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We expect the sudden growth in steel production in the UK in H111 to be short-lived as the country experiences a sluggish domestic recovery and external trade headwinds caused by the slowdown in the eurozone. Furthermore, the introduction of environmental legislation will increase costs for these companies and thus output will be reduced as the UK becomes less competitive. Indeed, we expect growth to come in below market expectations on line with our below consensus forecast for the eurozone, the primary export destination for UK steel.

The UK has one of the worst performing steel industries in Europe. In the first 10 months of 2011, UK crude steel output rose 0.2% to 7.43mn tonnes. This followed a 3.5% decline to 9.71mn tonnes in 2010.

Although monthly output reached 968,000 tonnes in June, the highest rate since January 2010, BMI believes that output will fall back during H211. However, base effects from a poor H210 should ensure 1.0% growth in crude steel production to 9.81mn tonnes. Output remains down a third from pre-recession norms and BMI does not anticipate resurgence amid the gloomy economic climate. The beginning of a recovery in the sector is expected to be delayed until 2012 at the earliest, when we expect domestic finished steel consumption to rise 5% to 9.8mn tonnes and exports to rise to 6.6mn tonnes. However, it will take until 2015 at the earliest for domestic and external demand to return to normal.

Having lagged behind most other developed states during the recovery, the UKs economy is now under pressure. That said, for the time being we still believe that the economy is traversing a soft patch rather than staring into the jaws of recession. Moreover, as we have stressed before, the recovery was never going to be linear, with deleveraging and economic rebalancing coupled with a severe fiscal austerity drive, ensuring that steel output volatility will remain elevated.

BMI does not forecast a full return to pre-recession rates of output over the medium-term and there are question marks over its future direction. High growth steel-making countries in Europe have tended to be heavily specialised and a recovery in British steel may focus on adding value rather than volume. This process appears to be driving Tata Steel Europes restructuring of its British operations (see Competitive Landscape: Steel). While it is closing or mothballing part of its Scunthorpe plant due to a squeeze on margins caused by rising raw material and electricity costs, as well as poor sales of long products, it is also investing in high-tech machinery at its Scunthorpe and Clydebridge plants to add value to production, although there is little likelihood that this will lead to a rise in net capacity.

Primary aluminium production has already been cut back following the cut in national production capacity to 221,000tpa (tones per annum) with the closure of the Anglesey smelter in response to a lack of long-term supply of cheap electricity. While we forecast a return to operating rates of 90% of the 221,000tpa capacity from 2011, this is weighed down with negative risk with the very real prospect of one or both of the countrys smelters closing amid adverse market conditions. Smelter closures are unfortunate, given the British aluminium industrys reputation for being highly efficient. The closure of capacity would invariably increase the UKs reliance on imported aluminium as well as boosting demand for recycled aluminium. Ironically, this will benefit less regulated smelters in Asia which have fewer restrictions on carbon emissions. The transfer of metals production from the UK to lightly regulated emerging markets undermines the British governments objective of reducing global carbon emissions.