Steelmaking over-capacity pressures profitability

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20 January 2012 – Significant rationalization in the global steel sector is required if many operators are to remain profitable, according to EY’s Global Mining & Metals Leader Mike Elliott.

EY’s report, Global Steel 2012: Competing for growth in the steel sector, released today, highlights the issues and challenges facing the sector.

Elliott says steelmaking capacity increased by 80 million tonnes in 2011 to an estimated 1,890 million tones, with 2011 consumption at 1,398 million tones, resulting in 493 million tonnes of excess capacity.

“There is now significant over-capacity in the steel sector globally. Until that is addressed it will continue to put pressure on the profitability of every operator in the sector,” he says.

However, global figures mask the regional shifts in production and demand, with fewer domestic growth prospects as well as increased competitive threats for steel players with an established footprint in Europe and North America.

“Russian steel sector will witness a primarily positive effect of the accession of Russia into WTO, while the mining sector will target IPOs subject to the improved environment at the key capital markets. Many of the planned 2011 IPOs were postponed for the better times by major mining companies” – says Evgeny Khrustalev, CIS M&M leader.

China remains the dominant global player, accounting for 45% of global steel production in 2011. China is a net exporter of steel, with production exceeding domestic demand by 39 million tonnes in 2011. However, the pace of growth in China’s steelmaking capacity is now likely to plateau.

India, the new emerging steel powerhouse, is likely to remain a net importer for a number of years despite rapid ongoing growth in its steelmaking capacity. Although capacity increased 8.9% between FY2005 and FY2011*, this was outstripped by growth in domestic consumption of 13.1% over the same period.

“Steel is a sector that has historically benefited from significant subsidies, concessions and protection in many countries around the world, with governments often under pressure to protect manufacturing jobs.”

“Despite this, given the level of global steelmaking over-capacity and the efficiency and profitability gulf between the older plants and newer plants, rationalization seems inevitable at some point.”

Elliott says the steel sector has generally been slow to respond to changes in the operating environment.

“There are a few clever operators doing some clever things, but we are not seeing sector-wide changes,” he says.

“Steelmakers who are transforming their business model are introducing greater operating flexibility, increasing ownership of raw material production, and becoming more customer-oriented in their product mix and more innovative in how they price their product.”

“Factors like proximity to the customer, labor costs, the cost of energy and the cost of carbon will be strategic drivers of where steelmaking capacity will be in the future.”

Elliott says this is reflected in the push by multinational steelmakers to establish greenfield or joint ventures in India, where demand is expected to continue to grow at pace.

“It will be the most efficient, customer-focused steelmakers that do best.”

Elliott says the business model of steelmaking needs to adapt so that supply-constrained raw material price risk is managed by steel producers or passed on to customers.

* Indian financial year April to March.

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