Global steel 2015-2016
Globalize or customize: finding the right balance
The steel sector is undergoing a transformation, as globalization defines the business landscape.
"Several megatrends at the macroeconomic as well as sector level are driving the globalization of the steel business. The industry must embrace the challenge and transform itself for success." - Anjani Agrawal, Global Steel Leader
Steel — a sector being driven to transform
The outlook for the global economy is mostly positive with growth picking up in the US, India and Southeast Asia, while several emerging markets are experiencing a deceleration in growth. However, the structural shift in the transitioning Chinese economy could cap this momentum.
Countries and businesses are becoming increasingly interdependent through trade, investment and financial systems across the world.
The risks and opportunities in the steel business are getting larger in scale and impact, with their sources becoming more diverse and global.
Real growth is in being a truly international player
To survive and thrive, in a sector in constant transition, steelmakers need to transform themselves.
Globalization is no longer a matter of choice; steel businesses’ long-term success depends on it.
The businesses that ride the next wave of growth will be those that understand the trends and refine their strategies, business models and portfolios according to a truly global mindset.
The steel producers must find the right balance between globalization and customization.
Opportunity to embrace globalization
While the Chinese steel sector turns introspective over the next decade to deal with its excess capacity, pollution, low market concentration and lack of profitability, this is the window of opportunity to build competitive advantage now before supersized, more efficient Chinese steelmakers emerge in the global market.
Steel companies that embrace globalization (in their strategy, supply chains, knowledge and information, processes, talent and financial flows) while balancing with customization (of their products, marketing, stakeholder relationships) will emerge as sector leaders in the long term.
Drivers of globalization
Below are some of the key drivers of globalization that are putting increasing pressure on the steel sector. Pressure to globalize will drive the need for stronger global policy coordination among nations and resilient supply chains for companies operating in this environment.
Key transformation themes for the sector
To succeed and become more competitive in this dynamic environment, steel companies need to focus on four critical themes:
- Rationalize excess capacity
Rationalize excess capacity
“Rationalization of excess capacity and an associate period of increased consolidation will be necessary to bring back efficiency and profitability to the sector.”- Lee Downham, Global Mining & Metals Transactions Leader, EY
Many steel-producing countries still see themselves as isolated or domestic markets, but that is no longer the reality. Low-cost excess capacity in one country is displacing production or sales in another, and this is providing incentives for governments to implement regional policies to protect the domestic steel sector or even encourage capacity addition.
The largest surplus capacity today is in China
The Chinese Government has awakened to the need to rationalize this excess capacity and is putting in place policy measures to deal with it. Initiatives include domestic consolidation and enforcement of environmental regulations. Given the social implications of these initiatives, it will be a few years before the country achieves any meaningful capacity reduction.
While China deals with excess capacity, it’s the perfect opportunity for non-Chinese steelmakers to remove inefficiencies and create economies of scale through consolidation.
Reasons for global excess capacity
Steel players in the US and Europe have attempted to be in sync with the local demand. Governments can play a facilitating role by aligning their social security programs to alleviate the potential pain of capacity closure. Simultaneously, governments need to focus on making steel companies more globally competitive rather than providing support in the form of subsidies or temporary trade barriers.
“Investment in new steel projects continues despite slowing demand growth, currency fluctuations and falling steel prices.”- Pierre Mangers, Executive Director, EY
Investors and capital providers must adopt dynamic demand forecasting models and robust project appraisal processes. Then, they need to test the underlying assumptions that result from these models and processes even when the investment appears to be logical, purely in a national or regional context.
- Increase market and product concentration
Increase market and product concentration
“Several steelmakers are already focusing on growth strategies, looking at how they can expand to gain access to areas of increased demand, regardless of location.”- Bob Stall, Partner, EY
The global steel industry is relatively fragmented, with the market share of top 10 steel producers at 28% being very low in comparison with the automotive or seaborne iron ore markets.
The industry went through intense consolidation from 1995 to 2005 in order to counteract the downturn.
Steel market concentration virtually unchanged from 1970
The inability of many in the sector to generate surplus cash or access capital has restrained further consolidation since the start of the most recent downturn. Synergies and market access have been the major motivations for steel deals, including selling off non-core assets, resulting in increased concentration in regional markets.
With the currently changing dynamics, steelmakers are focusing on innovative growth strategies, exploring how they can gain access to areas of increased demand, regardless of location.
In areas with higher consolidation, e.g., the US, Japan and the EU, steelmakers have gained market power. In future, the biggest impact in the global steel market will be felt when giant Chinese steel businesses emerge post their domestic consolidation. Steelmakers will be seeking:
- Economies of scale
- Global synergies
- Expanded product portfolios
- An extended value chain in response to globalization
With their end-use sectors increasingly operating from global platforms, steel suppliers will seek to follow their customers with specialized products to leverage R&D and extend products’ life cycle.
Capital raising 2011–2014
2014 vs. 2013
2014 vs. 2011
IPOs 383 172 Follow-ons (equity) 13,561 2,856 9,051 2,674 –70% –80% Convertibles 459 163 2,774 322 –88% –30% Bonds 30,418 22,877 19,835 15,520 –22% –49% Loans 53,571 19,662 31,248 27,435 –12% –49% Total 98,392 45,730 62,908 45,951 –27% –53%
Recent capital raisings also show that global majors have been able to raise capital relatively easily and cost effectively. As the market concentration increases, steelmakers will then have pricing discipline, enhanced capacity utilization and improved market power with customers, suppliers and capital providers, thereby sustaining and growing profitably.
- Increase market competitiveness
Increase market competitiveness
"The implementation of agile supply chain strategies will aid in the creation of competitive advantage in a rapidly changing business environment." - Carlos Bremer, Partner, EY
Global steel exports increased dramatically to reach record levels in 2014.
The spread between Chinese steel prices and those in other regions further expanded, making imported steel attractive despite high freight costs and longer lead time.
Other regional and currency issues have also made exports from several other countries like Russia cost competitive. However, using resources to deal with increasing trade is not a long-term solution. Instead, the best strategy will be for businesses to be more competitive, agile and innovative while maintaining cost competitiveness.
Steelmakers are focusing on developing premium, value added, niche downstream products for specialty sectors or applications. Leaders are collaborating with their customers in the early stage of product development, integrating R&D, manufacturing, sales and supply chains. The focus is also on after-sales support, performance based service contracts and franchise developments where feasible.
Reconfiguring the supply chain
Reconfiguring the supply chain to make it efficient, while maintaining its agility and responsiveness to an ever-changing scenario, will be critical to becoming more competitive.
Reliability of product delivery and quality is a baseline expectation. Servicing low-volume, high-value and high variability products for small but profitable customers will also need to be supported by forecasting and aggregation tools, both for demand and capacity. All these must be technology-enabled by real-time collaboration and through an information sharing platform across all levels of the supply chain.
- Embrace digital
"It has become imperative for steel companies to adopt digitization, implement innovative systems and change their business models in order to stay ahead of the competition." - Angie Beifus, Senior Mining & Metals Analyst, EY
Digital is already one of the defining megatrends now, but explosive growth has barely begun. Steelmakers must adopt digitalization to address the challenges they face and adapt to new models of working to:
- Develop differentiation
- Improve risk resilience
- Ensure sustainability
- Drive profitability
Digital channels to address challenges in the steel sector
Managing risks and volatility
To manage external risks a steel business faces, a critical success factor will be a system that enables early capture of impending trends and faster analysis of scenarios and that generates options for decision-making.
Use of predictive analytics to develop actionable insights and plan for the future can be vital in several functional areas, such as:
- Forecasting future demand and supply of steel or inputs
- Targeting and tapping into new markets
- Meeting fluctuating customer demands
Automation and convergence of information technology with operational technology can allow integration of upstream, midstream and downstream to provide an accurate view of the supply chain.
Business-to-business (B2B) integration also facilitates more efficient and effective communication with stakeholders.
Implementing reliable technology will improve end-to-end productivity and product quality. Some recent initiatives from steel players include launching and participating in online trading platforms to manage risks and create new offerings.
Global strategy, local execution
While the global outlook for steel is mildly positive as there are increasing signs of momentum in some parts of the world, there are still risks to global growth and a number of these evolve around China.
"In China, a slowing domestic real estate market remains the biggest downside risk for steel." - Miguel Zweig, Global Mining & Metals Leader, EY
There is no consensus on whether China has reached peak steel consumption. The persistent rise in urbanization will continue to boost steel demand. The pressure to preserve provincial employment and tax revenues will delay the overall capacity rationalization for years to come, while product mix undergoes change.