Downturn in investments hits steel industry hard

Rautaruukki to shut down one blast furnace in Raahe; more than 500 jobs in danger

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The global decline in investments has started to affect even the front-end of the production chain. Steelworks across the world are reducing their production, as prices drop and the manufacturing industries are holding back on new investments.
      The large Finnish steel producer Rautaruukki announced yesterday that it is to adjust steel production and other operations in line with weakened demand and elevated inventory levels.
     
In connection with adjustment and efficiency measures, the company is to start co-determination negotiations about possible lay-offs, redundancies, and part-time working in different market areas.
      According to Rautaruukki, actions to improve efficiency aim at permanent cost savings of around EUR 60 million at an annual level.
      In the company’s Finnish units, it is estimated that efficiency measures will involve the loss of a maximum of 520 jobs. Corporate-wide, the company estimates it needs to reduce around 1,000 jobs, according to Rautaruukki’s stock exchange release of December 1st.
     
To adjust steel production, one of the two blast furnaces at the Raahe Works in Finland will be shut down temporarily. Output at Ruukki Production's other units in Finland will also be scaled back accordingly.
      The divisions and business support functions will continue to implement actions under the Boost programme launched in October this year.
      According to the programme, Ruukki Metals is planning to close the steel service centre in Tampere, Finland by the end of June 2009 and to focus parts processing on Raahe and Seinäjoki.
     
Furthermore, Ruukki Construction is to continue to further improve production efficiency by centralising construction product manufacture in the Baltic states on the Pärnu plant in Estonia.
      The small profiling units in Riga (Latvia) and in Vilnius (Lithuania) will be closed by the end of April 2009. Local sales offices in Latvia and Lithuania will continue to operate. In addition, production and supply chain efficiency will be improved across the division.
      Rautaruukki was set up by the Finnish government in 1960. The state gave up its majority holding in 1997, and today the state owns just under 40% of the shares of Rautaruukki Corporation.
     
Another major Finnish stainless steel producer Outokumpu had better news, announcing on Monday that the planned temporary layoffs at its Tornio plant can be avoided, as the same level of savings could be achieved by other actions.
      The company proposed initiating the statutory negotiations in November due to the current low order load.
      Outokumpu Group employs 8,700 people, of whom 2,300 work at the Tornio Works in Northern Finland.
     
In recent years, there has been a major global investment boom both in the manufacturing and construction sectors. Thanks to that period of intense economic activity, there has also been a big demand for the products of steel producers.
      Now that the United States and the euro zone have already slumped into recession the probability is that the entire global economy is to slide closer to a depression period, estimates Jukka Palokangas, the Chief Economist of the Federation of Finnish Technology Industries.
      ”Typically, the customers of metal processing companies are investing industries, and when the cyclical depression coincides with the financial crisis even steel companies will have to adjust their production in line with weakened demand”, Palokangas notes.
      Construction began to slow down in Europe already in the spring, whereupon difficulties expanded into the car industry.
      ”In the autumn, the deceleration has spread across all industries as a result of the financial crisis. At present, no economic fields are showing profit, and the same phenomenon is expected to occur even in the services sector, albeit at a delay”, Palokangas concludes.
     
Following price cuts, the large steel producers worldwide have started to drive down their production. The world’s largest steel giant Arcelor Mittal announced last month that they would cut their capacity in the United States by 35% and in Europe by 30%.
      According to Pohjola Bank analyst Pekka Spolander, the sudden slamming on of the brakes at Rautaruukki indicates that the demand for carbon steel has also stopped very rapidly.
      The fact that one of the two blast furnaces at the Raahe Works in Finland will be shut down temporarily implies that the volumes have really fallen. The same applies to the entire basic industry: the volume of orders on hand for the last quarter of 2008 are almost non-existent”, says Spolander.
     
Spolander notes further that even though the most acute financial crisis were over, all companies are just keeping an watchful eye on their cash reserves.
      ”The inventories have been reasonably large. When there is a slump in demand, customers do not buy anything, but use up all their stocks, waiting for prices to drop. The phenomenon could be seen in the stainless steel industry slightly earlier than in other industries”, Spolander concludes.
      President and CEO Sakari Tamminen from Rautaruukki confirms that the difficult market situation calls for adjustment measures in all sub-contractor chains.
      ”I believe that some industries are overreacting. If nobody in the chain has a clear idea of what the prospects for the near future are, no decisions are made”, Tamminen notes.
      Mika Vuoti, the chief shop steward of Rautaruukki’s Raahe Works, reports that the news came as a surprise to the personnel. He hopes that the management of the corporation would be sensible enough in order to ascertain first what the prospects for next year are.


Links:
  Federation of Finnish Technology Industies
  Rautaruukki Corporation Stock Exchange release 1.12.2008
  Outokumpu Stock Exchange release 1.12.2008

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