A new world, a new strategy
Global steel 2013
Despite a slight increase in demand for steel and the removal of older steelmaking capacity in 2012, the global percentage level of excess capacity is greater now than it was a year ago.
In 2013, excess capacity will remain the most significant issue in the steel sector.
This is due to the continued growth in new steelmaking facilities. Capacity utilization rates in the sector remain at about 80%. In 2013, excess capacity will remain the most significant issue in the steel sector.
High-cost producers will be challenged by:
- Sluggish global steel demand
- Excess steelmaking capacity
- Ongoing volatility in raw materials costs
However, the continued closure of older, higher-cost steelmaking capacity and increased demand should lead to improved profitability for the sector in 2014 and 2015, driven by better utilization rates.
Restoring sustainable value
Our 2012 steel report detailed the importance of:
- Customer reach
- Operational agility
- Cost competitiveness
- Stakeholder confidence
While these remain priorities for 2013, the big challenge for steelmakers in 2013 is to be cost competitive while maintaining enterprise value. To achieve this, producers need to assess and address the following, recognizing that the best solutions will be unique to each business:
- Is there value in vertical integration?
- Strategic cost reduction for survival and future growth
- The optimal capital structure for the future business model
Is there value in vertical integration?
In recent years, many steelmakers have integrated raw material mines into their supply chains. However, our new analysis suggests that despite the benefits in controlling raw material costs, it may not always have a positive benefit on enterprise value.
Steelmakers should critically assess the value of vertical integration to their business and consider alternatives to managing raw material costs and supply, such as long-term contracts with suppliers and relocating production sites closer to upstream suppliers.
Strategic cost reduction
While cost reduction activities are necessary, steelmakers must not move away from their overall company strategy, thus potentially causing further value erosion.
In this report, we also discuss the different approaches currently being used to reduce cash operating costs, including:
- Reducing production volumes from loss making plants to stabilize steel prices and address oversupply in the market
- Restructuring labor
- Canceling or reducing supply contracts
The goal for companies is the optimal allocation of capital to maximize shareholder returns and achieve the most efficient capital structure. As a result, an increasing number of corporate boards are putting greater focus on the key drivers of efficient capital allocation.
This focus is extremely relevant to steelmakers because falling demand and oversupply in regional markets have led to short-term liquidity challenges that may threaten credit ratings and debt covenants. Capital management today includes:
- Building in options
- Capital raising
- Divesting non-core assets