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Ironing out the wrinkles

The metal industry is on its way to recovery after the crisis.

Although the losses of other industries, like banking or construction, might have been more prominently featured in the news, the four-year period since the financial crisis hit in 2008 has not exactly been a joyride for the metal sector either. 
When its two key buyers, the car industry and the construction sector, collapsed, Hungarian steel production swiftly followed suit. From the neighborhood of two million tons a year before the crisis, the country’s steel output suddenly plunged 30% to 1.4 million tons in 2008. And while the construction business is still flat lining, closing 2011 with another two-digit decline, the auto industry is now showing clear signs of recovery. This, topped with substantial investments such as the Mercedes-Benz plant that recently started production in Kecskemét (90 km southeast of Budapest), provides the metallurgy sector with a good deal of optimism. 

“If all goes well, the volume of this year’s steel production will sneak back to pre-crisis levels, reaching the area of 2 million tons,” says Attila Kovács, CEO of DRW Danube Tube and Hollow Section Manufacturing and Trading Kft. Kovács’ company started to operate last October, re-establishing a 50-year-old tradition of steel manufacturing after four years of forced hiatus in Csepel, one of the industrial suburbs of Budapest. The company has published extremely ambitious plans, but Kovács said its expectations, based on the first ten months of operation, have proved to be well founded. “We will definitely meet our revenue target of HUF 5 billion this year, and we still think that four-fold growth by 2014 is a realistic goal,” he declares. In terms of production figures, this means that the output of the company will be around 30,000 tons this year, with the aim of reaching 120,000 tons in two years.

While this might seem all too optimistic in a sector whose aggregate production is estimated to be around 140,000 tons this year, Kovács says his firm has tradition and experience on its side. “Although the machinery we use in the production process is brand new, the basic technology has not changed, and Csepel can provide us with seasoned experts in the field of tube manufacturing. Well-established infrastructure is also a contributing factor. Our plant has a direct railway connection, but we transport most of our products on the Danube using our own harbor. This means that we can keep transportation costs at around EUR 20 per ton, rather than the usual transportation costs of EUR 35-40 per ton, which is a significant competitive advantage,” he explains. And while competition still exists, the market is not nearly as saturated as it was before the crisis, as the rise in demand was not matched by a corresponding increase in production capacities. “We see growth potential both on the domestic market, where our high added-value tubes can replace imported products, and in neighboring countries. Especially so if, as we all expect, the EU introduces anti-dumping import duties on Ukrainian, Russian and Turkish hollow tubes,” Kovács concludes.

The promising growth of DRW is a spectacular success, but it is by no means an isolated example. Some 20 years after the collapse of the Soviet-type planned economy, most of Hungary’s traditional heavy industry centers (with the exception of Miskolc) are still operating, albeit with much lower production volumes. 
But while in the past four years survival was the ultimate and only goal these factories could aim for, the picture now seems a little less menacing. For example, ISD Dunaferr, Hungary’s single biggest metal producer (based in Dunaújváros, 70 km south of Budapest), resumed its reconstruction program with the opening of a new furnace in June. The program was originally started in 2005 but was put on hold when the crisis hit in 2008. Shareholders have now decided to resume the modernization project, as the HUF 10 billion investment will result in a 40% growth of hot-rolled coil and sheet production capacities. CEO Evgeny Tankhilevich says this considerable increase will largely be based on imported raw material from the Ukrainian affiliates of Dunaferr’s parent company, ISD Holding, whose shipping capacities are “virtually unlimited”. “I hope that we will always have local slabs in the furnace, but we build our growth expectations on the capacity of our Ukrainian partners,” Tankhilevich said at a press conference in June.

“The country of iron and steel”

The infamous slogan of Hungary’s economic restructuring in the 1950s, of becoming a “country of iron and steel”, originates from the first Hungarian post-war Communist dictator, Mátyás Rákosi, who introduced a Soviet-style planned economy through the three-year plan (1947) and the five-year plan (1950). With Hungary lacking both a tradition of heavy industries and the necessary raw materials, the artificial creation of industrial centers in Miskolc, Salgótarján, Ózd, Dunaújváros, Csepel and various other locations proved to be disastrous from a market point of view. After the collapse of the Communist regime in 1989, these non-competitive state-owned industrial giants collapsed, posing both economic and a social issues, the effects of which still strongly affect entire regions of the country.

As the metal industry is now beginning to get back into shape, the change in the structure of its customers becomes increasingly tangible. With one key buyer left and the construction industry practically removed from the picture, the gap seems to be filled by other sectors, mainly by machinery and vehicle manufacturers. Carmakers have always played an important role as the buyers of metal products, and although Suzuki and Mercedes largely rely on their own supply chains and imported metal parts, the rate of domestic production is still on the rise.

Daimler AG’s greenfield Mercedes investment, for example, triggered great enthusiasm among Hungarian companies, but it turns out that becoming a partner is harder than they would have expected. To date, some 18 suppliers were reported to have local production, but according to business weekly Figyelő, no Hungarian-owned company has become a TIER1 supplier thus far. Attila Kovács confirms the difficulties of becoming a supplier in the auto industry. DRW has just completed sample shipments of precision tubes used in the seats and pneumatic cylinders to a Hungarian carmaker. Although Kovács has not disclosed which company it aspires to partner, he said it was waiting to see whether these tests would lead to a long-term business relationship.

A more surprising source of demand comes from the producers of agricultural machinery. Brands like Caterpillar or JCB tend to use more and more Hungarian-made parts in their tractors, trailers, and other industrial or agricultural vehicles. These, combined with the traditions of Hungarian agricultural machine production, contribute to a steadily growing industrial sector. The former centers of state-owned giant Mezőgép in Győr, Orosháza, and Szombathely still operate under the ownership of various, mostly non-Hungarian parent companies. Other important domestic customers include the EU-subsidized wind turbine industry, and the few state-funded projects that remain from the construction business, such as the reconstruction of Budapest’s Margithíd (Margaret Bridge), the re-construction of railway bridges all across the country, and the extension of the southern sector of the M0 motorway around Budapest.

Zsolt Balla