Sub Heading 3
Metals Market Study Summary Report
Strategic Rail Authority Freight Team August 2004
This document is confidential and is intended for the use of the client to whom it is addressed. The views in this paper are those of Symonds Group Ltd and do not necessarily represent the views of the SRA.
2
Contents 1. Introduction to the Study 1.1 Purpose of SRA Study 1.2 Background 1.3 Limitations
3 3 3 4
2. Metals: Market Structure and Definition 2.1 Key Players in the Steel Market 2.2 Metals Production 2.3 Demand Drivers in the Metals Industry
5 5 6 6
3. Metals: Current Market Size 3.1 UK Steel Production 3.2 UK Steel Consumption 3.3 Transportation Patterns
8 8 9 11
4. Metals: Market Forecasts 4.1 Steel Consumption 4.2 Steel Consumption and Production Scenarios 4.3 Steel Scrap 4.4 Other Metals
14 14 15 17 17
5. Metals: Rail Traffic Forecasts 5.1 Rail Traffic Opportunities
18 18
6. Metals: Opportunities and Constraints 6.1 Effects of Economic Issues on Rail Freight 6.2 Opportunities and Constraints 6.3 Threats to Rail’s Modal Share
20 20 20 22
3
1.
Introduction to the Study
1.1
Purpose of SRA Study The Metals market study is part of a wider piece of research being conducted by the Strategic Rail Authority in relation to its Corporate Plan 2003-04 freight objectives. The outputs from the market studies will be used to inform several of the SRA’s key work streams. As well as helping to identify marketing priorities, the results may be used in demand modelling to improve forecasts of likely future traffic. The other markets being studied are:
1.2
•
Coal
•
Automotive
•
Waste
•
General Freight
•
Aggregates
•
Petroleum and Petroleum Products.
Background The SRA aim was to carry out studies of each major market sector for which rail either carries, or may have the ability to capture, significant volumes of traffic. Each study reviews the structure of the respective market within the UK economy, and identifies past, current and forecasts of future volumes and patterns of supply and demand. Key constraints and risk areas are identified where possible. It is worth noting that although much of the analysis is at industry level, rather than by transport mode, focus is placed on issues with potential relevance to rail and forecasts of rail use have been generated. The Metal market study was completed by Symonds Group Ltd in the period July 2003 to December 2003. It should be noted that the figures and forecasts contained within the market study were generated by the consultants based on views and assumptions deemed appropriate, in their view during this time. The forecasts do not reflect changes to the metals industry that have occurred during the first-half of 2004. The SRA has decided to publish this summary report as a contribution towards the metals industry and to share the results with the various companies and bodies who aided the study. As this is a summary of the consultant’s work, the views stated are those of Symonds Group Ltd rather than the SRA.
4
1.3
Limitations It must be recognised that market analyses of this kind tend to be limited by data availability. Given this, early phases of the work were focused on information and data gathering and identification. It should be highlighted that specific rail flows typically result from market dynamics that are not possible to model accurately in full, therefore any forecast will include a qualitative element informed by consultation with key players.
5
2.
Metals: Market Structure and Definition Symonds reports on the prospects for rail freight growth in the metals sector; this includes:
•
Steel
•
Steel scrap
•
Stainless steel
•
Aluminium
•
Iron ore.
However, the report mainly focuses on steel.
2.1
Key Players in the Steel Market The UK steel market is characterised by the existence of one dominant producer, Corus, together with a couple of smaller producers. These producers are responsible for meeting half of the UK’s steel consumption. The remainder of the UK’s consumption needs are met by imports. In total, Symonds identified the following key players in the UK steel industry:
•
Corus Group Plc – is the sixth largest steel producer in the world in terms of production
•
Celsa Steel UK – currently sells most of its production to the UK markets, but exports some product to Ireland
•
Thamesteel Ltd – currently does not sell into the UK market, but exports to Saudi Arabia
•
Alphasteel – currently produces reinforced bars for the concrete industry
•
ISTIL (UK) Plc – the mill now concentrates on rolling merchant products from Ukrainian billet feedstocks, for sale almost exclusively within the UK market
•
Caparo – UK steel conversion and distribution business.
6
2.2
Metals Production Two ways of producing crude steel are utilised in the UK. Around 75% of UK production is currently via the basic oxygen converter method with operational plants at Port Talbot, Scunthorpe and Teesside (all Corus). The electric arc furnace process is used in the UK at the Corus plants in Rotherham and Stocksbridge together with the recently reopened Thamesteel and Celsa plants at Sheerness and Cardiff and Alphasteel in Newport. In terms of raw materials, the basic oxygen converter method requires substantial quantities of iron ore whilst the electric arc furnace process is based on the utilisation of steel scrap. Steel scrap is collected (produced) from a number of sources that fall into one of two categories:
•
New scrap – arises in industry from off-cuts, stampings, turning etc
•
Old scrap – derived from end-of-life products.
Demand for scrap is driven mainly by the production of steel, in particular that produced using the electric arc furnace method. The extent to which the UK scrap merchants can tap into the growing worldwide market for steel is, however, constrained by the amount of steel scrap available for collection in the UK. Much of the steel scrap collected comes from industry. However, the declining importance of the industrial sector to the UK economy means that the amount of scrap becoming available from this sector can be expected to decline over time. The UK aluminium industry encompasses all sectors, from primary production through fabrication and end-use of aluminium in all its forms, to recycling back into aluminium products. Primary aluminium is produced in the UK at three plants, located at Lynemouth, Holyhead and Fort William. Stainless Steel is produced in the UK at the Tinsley meltshop in Sheffield by Outokumpu Stainless. With demand for stainless steel growing by 5% per annum worldwide, the outlook for the plant appears positive. 2.3
Demand Drivers in the Metals Industry There is no simple variable that explains UK steel consumption. Steel has many enduses and their individual demand drivers are not identical. This becomes particularly apparent when it is considered that it is the domestic supply of these end-user industries that affects steel consumption. Thus, whilst GDP may well be a key variable in explaining the consumption of each of the end-use industries, it may be largely irrelevant in explaining the domestic supply. This is demonstrated by Figure 2.1.
7
annual change (10-yr moving average)
GDP
Steel Cons
4.0% 3.0% 2.0% 1.0% 0.0% -1.0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
-2.0% -3.0% -4.0% -5.0%
Figure 2.1: Comparing GDP to UK Steel Consumption
As demonstrated by Figure 2.1, although broadly consistent, UK steel consumption does not track with GDP changes precisely. Therefore, to fully understand and forecast steel consumption, it is necessary to study each of the end-uses of steel in turn. A picture of overall steel consumption can then be built. Based on this ‘picture’, Symonds derived an equation to provide an approximate representation of steel consumption. The reliability of the equation was tested against historical data, and comparing forecasts with actual data gives a good measure of correlation. The forecasts produced using this methodology are examined in Section 4.
8
3.
Metals: Current Market Size
3.1
UK Steel Production During 2002, the UK was the 17th largest producer of crude steel in the world with output of 11.7 million tonnes. However, UK production has declined sharply over recent years, as shown by Figure 3.1. As recently as 1997, UK production totalled 18.5 million tonnes and only once in the past fifty years has UK production been below the levels seen in 2001 and 2002. This was in 1980 when output was hit by strike action.
million tonnes
30 25 20 15 10
19 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 20 01
5
Figure 3.1: UK Production of Crude Steel (Million Tonnes)
Symonds believe that reduced output during 2001 and 2002 reflects the ending of primary steelmaking by Corus at the Llanwern plant, together with an outage of one of the blast furnaces at Port Talbot for over thirteen months. Bankruptcy of Allied Steel and Wire during 2002 also hit output. During the first six-months of 2003, UK steel output rose by 4.6% year-on-year to 6.35 million tonnes. UK production of finished steel has also declined in recent years, as shown by Table 3.1.
9
Finished Steel Production Hot Rolled Flat Products
1996 8,625
1997 9,028
1998 8,450
1999 7,969
2000 7,326
2001 5,866
Hot Rolled Long Products
7,048
7,122
6,763
6,217
5,678
5,671
15,776
16,223
15,301
14,186
13,003
11,407
1,320
1,931
1,877
1,692
1,571
1,588
Total Hot Rolled Steel Products Other Steel Products
Table 3.1: UK Production of Finished Steel (‘000) Tonnes. Source: ISSB Limited
Symonds Group concluded that the main reason for the decline in UK steel production since 1997 and particularly between 2000 and 2002 was a strong Sterling exchange rate, which led to increased imports of finished steel products into the UK and a decline in Corus’ exports. As a result, Corus suffered large financial losses and cutback its production in response. In an effort to restore profitability, Corus is planning to implement a new strategy by 2005 focusing its UK steelmaking on three plants, each of which will receive significant investment. As a result both of this strategy and of current investment in other UK steel plants, Symonds expects UK production to rise from recent low levels over the next few years. This is consistent with increased world demand particularly from the USA and Far East markets, particularly China. However, Symonds argue that UK steel production is unlikely to stabilise at the 17-18 million tpy (tonnes per year) levels seen during the mid 1990s. Instead, they expect production levels to rebound to around 15-16 million tpy in the short term but believe there is the possibility of further cutbacks from this level before 2021. From 1983 to 2000, the UK was a net exporter of steel products. However, the continued steady growth of imports together with the recent sharp decline in exports meant that in 2001 the UK imported more steel products than it exported for the first time in nineteen years. This suggested a decline in market share for UK producers. Almost all imports into the UK are of finished steel products. In 2001, exports of finished steel products from the UK totalled 6.5 million tonnes. Almost all these exports were of Corus material.
3.2
UK Steel Consumption UK consumption of steel has not shown any consistent pattern of growth or decline over the past twenty-five years. Instead it has tended, to a fairly limited degree, to vary along with the economic cycle. Between 1999 and 2001, consumption was stable at around 13.4 million tpy. Table 3.2 and Figure 3.2 show finished steel consumption.
10
19000 18000 17000 '000 tonnes
16000 15000 14000 13000 12000 11000 2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
10000
Data: National Statistics - Economic Trends Annual Supplement, table 4.3
Figure 3.2: UK Steel Consumption (‘000 Tonnes)
Year
Net Home Deliveries by UK Producers
Imports
Derived Non-Producer Exports
Apparent Consumption
1996
8383
5147
612
12918
1997
8626
5894
526
13994
1998
8260
6466
132
14594
1999
7652
6014
207
13459
2000
7255
6387
283
13359
2001
6762
6978
330
13410
Table 3.2: Apparent Consumption of Finished Steel (‘000 Tonnes). Source: ISSB Limited
Of the domestic consumption met by domestic supply, around half is supplied via stockholders. The remainder is delivered direct from UK steel mills to UK consumers. The main end-uses of steel in the UK are in the construction, automotive, mechanical engineering and metal goods sectors. An estimate of the breakdown of consumption by end-users for 2002 is as follows:
•
Engineering 24%
•
Construction 22%
•
Automotive 17%
•
Metal goods 14%
•
Other industries 23%.
11
Over the past two decades, steel consumption has been positively driven by rising construction and vehicle output but dragged down by declining manufacturing engineering and metal fabricated goods output in the UK economy.
3.3
Transportation Patterns Figure 3.3 illustrates rail’s share of the UK metals market, in 2001. In this figure, iron ore refers only to consumption at Scunthorpe (as Port Talbot and Teesside have iron ore delivered direct to the plant by sea).
Rail
12
Road
10 8 6 4 2 -
Iron Ore
Corus to Corus
Corus to Distribution
UK Steel Exports
UK Steel Imports
Stainless Steel
Aluminium
Steel Scrap
Figure 3.3: Rail’s Share of the UK Metals Market (Million Tonnes Per year)
As with exported material, a lot of imported steel is transported around the UK by road. Where rail does play a role, it is to transport imported material from ports of entry to railhead distribution centres, from where it will usually travel by road to its final destination. The relevant materials that are transported by rail around the UK can be grouped into a number of categories: Raw material supply For steel, this includes coke and limestone, which were not included in Symonds study, together with iron ore, which was. There is only one iron ore flow on the UK rail network and this is the movement of around 5 million tonnes per annum from Immingham to Scunthorpe. Corus to Corus flows of semi-finished product This is material typically transported between Corus steelmaking and processing plants. Symonds understands that 95-100% of such movements is carried by rail, and these form the bulk of UK metals rail freight with total volumes of around 6.7 million tpy.
12
UK Production to distribution flows of finished product Customers nearly always receive their steel by road. However, often the initial stage of the journey is from a steel plant to a warehouse (usually in the West Midlands), from where it is transported by road to its final destination. This part of the journey is often made by rail with the modal share depending on the type of material, its source and its destination. At present, 1.5-2.0m tpy of finished steel products are transported by rail to railhead terminals for onward distribution by road to end-use customers. Imported finished steel products UK steel imports have been rising, and currently total around 7m tpy. As with flows UK produced steel; the use of rail in this category is largely to transport the products railhead terminals in the West Midlands for onward distribution by road. A lack available terminal capacity for imports is one reason why modal share for rail is low 13%.
of to of at
Exports of finished steel products UK steel exports total in excess of 6m tpy. The share of these exports transported by rail is only around 8%. Stainless Steel Whilst UK output of stainless steel is only around 500,000 tpy, over 700,000 tpy is transported by rail. This is because slab produced at Sheffield is railed to Immingham and then shipped to Sweden for processing. Up to half of this material then returns from Sweden to Sheffield for further processing or sales within the UK. Aluminium There are two major flows relating to aluminium on the UK rail network. These are deliveries of imported alumina (the raw material) from Blyth to Lynemouth and Fort William, and primary aluminium from Lynemouth for processing at the Rogerstone plant near Newport, Gwent. In terms of supplying to processors and consumers, or in dealing with imports of aluminium or aluminium products, rail has a limited share. Based on all flows in the aluminium market, the modal share of rail is currently around 10%. Steel Scrap From initial collection to arrival at a major scrapyard, scrap is always delivered by road at present. However, there are around fifteen scrapyards with rail sidings. From here, deliveries go either to one of the four electric arc furnace steel plants in the UK or to ports for export. The steel scrap market totals around 9.5m tpy. Rail’s modal share of this business is around 10%. The factors affecting modal choice vary depending on the category. For example, Corus makes extensive use of rail to receive its iron ore and to move its semi-finished products between plants. Symonds believes that road is not viewed as a viable alternative for much of this traffic. By contrast, for UK movements of finished steel products, exports, and for imports and steel scrap, there is a greater willingness of participants to shift between modes. Infrastructural issues such as warehousing, terminals and availability of rail paths can play an important role in determining modal choice in these categories.
13
In terms of the rail routes used for UK metals freight, rail flows occur between a combination of 21 rail-linked metals plants, 18 steel scrap yards (including those at ports), 12 rail-warehousing terminals and a similar number of ports. There are particularly large flows around South Wales, the West Midlands, Humberside and Yorkshire.
14
4.
Metals: Market Forecasts
4.1
Steel Consumption There are many different factors that explain UK steel consumption, due to the number and diversity of end-uses. Therefore, to fully understand and forecast steel consumption, it is necessary to study each of the end-uses of steel in turn. The major end-use industries of steel include:
•
Metal fabricated goods
•
Mechanical engineering
•
Automotive
•
Construction
Based on an analysis of the end-user markets, Symonds Group produced three scenarios for UK steel consumption. These are shown in Figure 4.1.
Base Case
Low Case
High Case
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
1978
1982
million tonnes
18 17 16 15 14 13 12 11 10 9 8
Actual
Figure 4.1: Steel Consumption Forecast Scenarios (Million Tonnes)
The base case is a revised version of the Cambridge econometrics forecasts.1 It assumes continued strong growth in construction output, relatively stable output for metal goods but a decline in vehicle output and a continued decline in manufacturing output. Overall, UK steel consumption is projected to decline by 0.1% per annum to 2021. This would mean UK steel consumption decreasing from current levels of 12.7m tonnes down to 12.3m tonnes by 2021. 1 Cambridge Econometrics publication ‘Industry and the British Economy’.
15
Low and high case scenarios have also been produced, as shown in Figure 4.1. Symonds noted that both these scenarios have a very low chance of being achieved, but are useful in presenting a range of outcomes for the steel industry.
4.2
Steel Consumption and Production Scenarios Four scenarios for UK steel production and consumption were produced by Symonds Group, based largely on forecasts of the UK exchange rate. There is an overall base scenario followed by three alternative scenarios that show the more extreme possibilities that could occur within the steel industry. The four scenarios considered are summarised in Table 4.1, along with the corresponding assumptions on consumption. Scenario Base Optimistic High Import Worst Case
Production Base production scenario Exchange rate averaging 1.40 Euro/£ High production scenario Exchange rate averaging 1.30 Euro/£ Low production scenario Exchange rate averaging 1.55 Euro/£ Low production scenario Exchange rate averaging 1.55 Euro/£
Consumption Base consumption scenario -0.1% growth per annum. High consumption scenario 1.5% growth per annum. High consumption scenario 1.5% growth per annum. Low consumption scenario -2% growth per annum.
Table 4.1: Steel Market Forecast Scenarios
In compiling the forecasts in each scenario, the consumption forecast has been taken from Section 4.1. Then anticipated trends in import levels into the UK, and export levels from the UK, have been estimated, based on the exchange rate assumptions within the production scenarios being considered and following consideration of global trends in the steel industry such as the rising demand for steel products from China. This process then leaves a surplus demand remaining in the UK to be met by domestic deliveries (i.e. consumption + imports – exports). Total UK production is then calculated as domestic deliveries plus exports. As with the consumption forecasts, the forecasts of imports, exports and UK production are best judgement estimates by Symonds based on the review and analysis of the industry. Symonds considers that a good outcome for UK steel producers would be for the UK to join the Euro, particularly if it is at an exchange rate of 1.37 Euro/£ as has been mooted by the Treasury2. Around this exchange rate level, UK steel producers have been competitive in the past. However, assuming Euro entry to be unlikely in the near future, Symonds has produced four scenarios based upon variable exchange rates. The base scenario assumes an average level of Sterling of 1.4 Euro/£. Table 4.1 presents a summary of Symonds forecasts for UK production of crude steel and for UK imports of finished steel.
2 http://www.hm-treasury.gov.uk/documents/the_euro/assessment/studies/euro_assess03_studsomerset.cfm
16
Year UK Production 2001 2006 2011 2016 2021 UK Imports 2001 2006 2011 2016 2021
Scenarios Base 13,543 15,500 15,000 14,300 13,200
Optimistic 13,543 17,000 18,000 18,500 18,500
High Import 13,543 13,250 12,000 11,000 10,000
Worst Case 13,543 12,500 9,000 6,500 5,000
6,978 7,500 8,000 8,500 9,250
6,978 6,750 7,500 8,000 8,750
6,978 8,000 9,750 11,500 13,000
6,978 7,500 7,800 8,200 8,500
Table 4.1: Forecast Summary (‘000 Tonnes) Source: Data to 2001, ISSB Limited. Data from 2003, Symonds Group Forecasts
In the base scenario, UK consumption is forecast to decline at a rate of 0.1% per annum through the forecast period. UK production, meanwhile, should be relatively competitive based upon an exchange rate averaging around 1.40 Euro/£ and given current world demand levels. However, after an initial rise in output to 2006, Symonds still expects UK production to gradually decline over the remainder of the forecast period. Steel imports into the UK have been on an upward trend for the past twenty years and this is expected to continue. Therefore, with UK consumption forecast to be stagnant, a gradual decline in UK production is expected beyond 2006. With construction output expected to grow strongly and the mechanical engineering and metal goods industries expected to experience output decline, a key to potential future variability in steel consumption is considered to be the future of UK automotive output. If the industry booms during the forecast period, then consumption should tend towards the high case scenario. By contrast, if UK car production declines very sharply with, for example, production moving to Eastern Europe then steel consumption will tend towards the low case scenario. The base case scenario assumes vehicle production declining steadily through the forecast period from current levels of 1.6 million cars/annum to 1.1m cars/annum by 2021. Symonds argues that the base scenario is considered the most likely outcome, and follows from having considered both the outlook for UK consumption of steel and the current state and potential of the UK steel producers. Furthermore, this scenario suggests that once the current re-organisation at Corus has been completed in 2005, the vast majority of UK steel plants will then survive through to 2021 with production only declining slowly through this period. The optimistic scenario is less likely to occur. However, it does show how, if conditions were to work in its favour, the UK steel industry would have the potential to thrive through to the end of the forecast period. In the high import scenario, UK consumption of steel is very strong. However, the UK steel industry is forecast to decline significantly, due to a strong level of Sterling. In such a situation, this would allow major scope for increased imports into the UK whilst denting UK producer’s ability to export competitively.
17
It should be stressed that Symonds considers the worst-case scenario to be an unlikely scenario. However, it illustrates the potential decline of the UK steel industry should factors such as a strong exchange rate and a big decline in UK car production combine to undermine UK steel producers’ markets.
4.3
Steel Scrap Demand for steel scrap in the UK will be determined by domestic electric-arc-furnace steel production and is forecast to decline by the end of the forecast period. This will allow domestic scrap suppliers to increase exports to Europe, Asia and North America. However, the potential to increase exports will be restricted by limits to the amount of scrap material produced from domestic and industrial sources in the UK due to less metal being used in the manufacture of machinery. Hence, the overall size of the UK steel scrap market is unlikely to increase.
4.4
Other Metals Consumption of stainless steel is growing faster than for either of its main competitor materials, aluminium and carbon steel. At present, it is the rapid growth in demand from China that may lead to growth in stainless steel demand of 5% per annum or higher over the coming decade. Because of this huge growth potential, Symonds expects that stainless steel production at the Sheffield site (see Section 2.2) will continue throughout the forecast period. UK consumption growth of aluminium products is currently 2% per annum. However, even if the three UK plants continue to prosper, this would likely lead to a requirement for additional imports of primary aluminium through the forecast period, as UK plants are already producing at close to capacity. Furthermore, UK production will be sensitive to a number of factors, most important of which will be UK energy prices, which are expected to rise. It is, therefore, possible that some of the UK primary aluminium plants will not survive through the forecast period.
18
5.
Metals: Rail Traffic Forecasts Using the base case outlook for the metals industry to forecast rail flows whilst assuming no change to rail’s modal share results in an increased flow of imported metal using the rail network through the forecast period. Meanwhile, once the anticipated Corus changes in 2005 have been implemented, their inter-company flows are forecast to remain relatively stable with just a few possible reductions post-2011. However, Symonds suggests that if modal share remains unchanged, then the amount of finished product being delivered by rail to UK distribution terminals or to ports for export would be expected to fall. However, there is a major export flow of semi-finished material anticipated from Teesside to Teesport. Given that movements of Corus material are currently more likely to be on rail than is the case for non-Corus steel production, the overall tonnages carried by rail would be affected by changes in Corus market share. In the absence of any modal shift, the bigger the shift away from domestic production towards imported sales, the bigger the decline in rail tonnages would be. There are, however, opportunities for increasing rail’s share of the steel import market (see below).
5.1
Rail Traffic Opportunities In reality modal share will not remain unchanged and there are a number of regulatory and economic factors that could impact on the scope for rail to retain or grow its present share of the steel and other metals distribution market. These factors include:
•
Implementation of the EC Working Time Directive in the transport sector
•
Road congestion and the planned introduction of HGV road user charging
•
The rail access charge regime for freight
The first two factors are likely to result in higher road haulage costs whilst the third has the potential to increase rail costs. Symonds took these factors into account in considering the potential for rail freight to increase its market share in individual sectors. The results are summarised in Table 5.1.
19
Distribution sector Corus to Corus UK Production to Distribution UK Production to Export Imports Iron ore Stainless steel Aluminium Scrap
Mode determinant/s Integration of steel production with rail transport Existing 95% rail modal share Handling characteristics of semi-finished products Handling characteristics of some of the finished products Capacity of inland distribution depots Very competitive ports sector Limited rail infrastructure at ports Availability of appropriate train paths Very competitive ports sector Limited rail infrastructure at ports Capacity of inland distribution depots Single dedicated rail service from Immingham to Scunthorpe Integrated production cycle Bulk alumina imports Market concentration/bulk factor Price competition
Scope for increased rail freight Minimal Small-medium Small-medium Significant Medium Small Small Significant
Table 5.1: Potential for Rail Freight
Further detail on the opportunities, threats and risks to rail’s share of the metals industry transport is contained in the following section.
20
6.
Metals: Opportunities and Constraints
6.1
Effects of Economic Issues on Rail Freight The future tonnages of metals carried on the rail network will obviously be influenced by economic factors related to the relative cost of road versus rail freight. Assuming that access charges are not increased on the rail network, then Symonds expects the economics of rail to improve in relation to road over the forecast period. This ought to lead to increased use of rail in a number of market categories: deliveries to distribution, UK steel exports, steel imports and steel scrap. The key economic factors that could improve the case for rail in the metals industry include the imposition of the working time directive, which is expected to lead to increased road haulage costs, and increased congestion on the road network.
6.2
Opportunities and Constraints Symonds concluded that certain infrastructural issues needed to be addressed before rail freight can fully achieve potential increases in its modal share. These issues include: •
Improved rail access to a number of major UK ports and steel stockholders
•
Additional warehousing
•
Rolling stock availability
•
Number and capacity of rail terminals
•
Availability of rail paths
Given these constraints, Symonds also detailed the various opportunities for rail. Firstly, there remain opportunities to increase the share of domestic steel production being transported to end-users via rail-connected terminals. Rolling stock availability and the issue of terminal capacity are important to increase market share in this market, whilst Celsa additionally has the cost of maintaining and operating its internal railway as a potential constraint. Symonds considers the biggest potential for increasing rail freight lies in increasing the share of imports using rail. With import levels forecast to grow, this is an expanding area of the market. At present, modal share is around 13% due largely to the lack of available West Midlands terminal capacity and the limited rail access to and from a number of UK ports. Addressing the issue of terminal capacity is likely to be the most important issue in seeking to attract additional imported steel to the rail network.
21
Symonds suggested that the major importers will consider significantly increasing their rail shares only if they have access to terminal facilities in the West Midlands. At present, the only terminal with some capacity available for importers is believed to be the EWS Wolverhampton steel terminal. There is substantial scope to increase the amount of steel imports making use of the rail network. Combining the base scenario metals outlook with an optimistic view of the modal share economics suggests that they could be increased from less than 1 million tonnes per year at the present time to just under 3 million tonnes per year by 2021. However, without new terminal capacity, it is difficult to see how rail tonnages could be increased much above the 1 million tpy level. A secondary benefit of new terminal capacity is that by increasing the amount of steel imports utilising rail, especially if through the channel tunnel, it would also increase the opportunities for competing with road to transport steel exports. At present rail freight operators cannot compete with cheap offers from road hauliers looking to fill their vehicles for a return journey to Europe given that they (the rail operators) need to secure rolling stock availability to make the journey. Increased imports of steel by rail could ensure the availability of rolling stock for these return export journeys, allowing rail the opportunity to compete with road for export business. The steel scrap market is not anticipated to grow through the forecast period. However, further concentration on the larger plants that produce large volumes of scrap can be expected at the expense of smaller operations. Therefore, with only a 10% modal share at present, rail has much potential to increase its share of this 9.5 million-tpy market. Additional scrap yard rail connections, and suitable infrastructure and rail paths to deepsea ports may be required. The resumption of rail-freight grants would also assist in helping this industry continue its recent move towards increased rail usage. The addition of inland terminal capacity and improving rail infrastructure at ports would require significant investment, which the economics of rail freight may not justify in some cases. Overcoming the infrastructural constraints, combined with the likely shift in modal share from economic factors, could potentially lead to rail’s share of the market rising to up to 35% for steel imports and domestic distribution traffic and 25% for steel exports and steel scrap movements. Based on these opportunities and constraints, Symonds estimated an optimistic view of the potential for rail to improve modal share within different sectors of the metals industry. To gain a full picture o the potential for rail flows in the industry by 2021, these modal share changes were then combined with the projected changes in the size of the various market categories stemming from the base scenario forecast for the steel industry. Figure 6.1 shows the potential effects upon rail freight of the combined metals related and economic related changes to rail freight by 2021. In this figure, iron ore refers only to consumption at Scunthorpe (as Port Talbot and Teesside have iron ore delivered direct to the plant by sea). Also, potential UK production at Corus Teesside and Thamesteel Sheerness is excluded. This is because output from these plants is to be focused entirely on exports of billets and blooms and as such they will not be transporting either semi-finished or finished products around the UK either by road or rail with the exception of a single flow of material from Teesside to Teesport.
22
Forecast Market Size and Rail Freight Potential, 2021 12
Rail
Road
10 8 6 4 2
Figure 6.1:
6.3
Co ru s2 D 00 om 1 es tic 20 D 21 i st rib ut io n 20 01 U K 20 St 21 ee lE xp or ts 20 01 U K 20 St 21 ee lI m po rts 20 01 20 St ai 21 nl es sS te el 20 01 20 21 A lu m in iu m 20 01 20 21 St ee lS cr ap 20 01 20 21
Co ru s
to
Iro
n
O re
20 01 20 21
0
Forecast Market Size and Rail Freight Potential, 2021 (Million Tonnes)
Threats to Rail’s Modal Share Whilst Symonds report largely focuses on the opportunities for increasing rail freight in the metals industry, there is also potential for rail to lose its market share if rail costs were to rise significantly related to road haulage costs. The base scenario in Symonds’ report is that the relative cost position of rail against road will improve through the forecast period as the costs of road haulage increase. If, however, rail costs were to increase then a section of metals traffic could potentially be lost to the network. A similar result could occur if, contrary to our forecast, ongoing road haulage efficiency improvements or universal road-user congestion charging lead to a reduction in road haulage costs improving the relative attraction of road to rail. In either case, flows to distribution, exports, imports and steel scrap, where material could be switched to road, could be lost. These markets currently amount to over 3 million tonnes per annum of traffic. For inter-plant flows and imports of iron ore, road does not provide a satisfactory alternative to rail. Thus, even under a scenario of rising rail costs, this 6 million tpy of traffic would continue to move largely by rail, as would the 5-6m tpy of iron ore imports. However, it would mean an increase in costs for those steel plants that receive their raw products or semi-finished feed by rail.
Strategic Rail Authority Freight Team August 2004
This document is confidential and is intended for the use of the client to whom it is addressed. The views in this paper are those of Symonds Group Ltd and do not necessarily represent the views of the SRA.
2
Contents 1. Introduction to the Study 1.1 Purpose of SRA Study 1.2 Background 1.3 Limitations
3 3 3 4
2. Metals: Market Structure and Definition 2.1 Key Players in the Steel Market 2.2 Metals Production 2.3 Demand Drivers in the Metals Industry
5 5 6 6
3. Metals: Current Market Size 3.1 UK Steel Production 3.2 UK Steel Consumption 3.3 Transportation Patterns
8 8 9 11
4. Metals: Market Forecasts 4.1 Steel Consumption 4.2 Steel Consumption and Production Scenarios 4.3 Steel Scrap 4.4 Other Metals
14 14 15 17 17
5. Metals: Rail Traffic Forecasts 5.1 Rail Traffic Opportunities
18 18
6. Metals: Opportunities and Constraints 6.1 Effects of Economic Issues on Rail Freight 6.2 Opportunities and Constraints 6.3 Threats to Rail’s Modal Share
20 20 20 22
3
1.
Introduction to the Study
1.1
Purpose of SRA Study The Metals market study is part of a wider piece of research being conducted by the Strategic Rail Authority in relation to its Corporate Plan 2003-04 freight objectives. The outputs from the market studies will be used to inform several of the SRA’s key work streams. As well as helping to identify marketing priorities, the results may be used in demand modelling to improve forecasts of likely future traffic. The other markets being studied are:
1.2
•
Coal
•
Automotive
•
Waste
•
General Freight
•
Aggregates
•
Petroleum and Petroleum Products.
Background The SRA aim was to carry out studies of each major market sector for which rail either carries, or may have the ability to capture, significant volumes of traffic. Each study reviews the structure of the respective market within the UK economy, and identifies past, current and forecasts of future volumes and patterns of supply and demand. Key constraints and risk areas are identified where possible. It is worth noting that although much of the analysis is at industry level, rather than by transport mode, focus is placed on issues with potential relevance to rail and forecasts of rail use have been generated. The Metal market study was completed by Symonds Group Ltd in the period July 2003 to December 2003. It should be noted that the figures and forecasts contained within the market study were generated by the consultants based on views and assumptions deemed appropriate, in their view during this time. The forecasts do not reflect changes to the metals industry that have occurred during the first-half of 2004. The SRA has decided to publish this summary report as a contribution towards the metals industry and to share the results with the various companies and bodies who aided the study. As this is a summary of the consultant’s work, the views stated are those of Symonds Group Ltd rather than the SRA.
4
1.3
Limitations It must be recognised that market analyses of this kind tend to be limited by data availability. Given this, early phases of the work were focused on information and data gathering and identification. It should be highlighted that specific rail flows typically result from market dynamics that are not possible to model accurately in full, therefore any forecast will include a qualitative element informed by consultation with key players.
5
2.
Metals: Market Structure and Definition Symonds reports on the prospects for rail freight growth in the metals sector; this includes:
•
Steel
•
Steel scrap
•
Stainless steel
•
Aluminium
•
Iron ore.
However, the report mainly focuses on steel.
2.1
Key Players in the Steel Market The UK steel market is characterised by the existence of one dominant producer, Corus, together with a couple of smaller producers. These producers are responsible for meeting half of the UK’s steel consumption. The remainder of the UK’s consumption needs are met by imports. In total, Symonds identified the following key players in the UK steel industry:
•
Corus Group Plc – is the sixth largest steel producer in the world in terms of production
•
Celsa Steel UK – currently sells most of its production to the UK markets, but exports some product to Ireland
•
Thamesteel Ltd – currently does not sell into the UK market, but exports to Saudi Arabia
•
Alphasteel – currently produces reinforced bars for the concrete industry
•
ISTIL (UK) Plc – the mill now concentrates on rolling merchant products from Ukrainian billet feedstocks, for sale almost exclusively within the UK market
•
Caparo – UK steel conversion and distribution business.
6
2.2
Metals Production Two ways of producing crude steel are utilised in the UK. Around 75% of UK production is currently via the basic oxygen converter method with operational plants at Port Talbot, Scunthorpe and Teesside (all Corus). The electric arc furnace process is used in the UK at the Corus plants in Rotherham and Stocksbridge together with the recently reopened Thamesteel and Celsa plants at Sheerness and Cardiff and Alphasteel in Newport. In terms of raw materials, the basic oxygen converter method requires substantial quantities of iron ore whilst the electric arc furnace process is based on the utilisation of steel scrap. Steel scrap is collected (produced) from a number of sources that fall into one of two categories:
•
New scrap – arises in industry from off-cuts, stampings, turning etc
•
Old scrap – derived from end-of-life products.
Demand for scrap is driven mainly by the production of steel, in particular that produced using the electric arc furnace method. The extent to which the UK scrap merchants can tap into the growing worldwide market for steel is, however, constrained by the amount of steel scrap available for collection in the UK. Much of the steel scrap collected comes from industry. However, the declining importance of the industrial sector to the UK economy means that the amount of scrap becoming available from this sector can be expected to decline over time. The UK aluminium industry encompasses all sectors, from primary production through fabrication and end-use of aluminium in all its forms, to recycling back into aluminium products. Primary aluminium is produced in the UK at three plants, located at Lynemouth, Holyhead and Fort William. Stainless Steel is produced in the UK at the Tinsley meltshop in Sheffield by Outokumpu Stainless. With demand for stainless steel growing by 5% per annum worldwide, the outlook for the plant appears positive. 2.3
Demand Drivers in the Metals Industry There is no simple variable that explains UK steel consumption. Steel has many enduses and their individual demand drivers are not identical. This becomes particularly apparent when it is considered that it is the domestic supply of these end-user industries that affects steel consumption. Thus, whilst GDP may well be a key variable in explaining the consumption of each of the end-use industries, it may be largely irrelevant in explaining the domestic supply. This is demonstrated by Figure 2.1.
7
annual change (10-yr moving average)
GDP
Steel Cons
4.0% 3.0% 2.0% 1.0% 0.0% -1.0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
-2.0% -3.0% -4.0% -5.0%
Figure 2.1: Comparing GDP to UK Steel Consumption
As demonstrated by Figure 2.1, although broadly consistent, UK steel consumption does not track with GDP changes precisely. Therefore, to fully understand and forecast steel consumption, it is necessary to study each of the end-uses of steel in turn. A picture of overall steel consumption can then be built. Based on this ‘picture’, Symonds derived an equation to provide an approximate representation of steel consumption. The reliability of the equation was tested against historical data, and comparing forecasts with actual data gives a good measure of correlation. The forecasts produced using this methodology are examined in Section 4.
8
3.
Metals: Current Market Size
3.1
UK Steel Production During 2002, the UK was the 17th largest producer of crude steel in the world with output of 11.7 million tonnes. However, UK production has declined sharply over recent years, as shown by Figure 3.1. As recently as 1997, UK production totalled 18.5 million tonnes and only once in the past fifty years has UK production been below the levels seen in 2001 and 2002. This was in 1980 when output was hit by strike action.
million tonnes
30 25 20 15 10
19 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 20 01
5
Figure 3.1: UK Production of Crude Steel (Million Tonnes)
Symonds believe that reduced output during 2001 and 2002 reflects the ending of primary steelmaking by Corus at the Llanwern plant, together with an outage of one of the blast furnaces at Port Talbot for over thirteen months. Bankruptcy of Allied Steel and Wire during 2002 also hit output. During the first six-months of 2003, UK steel output rose by 4.6% year-on-year to 6.35 million tonnes. UK production of finished steel has also declined in recent years, as shown by Table 3.1.
9
Finished Steel Production Hot Rolled Flat Products
1996 8,625
1997 9,028
1998 8,450
1999 7,969
2000 7,326
2001 5,866
Hot Rolled Long Products
7,048
7,122
6,763
6,217
5,678
5,671
15,776
16,223
15,301
14,186
13,003
11,407
1,320
1,931
1,877
1,692
1,571
1,588
Total Hot Rolled Steel Products Other Steel Products
Table 3.1: UK Production of Finished Steel (‘000) Tonnes. Source: ISSB Limited
Symonds Group concluded that the main reason for the decline in UK steel production since 1997 and particularly between 2000 and 2002 was a strong Sterling exchange rate, which led to increased imports of finished steel products into the UK and a decline in Corus’ exports. As a result, Corus suffered large financial losses and cutback its production in response. In an effort to restore profitability, Corus is planning to implement a new strategy by 2005 focusing its UK steelmaking on three plants, each of which will receive significant investment. As a result both of this strategy and of current investment in other UK steel plants, Symonds expects UK production to rise from recent low levels over the next few years. This is consistent with increased world demand particularly from the USA and Far East markets, particularly China. However, Symonds argue that UK steel production is unlikely to stabilise at the 17-18 million tpy (tonnes per year) levels seen during the mid 1990s. Instead, they expect production levels to rebound to around 15-16 million tpy in the short term but believe there is the possibility of further cutbacks from this level before 2021. From 1983 to 2000, the UK was a net exporter of steel products. However, the continued steady growth of imports together with the recent sharp decline in exports meant that in 2001 the UK imported more steel products than it exported for the first time in nineteen years. This suggested a decline in market share for UK producers. Almost all imports into the UK are of finished steel products. In 2001, exports of finished steel products from the UK totalled 6.5 million tonnes. Almost all these exports were of Corus material.
3.2
UK Steel Consumption UK consumption of steel has not shown any consistent pattern of growth or decline over the past twenty-five years. Instead it has tended, to a fairly limited degree, to vary along with the economic cycle. Between 1999 and 2001, consumption was stable at around 13.4 million tpy. Table 3.2 and Figure 3.2 show finished steel consumption.
10
19000 18000 17000 '000 tonnes
16000 15000 14000 13000 12000 11000 2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
10000
Data: National Statistics - Economic Trends Annual Supplement, table 4.3
Figure 3.2: UK Steel Consumption (‘000 Tonnes)
Year
Net Home Deliveries by UK Producers
Imports
Derived Non-Producer Exports
Apparent Consumption
1996
8383
5147
612
12918
1997
8626
5894
526
13994
1998
8260
6466
132
14594
1999
7652
6014
207
13459
2000
7255
6387
283
13359
2001
6762
6978
330
13410
Table 3.2: Apparent Consumption of Finished Steel (‘000 Tonnes). Source: ISSB Limited
Of the domestic consumption met by domestic supply, around half is supplied via stockholders. The remainder is delivered direct from UK steel mills to UK consumers. The main end-uses of steel in the UK are in the construction, automotive, mechanical engineering and metal goods sectors. An estimate of the breakdown of consumption by end-users for 2002 is as follows:
•
Engineering 24%
•
Construction 22%
•
Automotive 17%
•
Metal goods 14%
•
Other industries 23%.
11
Over the past two decades, steel consumption has been positively driven by rising construction and vehicle output but dragged down by declining manufacturing engineering and metal fabricated goods output in the UK economy.
3.3
Transportation Patterns Figure 3.3 illustrates rail’s share of the UK metals market, in 2001. In this figure, iron ore refers only to consumption at Scunthorpe (as Port Talbot and Teesside have iron ore delivered direct to the plant by sea).
Rail
12
Road
10 8 6 4 2 -
Iron Ore
Corus to Corus
Corus to Distribution
UK Steel Exports
UK Steel Imports
Stainless Steel
Aluminium
Steel Scrap
Figure 3.3: Rail’s Share of the UK Metals Market (Million Tonnes Per year)
As with exported material, a lot of imported steel is transported around the UK by road. Where rail does play a role, it is to transport imported material from ports of entry to railhead distribution centres, from where it will usually travel by road to its final destination. The relevant materials that are transported by rail around the UK can be grouped into a number of categories: Raw material supply For steel, this includes coke and limestone, which were not included in Symonds study, together with iron ore, which was. There is only one iron ore flow on the UK rail network and this is the movement of around 5 million tonnes per annum from Immingham to Scunthorpe. Corus to Corus flows of semi-finished product This is material typically transported between Corus steelmaking and processing plants. Symonds understands that 95-100% of such movements is carried by rail, and these form the bulk of UK metals rail freight with total volumes of around 6.7 million tpy.
12
UK Production to distribution flows of finished product Customers nearly always receive their steel by road. However, often the initial stage of the journey is from a steel plant to a warehouse (usually in the West Midlands), from where it is transported by road to its final destination. This part of the journey is often made by rail with the modal share depending on the type of material, its source and its destination. At present, 1.5-2.0m tpy of finished steel products are transported by rail to railhead terminals for onward distribution by road to end-use customers. Imported finished steel products UK steel imports have been rising, and currently total around 7m tpy. As with flows UK produced steel; the use of rail in this category is largely to transport the products railhead terminals in the West Midlands for onward distribution by road. A lack available terminal capacity for imports is one reason why modal share for rail is low 13%.
of to of at
Exports of finished steel products UK steel exports total in excess of 6m tpy. The share of these exports transported by rail is only around 8%. Stainless Steel Whilst UK output of stainless steel is only around 500,000 tpy, over 700,000 tpy is transported by rail. This is because slab produced at Sheffield is railed to Immingham and then shipped to Sweden for processing. Up to half of this material then returns from Sweden to Sheffield for further processing or sales within the UK. Aluminium There are two major flows relating to aluminium on the UK rail network. These are deliveries of imported alumina (the raw material) from Blyth to Lynemouth and Fort William, and primary aluminium from Lynemouth for processing at the Rogerstone plant near Newport, Gwent. In terms of supplying to processors and consumers, or in dealing with imports of aluminium or aluminium products, rail has a limited share. Based on all flows in the aluminium market, the modal share of rail is currently around 10%. Steel Scrap From initial collection to arrival at a major scrapyard, scrap is always delivered by road at present. However, there are around fifteen scrapyards with rail sidings. From here, deliveries go either to one of the four electric arc furnace steel plants in the UK or to ports for export. The steel scrap market totals around 9.5m tpy. Rail’s modal share of this business is around 10%. The factors affecting modal choice vary depending on the category. For example, Corus makes extensive use of rail to receive its iron ore and to move its semi-finished products between plants. Symonds believes that road is not viewed as a viable alternative for much of this traffic. By contrast, for UK movements of finished steel products, exports, and for imports and steel scrap, there is a greater willingness of participants to shift between modes. Infrastructural issues such as warehousing, terminals and availability of rail paths can play an important role in determining modal choice in these categories.
13
In terms of the rail routes used for UK metals freight, rail flows occur between a combination of 21 rail-linked metals plants, 18 steel scrap yards (including those at ports), 12 rail-warehousing terminals and a similar number of ports. There are particularly large flows around South Wales, the West Midlands, Humberside and Yorkshire.
14
4.
Metals: Market Forecasts
4.1
Steel Consumption There are many different factors that explain UK steel consumption, due to the number and diversity of end-uses. Therefore, to fully understand and forecast steel consumption, it is necessary to study each of the end-uses of steel in turn. The major end-use industries of steel include:
•
Metal fabricated goods
•
Mechanical engineering
•
Automotive
•
Construction
Based on an analysis of the end-user markets, Symonds Group produced three scenarios for UK steel consumption. These are shown in Figure 4.1.
Base Case
Low Case
High Case
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
1978
1982
million tonnes
18 17 16 15 14 13 12 11 10 9 8
Actual
Figure 4.1: Steel Consumption Forecast Scenarios (Million Tonnes)
The base case is a revised version of the Cambridge econometrics forecasts.1 It assumes continued strong growth in construction output, relatively stable output for metal goods but a decline in vehicle output and a continued decline in manufacturing output. Overall, UK steel consumption is projected to decline by 0.1% per annum to 2021. This would mean UK steel consumption decreasing from current levels of 12.7m tonnes down to 12.3m tonnes by 2021. 1 Cambridge Econometrics publication ‘Industry and the British Economy’.
15
Low and high case scenarios have also been produced, as shown in Figure 4.1. Symonds noted that both these scenarios have a very low chance of being achieved, but are useful in presenting a range of outcomes for the steel industry.
4.2
Steel Consumption and Production Scenarios Four scenarios for UK steel production and consumption were produced by Symonds Group, based largely on forecasts of the UK exchange rate. There is an overall base scenario followed by three alternative scenarios that show the more extreme possibilities that could occur within the steel industry. The four scenarios considered are summarised in Table 4.1, along with the corresponding assumptions on consumption. Scenario Base Optimistic High Import Worst Case
Production Base production scenario Exchange rate averaging 1.40 Euro/£ High production scenario Exchange rate averaging 1.30 Euro/£ Low production scenario Exchange rate averaging 1.55 Euro/£ Low production scenario Exchange rate averaging 1.55 Euro/£
Consumption Base consumption scenario -0.1% growth per annum. High consumption scenario 1.5% growth per annum. High consumption scenario 1.5% growth per annum. Low consumption scenario -2% growth per annum.
Table 4.1: Steel Market Forecast Scenarios
In compiling the forecasts in each scenario, the consumption forecast has been taken from Section 4.1. Then anticipated trends in import levels into the UK, and export levels from the UK, have been estimated, based on the exchange rate assumptions within the production scenarios being considered and following consideration of global trends in the steel industry such as the rising demand for steel products from China. This process then leaves a surplus demand remaining in the UK to be met by domestic deliveries (i.e. consumption + imports – exports). Total UK production is then calculated as domestic deliveries plus exports. As with the consumption forecasts, the forecasts of imports, exports and UK production are best judgement estimates by Symonds based on the review and analysis of the industry. Symonds considers that a good outcome for UK steel producers would be for the UK to join the Euro, particularly if it is at an exchange rate of 1.37 Euro/£ as has been mooted by the Treasury2. Around this exchange rate level, UK steel producers have been competitive in the past. However, assuming Euro entry to be unlikely in the near future, Symonds has produced four scenarios based upon variable exchange rates. The base scenario assumes an average level of Sterling of 1.4 Euro/£. Table 4.1 presents a summary of Symonds forecasts for UK production of crude steel and for UK imports of finished steel.
2 http://www.hm-treasury.gov.uk/documents/the_euro/assessment/studies/euro_assess03_studsomerset.cfm
16
Year UK Production 2001 2006 2011 2016 2021 UK Imports 2001 2006 2011 2016 2021
Scenarios Base 13,543 15,500 15,000 14,300 13,200
Optimistic 13,543 17,000 18,000 18,500 18,500
High Import 13,543 13,250 12,000 11,000 10,000
Worst Case 13,543 12,500 9,000 6,500 5,000
6,978 7,500 8,000 8,500 9,250
6,978 6,750 7,500 8,000 8,750
6,978 8,000 9,750 11,500 13,000
6,978 7,500 7,800 8,200 8,500
Table 4.1: Forecast Summary (‘000 Tonnes) Source: Data to 2001, ISSB Limited. Data from 2003, Symonds Group Forecasts
In the base scenario, UK consumption is forecast to decline at a rate of 0.1% per annum through the forecast period. UK production, meanwhile, should be relatively competitive based upon an exchange rate averaging around 1.40 Euro/£ and given current world demand levels. However, after an initial rise in output to 2006, Symonds still expects UK production to gradually decline over the remainder of the forecast period. Steel imports into the UK have been on an upward trend for the past twenty years and this is expected to continue. Therefore, with UK consumption forecast to be stagnant, a gradual decline in UK production is expected beyond 2006. With construction output expected to grow strongly and the mechanical engineering and metal goods industries expected to experience output decline, a key to potential future variability in steel consumption is considered to be the future of UK automotive output. If the industry booms during the forecast period, then consumption should tend towards the high case scenario. By contrast, if UK car production declines very sharply with, for example, production moving to Eastern Europe then steel consumption will tend towards the low case scenario. The base case scenario assumes vehicle production declining steadily through the forecast period from current levels of 1.6 million cars/annum to 1.1m cars/annum by 2021. Symonds argues that the base scenario is considered the most likely outcome, and follows from having considered both the outlook for UK consumption of steel and the current state and potential of the UK steel producers. Furthermore, this scenario suggests that once the current re-organisation at Corus has been completed in 2005, the vast majority of UK steel plants will then survive through to 2021 with production only declining slowly through this period. The optimistic scenario is less likely to occur. However, it does show how, if conditions were to work in its favour, the UK steel industry would have the potential to thrive through to the end of the forecast period. In the high import scenario, UK consumption of steel is very strong. However, the UK steel industry is forecast to decline significantly, due to a strong level of Sterling. In such a situation, this would allow major scope for increased imports into the UK whilst denting UK producer’s ability to export competitively.
17
It should be stressed that Symonds considers the worst-case scenario to be an unlikely scenario. However, it illustrates the potential decline of the UK steel industry should factors such as a strong exchange rate and a big decline in UK car production combine to undermine UK steel producers’ markets.
4.3
Steel Scrap Demand for steel scrap in the UK will be determined by domestic electric-arc-furnace steel production and is forecast to decline by the end of the forecast period. This will allow domestic scrap suppliers to increase exports to Europe, Asia and North America. However, the potential to increase exports will be restricted by limits to the amount of scrap material produced from domestic and industrial sources in the UK due to less metal being used in the manufacture of machinery. Hence, the overall size of the UK steel scrap market is unlikely to increase.
4.4
Other Metals Consumption of stainless steel is growing faster than for either of its main competitor materials, aluminium and carbon steel. At present, it is the rapid growth in demand from China that may lead to growth in stainless steel demand of 5% per annum or higher over the coming decade. Because of this huge growth potential, Symonds expects that stainless steel production at the Sheffield site (see Section 2.2) will continue throughout the forecast period. UK consumption growth of aluminium products is currently 2% per annum. However, even if the three UK plants continue to prosper, this would likely lead to a requirement for additional imports of primary aluminium through the forecast period, as UK plants are already producing at close to capacity. Furthermore, UK production will be sensitive to a number of factors, most important of which will be UK energy prices, which are expected to rise. It is, therefore, possible that some of the UK primary aluminium plants will not survive through the forecast period.
18
5.
Metals: Rail Traffic Forecasts Using the base case outlook for the metals industry to forecast rail flows whilst assuming no change to rail’s modal share results in an increased flow of imported metal using the rail network through the forecast period. Meanwhile, once the anticipated Corus changes in 2005 have been implemented, their inter-company flows are forecast to remain relatively stable with just a few possible reductions post-2011. However, Symonds suggests that if modal share remains unchanged, then the amount of finished product being delivered by rail to UK distribution terminals or to ports for export would be expected to fall. However, there is a major export flow of semi-finished material anticipated from Teesside to Teesport. Given that movements of Corus material are currently more likely to be on rail than is the case for non-Corus steel production, the overall tonnages carried by rail would be affected by changes in Corus market share. In the absence of any modal shift, the bigger the shift away from domestic production towards imported sales, the bigger the decline in rail tonnages would be. There are, however, opportunities for increasing rail’s share of the steel import market (see below).
5.1
Rail Traffic Opportunities In reality modal share will not remain unchanged and there are a number of regulatory and economic factors that could impact on the scope for rail to retain or grow its present share of the steel and other metals distribution market. These factors include:
•
Implementation of the EC Working Time Directive in the transport sector
•
Road congestion and the planned introduction of HGV road user charging
•
The rail access charge regime for freight
The first two factors are likely to result in higher road haulage costs whilst the third has the potential to increase rail costs. Symonds took these factors into account in considering the potential for rail freight to increase its market share in individual sectors. The results are summarised in Table 5.1.
19
Distribution sector Corus to Corus UK Production to Distribution UK Production to Export Imports Iron ore Stainless steel Aluminium Scrap
Mode determinant/s Integration of steel production with rail transport Existing 95% rail modal share Handling characteristics of semi-finished products Handling characteristics of some of the finished products Capacity of inland distribution depots Very competitive ports sector Limited rail infrastructure at ports Availability of appropriate train paths Very competitive ports sector Limited rail infrastructure at ports Capacity of inland distribution depots Single dedicated rail service from Immingham to Scunthorpe Integrated production cycle Bulk alumina imports Market concentration/bulk factor Price competition
Scope for increased rail freight Minimal Small-medium Small-medium Significant Medium Small Small Significant
Table 5.1: Potential for Rail Freight
Further detail on the opportunities, threats and risks to rail’s share of the metals industry transport is contained in the following section.
20
6.
Metals: Opportunities and Constraints
6.1
Effects of Economic Issues on Rail Freight The future tonnages of metals carried on the rail network will obviously be influenced by economic factors related to the relative cost of road versus rail freight. Assuming that access charges are not increased on the rail network, then Symonds expects the economics of rail to improve in relation to road over the forecast period. This ought to lead to increased use of rail in a number of market categories: deliveries to distribution, UK steel exports, steel imports and steel scrap. The key economic factors that could improve the case for rail in the metals industry include the imposition of the working time directive, which is expected to lead to increased road haulage costs, and increased congestion on the road network.
6.2
Opportunities and Constraints Symonds concluded that certain infrastructural issues needed to be addressed before rail freight can fully achieve potential increases in its modal share. These issues include: •
Improved rail access to a number of major UK ports and steel stockholders
•
Additional warehousing
•
Rolling stock availability
•
Number and capacity of rail terminals
•
Availability of rail paths
Given these constraints, Symonds also detailed the various opportunities for rail. Firstly, there remain opportunities to increase the share of domestic steel production being transported to end-users via rail-connected terminals. Rolling stock availability and the issue of terminal capacity are important to increase market share in this market, whilst Celsa additionally has the cost of maintaining and operating its internal railway as a potential constraint. Symonds considers the biggest potential for increasing rail freight lies in increasing the share of imports using rail. With import levels forecast to grow, this is an expanding area of the market. At present, modal share is around 13% due largely to the lack of available West Midlands terminal capacity and the limited rail access to and from a number of UK ports. Addressing the issue of terminal capacity is likely to be the most important issue in seeking to attract additional imported steel to the rail network.
21
Symonds suggested that the major importers will consider significantly increasing their rail shares only if they have access to terminal facilities in the West Midlands. At present, the only terminal with some capacity available for importers is believed to be the EWS Wolverhampton steel terminal. There is substantial scope to increase the amount of steel imports making use of the rail network. Combining the base scenario metals outlook with an optimistic view of the modal share economics suggests that they could be increased from less than 1 million tonnes per year at the present time to just under 3 million tonnes per year by 2021. However, without new terminal capacity, it is difficult to see how rail tonnages could be increased much above the 1 million tpy level. A secondary benefit of new terminal capacity is that by increasing the amount of steel imports utilising rail, especially if through the channel tunnel, it would also increase the opportunities for competing with road to transport steel exports. At present rail freight operators cannot compete with cheap offers from road hauliers looking to fill their vehicles for a return journey to Europe given that they (the rail operators) need to secure rolling stock availability to make the journey. Increased imports of steel by rail could ensure the availability of rolling stock for these return export journeys, allowing rail the opportunity to compete with road for export business. The steel scrap market is not anticipated to grow through the forecast period. However, further concentration on the larger plants that produce large volumes of scrap can be expected at the expense of smaller operations. Therefore, with only a 10% modal share at present, rail has much potential to increase its share of this 9.5 million-tpy market. Additional scrap yard rail connections, and suitable infrastructure and rail paths to deepsea ports may be required. The resumption of rail-freight grants would also assist in helping this industry continue its recent move towards increased rail usage. The addition of inland terminal capacity and improving rail infrastructure at ports would require significant investment, which the economics of rail freight may not justify in some cases. Overcoming the infrastructural constraints, combined with the likely shift in modal share from economic factors, could potentially lead to rail’s share of the market rising to up to 35% for steel imports and domestic distribution traffic and 25% for steel exports and steel scrap movements. Based on these opportunities and constraints, Symonds estimated an optimistic view of the potential for rail to improve modal share within different sectors of the metals industry. To gain a full picture o the potential for rail flows in the industry by 2021, these modal share changes were then combined with the projected changes in the size of the various market categories stemming from the base scenario forecast for the steel industry. Figure 6.1 shows the potential effects upon rail freight of the combined metals related and economic related changes to rail freight by 2021. In this figure, iron ore refers only to consumption at Scunthorpe (as Port Talbot and Teesside have iron ore delivered direct to the plant by sea). Also, potential UK production at Corus Teesside and Thamesteel Sheerness is excluded. This is because output from these plants is to be focused entirely on exports of billets and blooms and as such they will not be transporting either semi-finished or finished products around the UK either by road or rail with the exception of a single flow of material from Teesside to Teesport.
22
Forecast Market Size and Rail Freight Potential, 2021 12
Rail
Road
10 8 6 4 2
Figure 6.1:
6.3
Co ru s2 D 00 om 1 es tic 20 D 21 i st rib ut io n 20 01 U K 20 St 21 ee lE xp or ts 20 01 U K 20 St 21 ee lI m po rts 20 01 20 St ai 21 nl es sS te el 20 01 20 21 A lu m in iu m 20 01 20 21 St ee lS cr ap 20 01 20 21
Co ru s
to
Iro
n
O re
20 01 20 21
0
Forecast Market Size and Rail Freight Potential, 2021 (Million Tonnes)
Threats to Rail’s Modal Share Whilst Symonds report largely focuses on the opportunities for increasing rail freight in the metals industry, there is also potential for rail to lose its market share if rail costs were to rise significantly related to road haulage costs. The base scenario in Symonds’ report is that the relative cost position of rail against road will improve through the forecast period as the costs of road haulage increase. If, however, rail costs were to increase then a section of metals traffic could potentially be lost to the network. A similar result could occur if, contrary to our forecast, ongoing road haulage efficiency improvements or universal road-user congestion charging lead to a reduction in road haulage costs improving the relative attraction of road to rail. In either case, flows to distribution, exports, imports and steel scrap, where material could be switched to road, could be lost. These markets currently amount to over 3 million tonnes per annum of traffic. For inter-plant flows and imports of iron ore, road does not provide a satisfactory alternative to rail. Thus, even under a scenario of rising rail costs, this 6 million tpy of traffic would continue to move largely by rail, as would the 5-6m tpy of iron ore imports. However, it would mean an increase in costs for those steel plants that receive their raw products or semi-finished feed by rail.
