Window of opportunity for steelmakers

July 27, 2015

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LONDON, 27 JULY 2015. Steel companies around the world must find the right balance between globalization and customization if they are going to survive and prosper, according to EY’s latest annual global steel report, Globalize or customize: Finding the right balance, Global steel 2015-2016.

It is EY’s fifth annual analysis and assessment of the risks and opportunities facing companies in the steel sector globally.

Excess capacity continues to be the biggest challenge in the global steel sector, amid declining growth in global demand, driven in large part by China.

Much of the surplus capacity is attributable to Chinese steel producers, although they are often displacing higher-cost, less-efficient production elsewhere in the world.

The Chinese Government’s planned rationalization of its steel sector over the next 10 years – to deal with its excess capacity, pollution, low market concentration and lack of profitability – is expected to create a smaller number of large and efficient Chinese steel companies.

Anjani Agrawal, EY’s Global Steel Leader, says:

“Non-Chinese steelmakers have a small window of opportunity to build competitive advantage before supersized, efficient Chinese steelmakers emerge more strongly in the global market.

“To make the most of this opportunity, the sector will need to undergo significant change and transform itself into a far more efficient and competitive sector able to create and retain value and turn profitable.”

The report notes four key areas of transformation for steel companies around the world:

1) Rationalize excess capacity
2) Increase market and product concentration
3) Boost market competitiveness
4) Embrace digital

Rationalizing capacity in a global market

Agrawal says, “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 more capacity.

“Governments need to focus on making steel companies more globally competitive rather than providing support in the form of subsidies or temporary trade barriers, and investors and capital providers must adopt more dynamic demand forecasting models and robust project appraisal processes.”

Increasing market and product concentration

Despite consolidation from 1995 to 2005, the global steel industry is still relatively fragmented with market share of the top 10 steelmakers at just 28% low in comparison to the automotive and seaborne iron ore markets.

Agrawal says: “Increasing globalization will push steelmakers into more consolidation to gain economies of scale, global synergies, expand product portfolios, extend their value chains and access new markets.

“As market concentration increases, it should enable greater pricing discipline, better capacity utilization and provide greater market power with customers, suppliers and capital providers.”

Boosting market competitiveness

Steelmakers need to focus on developing premium, value-added, niche downstream products for new sectors or specialty applications. Leading companies are collaborating with their customers in the early stage of product development, integrating R&D, manufacturing, sales and supply chains.

Agrawal says: “Reconfiguring the supply chain to make it more efficient, while maintaining agility and responsiveness to ever-changing scenarios will be critical for steelmakers to become more competitive.”

Embracing digital

“Digital is one of the defining megatrends right now but most steelmakers are yet to harness it to develop new ways of working,” says Agrawal.

Predictive analytics, digital supply chain and the convergence of information technology and operational technology offer opportunities to develop differentiation, improve decision-making, improve risk resilience and help drive profitable growth.

An intelligent connected ecosystem of smart machines, ICT systems, products, logistics and people can foster sustainable competitive advantage for steel companies and their stakeholders.

Globalization and customization – getting the balance right

The risks and opportunities in the steel business are getting larger in scale and impact, and are being driven by more diverse and global factors.

Agrawal says: “Globalization is forcing change on steelmaking companies worldwide, amidst their need to customize and they must achieve the fine balance to survive and succeed.”

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Notes to Editors

About the report
EY’s Global Steel 2015-16 report is an analysis of the global steel sector that assesses the risks and opportunities facing companies in the steel sector. It is the fifth consecutive annual report on the steel sector that EY has produced and is based in part on EY discussions with leading steel companies around the world. Steel companies that understand the risks and opportunities in the sector, and the potential impacts on their business, are better placed to respond to the current challenges in the sector.

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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