Canada Metals Report Q2 2010

The Canadian steel industry will witness a steady recovery in 2010, but the strength of growth will be determined by the fate of the automotive industry and a likely deal with the US on the ‘Buy America' programmed that has exacerbated the effects of recession on the sector, according to BMI's Canada Metals Report.

In 2009, Canada produced 8.97mn tones of crude steel, down 40.7% year-on-year (y-o-y). Q409 saw output rise 19.5% quarter-on-quarter (q-o-q) and 1.0% y-o-y to 2.34mn tones. Full year output was 500,000 tones below our forecasts, which had envisaged much stronger output and lower inventories in Q409. BMI estimates that hot-rolled output fell 35.4% y-o-y to 9.27mn tones.

Canadian steel shipments for 2009 were down by 26.4% y-o-y to 4.92mn tones, while inventories at the end of December were 1.04mn tones or 10.5% down y-o-y and, at the time, equating to 3.2 months supply, according to the Metals Service Center Institute. However, data show that the situation is slowly improving, although nowhere near pre-recession levels. Shipments of steel products from Canadian metals service centers were up 9.2% y-o-y to 444,400 short tones in January 2010. Canadian inventories at the end of the month totaled 1.18mn tones, equal to 2.7 months supply. BMI believes that inventories will need to decline further for the market to tighten and output to be boosted. This will depend in part on export performance, particularly to the US.

In February 2010, the US and Canada entered into a tentative pact to address Canada's concerns over Buy American provisions in the US$787bn economic stimulus package and open new Canadian markets to US exports. The agreement would give the US permanent access to Canadian provincial and territorial procurement markets under the WTO's Government Procurement Agreement (GPA). In return, the US would provide Canada with access to the 37 states covered by the GPA. If finalized, the agreement would ease long-running tension between the US and Canada over access to procurement markets and provide a life-line to the Canadian steel industry.

However, it may be too late for US Steel's facilities in Ontario, which were closed down in January 2010. The steelmaker owns the Hamilton complex at Lake Ontario with 2mn tone per annum (tpa) capacity of semi-finished steel, including 350,000tpa of bloom-cast billets. It also owns a 275,000tpa hot strip mill, pickling lines with 900,000tpa of capacity and cold rolling lines with 1mn tpa capacity. US Steel Canada's Lake Erie Works is located in Nanticoke, manufacturing 2.25mn tpa of slabs and 3mn tpa of high-quality hot rolled coils. The controversial mothballing of these facilities, which is now the subject of a legal dispute between the federal government and the steelmaker, is a significant blow to Canadian steelmaking, although the plants may be divested if approved by the Canadian courts.

In developed markets such as Canada, prospects are more subdued with progress expected to be modest throughout 2010. The steel industry will emerge from the current crisis increasingly focused on the emerging economies for growth. In terms of aluminum market demand, rising automotive sales within the North American market, coupled with increasingly stringent import and export laws over the last quarter, will certainly aid in easing the pressure for Canadian manufacturers; however, much has yet to be done to reach the levels witnessed within the aluminum markets only two years ago. Yet BMI does not believe there will be a return to pre-recession levels, with some capacity likely to come offline permanently. As such, by 2014 crude and hot-rolled output will be 7.9% and 8.8% down on 2008 levels at 13.94mn and 13.09mn tones respectively. At the same time, domestic finished steel consumption should return to the levels more typical of those seen before the recession, at around 15.5mn tones.

TABLE OF CONTENTS

Executive Summary

SWOT Analysis

Canada Political SWOT

Canada Economic SWOT

Global Metals Market Overview

Table: World's Top 10 Steel Producing Countries (mn tonnes)

Table: Recently Added And Planned Smelter Capacity

Aluminium Outlook

Table: BMI Aluminium Forecast

Table: Aluminium Indicators - Historical Data and Forecasts

Copper Outlook

Table: BMI Copper Update

Table: Copper Indicators, Historical Data and Forecasts

Metals Price Outlook

Table: Stock Levels At London Metal Exchange Warehouses (tonnes)

Global Mining Outlook

Table: Biggest Chinese Acquisitions In Australia Since 2005

Table: Global Mining - Top Five Companies By Market Capitalisation (US$mn)

Table: Global Mining - Key Players' Future Investment Plans (selected projects)

Industry Forecast Scenario

Table: Canada's Metals Industry, 2007-2014

Macroeconomic Forecast

Table: Canada - GDP Contribution To Growth

Table: Canada Long-Term Macroeconomic Forecasts

Competitive Landscape

Steel

Aluminium

Table: Canadian Aluminium Smelters

Trade Relations with the US

Company Profiles

Rio Tinto Alcan

ArcelorMittal Dofasco

US Steel Canada

Global Assumptions

2010 Global Growth Forecast Raised To 3.2%

Table: Global & Regional Real Gdp Growth

Table: Global Assumptions

Developed States

Table: Developed States, Real Gdp Growth Forecasts

Emerging Markets

Table: Emerging Markets, Real Gdp Growth Forecasts

Country Snapshot: Canada Demographic Data

Section 1: Population

Table: Demographic Indicators, 2005-2030

Table: Rural/Urban Breakdown, 2005-2030

Section 2: Education And Healthcare

Table: Education, 2000-2003

Table: Vital Statistics, 2005-2030

Section 3: Labour Market And Spending Power

Table: Employment Indicators, 2001-2006

Table: Consumer Expenditure, 2000-2012 (US$)

Table: Average Annual Manufactuing Wages, 2000-2012

BMI Methodology

How We Generate Our Industry Forecasts

Cross Checks