Recent forecasts (Hatch Consulting Group) estimate that global demand for steel could grow by a third – nearly 500m tons – by 2030, mainly driven by construction, infrastructure, automotive, energy and capital goods. So why do we hear so much negative news about this vital industry, and how can it return to profitability?
There is a big disconnect between the short-term and long-term picture of the global steel industry. There is structural overcapacity, leading to utilisation rates of 75-80%. (Typically, steel plants need at least 85% utilisation rates to generate margins and global consumption will need to grow by at least 400m tons for it to reach this figure.)
In the developed world, the industry is challenged by either flat-lining demand or marginal growth. It suffers from structural disadvantages due to high power costs, environmental regulation, old and dated assets, and challenges in passing raw material price increases to customers. There is a vicious cycle of weak demand, low margins and insufficient surpluses to fund modernisation.
The industry in developing regions has a different set of challenges. Demand is growing, but there is intense competition from global over capacity, weak economic returns to fund investment and suboptimal innovation and customer services.
Given these challenges, what are the levers for unlocking value in the global steel industry?
Accelerate consolidation in China
The industry will need to shrink, with fewer players. The Chinese government will be the prime driver for this process, but in slow, measured steps; keeping an eye on the social cost of consolidation. It is vital for the industry to move away from intense predatory competition to a stage where steel prices rise to a level that provides reasonable economic margins.
China is expected to become a large generator of steel scrap, with the opportunity to replace blast-furnace-based production with scrap-fed electric arc furnaces. Resulting pay offs include a lower carbon footprint, better ability to operate at lower capacities, predictable spreads between raw materials and steel prices, and better demand volatility management.
Some demand growth is necessary for the industry to consolidate and transform technologically. There is still huge potential for demand to grow in the developing world. Even in the US and Europe, there is a need to renew infrastructure.
Key role for the government
The role of the government is usually to provide long-term patient capital in developing regions or as a fire fighter of last resort to bail out failing producers in developed regions. But it should do more, and accept responsibility for key roles: shaping the industry, supporting national champions and incentivising the interdependencies and ecosystems required for manufacturing and construction to flourish. Some governments recognise this, and have been very successful in backing steel, many others remain indifferent or place excessive confidence in market forces.
Invest in product development
The automotive sector receives the largest share of the steel industry’s R&D spend. Other industries, such as construction and capital goods remain underinvested and the industry must innovate there faster.
Steel will continue to remain a fundamental basic material in an industrialised, modern economy. It has the ability to evolve and add value, but it must break out of the vicious cycle that it currently finds itself in and move to a profitable virtuous cycle.
Siddhartha Sengupta, Director, Hatch Consulting Group