (WSA) published its shortterm
growth outlook for steel demand on 27 April. The WSA forecasts a global 14.9% decline in apparent steel consumption in 2009: a -28.8% decline in the EU-27, -32.2% in NAFTA, -23.1% in the CIS, and -8.1% in Asia and Oceania.

■ Growth Outlook — CIRA forecasts a 30% YoY decline in crude steel production in Europe and a similar decline in the USA in 2009.

■ Production Discipline Tested — Cash constraints are driving traders and distressed companies to sell steel products below cash costs. Steel prices are likely to increase from the lows as inventory de-stocking comes to an end, but will place pressure on spot-focused producer profitability.

■ China, the Ongoing Focus — The WSA forecasts -5% growth in apparent demand in China in 2009. China’s lower exports and a slowing domestic economy are the cause. Apparent steel use for the world excluding China is expected to decline by -20.4% in 2009. CIRA forecasts China’s demand growth as flat YoY.

■ Stay Selective and Defensive — We see the risk of negative guidance and earnings shortfalls as extremely high in 2009. We believe the market’s shift to reflation trades is too early and remain cautious on the sector. Working capital build will test balance sheets in the early phase of the recovery.

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