Ilva and the Italian flat steel market – poised for a change?

For a number of years problems at Ilva, the largest steelworks in Europe, have been casting shadow over the performance of the whole Italian steel industry. Will an acquisition of Ilva by a consortium led by ArcelorMittal, now in its final stage, be a game changer for the market?

Following multiple reports of environmental and health problems caused by the Taranto plant, in 2013 Ilva was placed under special administration. In 2015 the Italian government took over administration of the business in an attempt to protect jobs, start cleaning up the site and prepare the company for sale. But this also led to a closure of two (and for a short period three) of Ilva’s five furnaces, and crude steel production at the plant slipped to just 4.7 million tonnes in 2015. Output recovered to 5.8 million tonnes in 2016, but this still meant that the mill operated only at 50% of installed capacity. As a result of problems with domestic steel production, local demand had to be covered by imports, which increased sharply in 2015.

Traditionally, Italy, together with Spain, are amongst European countries that heavily rely on imports. In Spain net flat steel imports have been consistently over 40% of apparent flat steel consumption, whilst in Germany, in comparison, net imports amount to only 1-2% of flat steel consumption, and France is predominantly a net flat steel exporter. In Italy net flat steel imports were responsible for fulfilling 15% of domestic demand between 2008 and 2012, with a steadily declining share, but as Ilva run into difficulties and reduced its production, the share of net flat steel imports in Italy’s apparent steel consumption jumped to 35% in 2015.

As the situation at Ilva stabilized, reliance on imports lessened in the last two years, but we might see a reverse of this trend in 2018. The largest Italian producer is reported to have problems with production once again, and market participants expect to see a significant decline in crude steel output, with some sources suggesting a fall to a figure as low as 4.5 million tonnes.

This is where ArcelorMittal is hoping to make a difference, as it aims to restore Ilva’s production levels and competitiveness, and regain the market share from imports. ArcelorMittal does not have any primary steelmaking capacity in Italy, only coating and galvanizing facilities. As such Italy is only the fifth largest destination for ArcelorMittal’s sales in Europe, responsible for 7% of the company’s EU sales last year.

ArcelorMittal’s plan is to increase Ilva’s finished steel shipments to 9.5 million tpy by 2023 (up from 5.5 million tonnes in 2016), using imported slab and imported HRC. Imported steel feedstock will be needed as crude steel production will be limited to 6 million tpy, but once the environmental plan is completed, ArcelorMittal plans to restart blast furnace #5 and raise crude steel output to 8 million tpy.

However, the takeover has been delayed by an anti-trust investigation of the European Commission (EC), with several scenarios of how the process could be moved forward. The EC has raised concerns about the market concentration in the galvanised steel sector, and one of the options for ArcelorMittal is to sell its Italian Piombino plant to Arvedi, with preliminary agreement reportedly already in place. Using latest available figures, MBR estimates ArcelorMittal’s share of European domestic coated shipments as 42% in 2016, and additions of Marcegaglia and Ilva’s production capacities would have seen it going above 50%. Piombino plant has production capacity of 800 thousand tpy of galvanized and pre-painted steel, while Arvedi has about 1 million tpy of installed HDG capacity.

For the Italian market, the sale of Piombino will see Arvedi’s galvanized steel production capacities rising to a similar level to Marcegaglia and not much lower than those at Ilva, and this can be sufficient to remove hurdles in approving Ilva’s acquisition. As a second option, there is a possibility that Marcegaglia could leave the consortium to be replaced by a state holding company Cassa Depositi e Prestiti (CDP).

The EC is expected to announce its decision in the beginning of April, but then the Italian government would still need to give its final approval for the sale. The situation is complicated by the results of recent elections in Italy that did not produce a clear winner, and delays in forming a government would slow down a decision-making process relating to Ilva.

Even if delayed, we expect that ArcelorMittal will be granted a permission to complete the acquisition and will quickly move to an implementation of its plans by raising production, trying to regain market share. In terms of prices, Ilva used to position itself as the lowest price supplier in Italy, undercutting prices of domestic producers. This, for example, led to a loss of €39 per tonne in 2016, the year that most other players were swinging back to profitability. This pricing policy is expected to change under ArcelorMittal’s management.

ArcelorMittal will be aiming to improve Ilva’s operational performance, as in the past buyers were pushing for a discount because of unreliable delivery times by Ilva. If this issue is resolved, ArcelorMittal is expected to follow with a step increase in Ilva’s offer prices, which eventually will lead to a greater uniformity of prices across Europe. The long-term differential between HRC prices in northern Europe and Italy has been €25 per tonne, while the difference with HRC prices in Spain, a south European market where ArcelorMittal has presence, has been €9 per tonne , and only €5 per tonne this year. Once Ilva is fully integrated into the ArcelorMittal’s structure, we expect that the discount for Italian steel compared to northern Europe will start narrowing down to the Spanish level with a possibility of uniformed European steel prices further down the line.

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