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The outlook for the Spanish steel industry is poor, with the repercussions of the current adverse economic circumstances likely to be felt for years.

In the first 10 months of 2011 Spanish crude steel production fell 3.7% year-on-year (y-o-y) to 13.47mn tonnes, making Spain one of the worst performing countries in terms of steelmaking. The contraction is reversing some of the recovery in 2010, when output grew 13.8% to 16.35mn tonnes. We have marginally reduced our estimate for 2011, from 16.18mn tonnes to 16.02mn tonnes, a fall of 2.0% y-o-y.

According to a host of leading indicator data, Spains economic recovery remains weak by regional standards. We estimate that GDP growth at 0.7% in 2011 and forecast a contraction of 0.5% in 2012. Aggressive fiscal austerity, rising interest rates, stubbornly high unemployment and deleveraging in the private sector will keep growth well below potential in the medium term.

Domestic finished steel consumption is estimated at 12.45mn tonnes in 2011, down 5% y-o-y. The likelihood of recession will plunge the market lower in 2012, with a forecast 5% fall to a new low of 11.82mn tonnes, contributing to the reversal of the gains in 2010. The eurozone crisis, coupled with Spains debt problems and austerity measures, will lead to a further decline in crude steel output to 15.22mn tonnes in 2012, a fall of 5.0%. This is a revision from the 16.22mn tonnes (0.5% growth) we forecast last quarter due to the deteriorating external environment. Widespread scaling back of government departments and investment projects, with hikes in taxes on income and consumption, will mean fiscal austerity weighs on the recovery in household consumption and gross fixed capital formation (GFCF), holding back the domestic market. In the longer run we believe economic growth in Spain will prove moribund and the local steel market will fail to return to pre-recession levels of consumption.

The metals market will be hampered by the ending of car scrapping incentives in June 2010, although is unclear how much positive impact the measures have had on Spanish autos production, which is normally highly export-oriented. The outlook for 2012 is not good and a decline is likely, dragging down domestic demand for flat steel products. BMI believes the automotive industry will not return to pre-crisis levels over the medium term and car exports are under severe pressure with the chance of a contraction.

With the domestic market in the doldrums, the steel industry is reliant on exports for growth. Germany, which has seen a better-than-expected increase in demand, has been the chief target for Spanish output.

The decline in the performance of the German manufacturing sector from mid-2011 is therefore having an effect on export performance with a resulting contraction in the Spanish steel industry. We estimate a 4.7% fall in exports to 9.35mn tonnes in 2011 followed by a further 5% decline in 2012. It will take until 2015 before Spains steel exports rise above the 10mn tonne level that was typical pre-recession.