Australia Metals Report Q4 2013 - New Market Study Published

Across all types of metals, we expect subdued growth in both production and consumption in Australia as a weakening global economic outlook, notably China, continue to take its toll on Australia's commodity driven economy. While significant additional global monetary stimulus should help to boost metal prices in the near term, the bout of loosening measures will be insufficient to stem the slowdown and the medium-term outlook for metals remain weak.

The slowdown in the metals industry in Australia is best exemplified by monthly crude steel production, which has continued to slide into negative territory following growth in 2010. Weak demand from slowing domestic construction and a cooling export market will continue to undermine Australia's steel industry in 2013. Crude steel production contracted by 6.5% in 2012, but we forecast an uptick in growth of 1.2% in 2013, and national production is unlikely to approach pre-crisis levels for many years. The country's two dominant steel producers, BlueScope Steel Ltd and Arrium Ltd (previously known as OneSteel Ltd), has embarked on a series of consolidation plans and restructuring programmes aimed at reducing operating costs and curbing overcapacity amid an environment of weak demand and declining steel prices.

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Most of Australia's refined metal output is for export, with Asia and particularly China accounting for the largest share. We therefore assign downside risks to our forecasts on the back of a continued slowdown in China's economy. Although economic data from China improved slightly in Q412, we believe this is a temporary phenomenon and expect the downturn for Australia's largest trading partner to resume in 2013. The impact of falling export demand from China in 2012 hinted at the devastating effect further weakness in the Chinese economy will have on the Australian metal sector, as companies fire workers to keep operations profitable and postpone or cancel investment plans. Domestic demand for refined metal production is dependent on the country's economic growth rate, which we forecast will be modest until at least 2016. Hence, any reduction in the growth rate would have a detrimental effect on the consumption of metals.

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