Steelmakers face intense global and regional competition in the face of large amounts of excess capacity, in an environment of increased trade and protectionism measures. In these challenging market conditions, steelmakers have been focusing on cash, cost and capital discipline.
To release additional cash flow, companies are looking at working capital (WC) performance management. WC performance has fluctuated over the last five years due to market volatility, ongoing transformation and the relative success and failure of companies to deliver efficiencies.
Our analysis of 50 of the largest global steel companies reveals aggregate levels of gross working capital (defined as sum of trade receivables, inventory and accounts payable) amounts at around US$245b. In addition, we found that there is a US$35.7b WC improvement opportunity between current (2016–17) WC performance of the top 50 steelmakers versus their historical best performance.
Despite recent initiatives to improve WC performance, we believe there remains significant opportunities for further improvement. Potentially — steelmakers could release additional cash flows of billions of dollars.
Major factors influencing changes in WC for steelmakers:
- Pricing practices for supply contracts have changed and a larger proportion of steel is negotiated on the spot market
- Raw material prices have been particularly volatile in the last year
- Declining capital expenditure
Overall steel companies need to drive continuous operational and structural improvements to manage WC more effectively. WC needs to be viewed as a strategic initiative, with the whole business engaged and incentivized to drive improvement. It could be achieved by:
- Building increased responsiveness to change
- Deploying lean and agile manufacturing and supply solutions for different products
- Making greater use of cross-functional cooperation and effective collaboration between participants in the value chain
Creating the right scale between globalization and customization
Steel companies that embrace globalization (in their strategy, supply chains, knowledge and information, processes, talent and financial flows) while balancing it with customization (their products, marketing, stakeholder relationships) will emerge as sector leaders in the long term.
Steel companies that will ride the next wave of growth will be those that understand globalization and tailor their strategies based on that understanding. They will explore new markets and establish well-rounded global business portfolios.
The following are factors encouraging globalization in the steel industry:
- Accelerated knowledge exchange through technology and social media
- Global regulation is increasing carbon, environmental and safety
- Global capital more interchangeable and free flowing across borders
- Currency realignment
- Continuous shifts in manufacturing competitiveness
- Increasing global trade
- Multi-speed regional growth
- Capital investors more sector or region agnostic