Following the sharp upturn in galvanized steel prices seen during the early months of this year, German steelmaker ThyssenKrupp announced back in April its intention to re-open its Galmed plant in Valencia, Spain by the end of this year (outbound link in Spanish). The facility, which can produce up to around 400,000 tonnes per year of hot-dipped galvanized steel (HDG) had previously been shuttered in late 2013.
And with Spanish car production up by around 11% during the first half of this year as well, the time seemed right to re-open a facility that previously shipped large quantities of HDG to Spain’s automotive factories.
But there are now thought to be doubts creeping in at ThyssenKrupp, which may opt to delay the re-opening of its Galmed plant until March 2017.
The first cause of concern has been the recent shrinking of margins for Europe’s HDG suppliers.
HDG producers, as for steel producers in general, have in recent months been battling against rising raw material costs and, although HDG prices in Europe have increased slightly, steelmakers are struggling to pass on rising costs in full to consumers. The result thus far has been pressure on margins.
This in turn is a symptom of weak underlying demand growth for HDG.
In particular there are concerns that the automotive industry, for the past few years a solid driver of HDG demand growth within the EU, may now be reaching a cyclical peak in terms of output.
With regard to Spain, car output during the most recent quarter (Q3) was down in year-on-year terms when compared to Q3 2015. This represented the first such contraction since 2012 and comes on the back of a number of cutbacks in Spain’s automotive industry since the summer.
Indeed, most of the vehicle manufacturers present in Spain have announced cutbacks or idling of facilities since the summer on concerns of a slowdown in demand both at home and abroad. Developments overseas are of particular importance given that some 85-90% of cars produced in Spain are exported.
Of key importance to ThyssenKrupp’s Galmed plant was the news back in July that carmaker Ford would lay off 430 workers at its Almussafes plant in Valencia – the only automotive plant in the region and a key potential customer for Galmed. This followed the lay-off of another 200 workers back in June.
These cutbacks from Ford are part of plans to trim output at the plant during late 2016 given the perceived slowdown in car sales.
It is understood that extended holidays and skipped shifts have seen vehicle output at the Almussafes site fall from around 2,000 vehicles per day during early 2016 to around 1,700 vehicles per day since late September – an output rate that will continue until the end of 2016 at the least according to market sources. Output at the plant as a result is expected to be more-or-less stable this year, after growing by some 38% last year.
Two factors are key in understanding the concerns held by Spain’s automotive industry and, by association, the country’s HDG producers.
Domestically, the ending of the PIVE scheme in Spain (Programa de Incentivo al Vehículo Eficiente) – a number of measures designed to encourage the purchase of new, more efficient cars via government subsidies – has acted to slow growth in domestic sales (outbound link in Spanish).
Meanwhile, and more importantly on the export market, a slowdown in sales growth in the UK market has also had repercussions for carmakers in Spain – almost 15% of vehicles produced in Spain in recent years ended up being sold to the UK (see pdf here for more details on the Spanish automotive industry (page 39 for export numbers, in English and Spanish).
Growth in new UK vehicle registrations has slowed to a pace generally not seen since 2011, perhaps as a result of the growing uncertainty in the country following the UK vote to leave the EU back in June. The associated significant weakening in the GBP:EUR exchange rate has also made imports more expensive for UK buyers, whilst also making UK car manufacturers more competitive relative to their Spanish counterparts.
Furthermore, with trade protectionism seemingly on the increase in more general terms as well around the world, the outlook for Spain’s export-focused automotive sector has become more clouded. Caution from ThyssenKrupp with regard its Galmed plant is understandable.