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Global Steel: 2010 trends, 2011 outlook - Challenges and issues - EY - Global

Global Steel: 2010 trends, 2011 outlook

Challenges and issues

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“The future growth in steel relies upon sustainable steel solutions that will reduce the carbon footprint of steel consuming industries through material and energy efficiency.“

Pierre Mangers, Executive Director, Mining & Metals, EY

Steelmakers have had a challenging couple of years in the wake of the global financial crisis. In 2010, recovery in steel demand was far from consistent and steelmakers had to work hard at managing every aspect of their business in the face of fluctuating demand. This is compounded by increasing raw material costs.

The fluctuations in demand, as well as raw material price volatility are the two biggest challenges facing steelmakers. And with these market conditions likely to persist, steelmakers need to factor this volatility into their business models.

In doing so, they have to consider the following issues:

  • Scarcity of coking coal - Coking coal is a key raw material for the production of steel. There is a significant supply-demand gap in the coking coal market and the shortage of this key material is a real concern, particularly as it is unlikely to improve any time soon.

    As a result steel players are looking to secure coal assets via joint ventures or acquisition, and they are also investing in new technologies to reduce or eliminate coking coal from the steel-making process.
  • Raw material price volatility - With a scarcity of supply comes the obvious increase in prices, which in turn creates a significant amount of margin squeeze for steel producers. In 2011 crude steel production costs are likely to increase due to forecast price increases for iron ore, coking coal and energy.

    Subsequently, companies are looking to control raw materials via backward integration strategies; securing contracts through joint-venturing of associates and/or buying from a diverse supplier base.
  • Increasing operational efficiency and cost effectiveness - To offset the margin squeeze, steel makers have begun focusing on increasing operational efficiencies in order to reduce operating costs and improve the quality of output.

    Some operators are reducing operating costs by optimizing the equipment that is being used, and adapting their maintenance strategies. Some companies are also considering a shared services approach to capture the benefits of economies of scale for common activities.
  • Improving energy efficiency - Energy is one of the main cost components in steelmaking operations and while the cost of energy increases steelmakers are under pressure to optimize their energy consumption. Steelmakers are coming up with innovative ways to use outputs from steel mills to generate electricity, and we are also seeing companies invest in energy companies to secure supplies.
  • Improving product mix - Some companies are investing in moving their line of steel product offerings up the value chain. Nucor has grown new markets during the recent economic downturn by developing a new and improved product mix. It has seen them move more than 500,000 tonnes of plate per year to value grades that carry higher margins.

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