Market Report, "Italy Metals Report Q3 2013", published

The outlook for Italy's metals sector is far from encouraging as a combination of cheap Chinese imports, low domestic demand and few project expansions mean that growth in consumption and production will stagnate over the period to 2017. We expect Italy to retain its position as the EU's second largest steelmaking country with a 16% share of production.

Things have certainly not started off the year well in terms of output, however. According to data from the Italian steel producers' association Federacciai, the country's crude steel output fell by 11.6% y-o-y in April to 2.12mn tonnes. It marks the 13th consecutive month in which a y-o-y decrease in national production has been recorded. For the January-April 2013 period, Italy's crude steel output reached 8.27mn tonnes, which is a 15.8% y-o-y decrease.

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The industry will face increased competitiveness in core markets as it feels growing pressure from non-EU rivals and this could prompt industry consolidation and a move towards greater specialisation rather than a focus on volumes. Indeed, one potential growth area we highlight for Italy's steel sector is in high-quality steel which China is increasingly demanding. As yet, Chinese producers have focused on low-quality mass production of steel and thus Italian producers, which have experience in the high-end steel sector could benefit.

We forecast a slow recovery and reduced capacity utilisation at the Ilva Steel plant in Taranto. However, this could easily be undermined by a complete and permanent closure of the plant. Such a prospect will preclude any return to the 30mntpa that was typical of the Italian steel industry before the 2008 financial crisis. We no longer expect the economy to return to growth in 2013 and the recovery will be slower than previously expected.

Alcoa's 150,000tpa Portovesme aluminium smelter has been closed and its remaining 44,000tpa smelter at Fusina, near Venice, could also be in jeopardy. As a result, Italian primary aluminium smelting could be approaching its end, mirroring a trend seen across where high operating costs have made it impossible to sustain output at current and projected global prices.

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