Boston, MA -- (SBWIRE) -- 07/21/2012 -- BMI's France Metals Report for Q3 2012 examines the long-term challenges facing steelmaking and aluminium smelting in the country and warns that the strong growth seen in the early months of 2012 will diminish.

We look at how the country's leading metals producers, ArcelorMittal and Rio Tinto Alcan, are facing up to an increasingly hostile and competitive operating environment and whether France will be able to return to pre-2008 rates of production. We also examine whether the structural shift towards delocalisation that has affected the French automotive industry could extend to metallurgical production.

In the first four months of 2012, France's crude steel output grew by a relatively impressive 5.4% yearon- year (y-o-y) to 5.57mn tonnes (mnt), which came on the back of a 2.4% rise in production in 2011. Growth in output coincided with rising exports and increased domestic manufacturing. However, the tide may be changing, as new industrial orders in the domestic metallurgical industry fell by 7.9% quarter-onquarter (q-o-q) in Q112, indicating some adjustment in metals production was likely going into Q212. The situation in the rest of the year is unlikely to improve in the face of the eurozone crisis, which is bound to have an effect on a range of French industrial activities. By 2016, crude production and consumption should reach 17.0mnt and 17.2mnt respectively, which is still well down on France's prerecession levels.

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Despite the cuts in capacity utilisation, aluminium should fare better than steel during the forecast period, helped in part by its use in lighter and more fuel-efficient vehicles. The French steel industry will undergo the same process of 'delocalisation' as other industrial sectors. In the longer term, however, we believe French production remains susceptible to production erosion, if not complete factory closures. Over time, we expect carmakers to be more inclined to boost production overseas and gradually reduce production domestically, meaning that a full recovery in auto production may be difficult to attain and therefore holding back consumption levels.

Over the last quarter, BMI has revised the following forecasts and views:

- We anticipate a 5% drop in crude steel consumption as manufacturing activity slows. With this in mind, BMI has stuck with its output forecast of 15.5mnt in 2012, a decline of 1.5%.
- BMI's Infrastructure team expects the construction sector to resume growth at 1.2% in 2012, following four years of contraction. As such, the market in hot-rolled products will tend to favour modest growth in long products while flat products will fall.
- By 2016, aluminium production should have recovered to 2008 levels, provided there is no closure of capacity.

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