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July 31, 2017
Five inconvenient truths for the global steel industry
By: John E. Lichtenstein and Richard Oppelt

Today, trade and overcapacity are such dominant issues for the steel industry that it tends to push other issues into the background, where they are largely ignored. This is particularly true for problems that challenge conventional industry wisdom, or that are believed to exist only in the distant future.

However, it is safe to say that conventional wisdom has not always served the industry well, especially when it comes to judging the speed at which the future is bearing down on the present. So, it is important that we look beyond trade and capacity issues, and explore what we call five inconvenient truths—trends that industry leaders need to be thinking about in the next few years, not in the distant future.

Truth #1: Global steel demand growth is slowing dramatically.

In the decade prior to the Great Recession, global demand grew at an annual rate of 5 percent.1 Looking at the next 20 years, we estimate growth of only 1.1 percent per year, resulting in 2035 global demand of 1.87 billion tons.2 That’s an increase of just 300 million tons from today—significantly less than the excess global capacity that is currently in place. Growth is slowing for several reasons:

  • China’s rapid ascent—which drove previous global demand—was a unique phenomenon that is not going to be repeated in other countries.

  • The long-term decline in overall steel intensity is accelerating due to material substitution, shifts in design parameters and steelmakers’ own success in producing lighter, stronger steels.

  • The growth of the circular economy, together with changes in consumer preferences, is already leading to reduced demand for end products such as automobiles.

  • Future economic development in emerging economies will be far less steel-intensive than in the past due to the globalization of manufacturing, among other trends.

Truth #2: The overcapacity problem will persist for years, probably decades.

Overcapacity is not going away. Like Sisyphus,3 the steel industry seems to be condemned to labor at a never-ending task, with progress continually being stymied by overwhelming forces. Why is this happening?

  • Reductions in China’s excess internal capacity are unlikely to keep pace with declining domestic demand, which is expected to fall by 50 to 100 million tons by 2035.4

  • China is adding to excess capacity outside its borders. The “One Belt, One Road” strategy calls for the construction of new steel plants in neighboring countries.5 China is also building and acquiring unneeded plants outside of Central Asia.6

  • Excess capacity is being created in other countries where there is local demand growth or the desire to diversify economic activity.

  • Capacity creep—which is normally 1 to 2 percent per year7—will be amplified in the coming years as companies deploy digital technologies to increase mill productivity.

Truth #3: The industry remains trapped in a downward value-capture spiral.

By definition, lighter and stronger steels reduce the mass of steel required in a given application, which in turn reduces the relative value of the steel, measured as a percentage of the total value generated by the steel users. In 1947, iron and steel accounted for 45 percent of the value of motor vehicles; by 2014, that had declined to less than 6 percent.8 Data from other steel markets tells the same story.

Not surprisingly, this has weakened the pricing power of producers. Even with advanced steel products that carry price premiums, the higher prices barely compensate for the lower tonnage that results from lighter gauges. Often, higher prices fail to generate adequate returns on the investments required to produce these steels.

This value-consuming spiral will continue as long as steel is priced by the ton. Shifting to value-based pricing is a lot easier said than done, but the need to do so is becoming more urgent in light of slower demand growth and ongoing overcapacity.

Truth #4: Digital platforms will become a dominant channel for steel commerce in the coming decade.

Industry participants point to the failure of steel marketplaces during the dotcom era as proof that “it can’t happen to us.” Their argument is that steel specifications are too heterogeneous and service requirements too exacting for online marketplaces to work.

Those attributes haven’t changed in the ensuing years—but there has been a quantum leap in the technologies that underpin marketplace platforms. These are enabling increased transparency and step-change improvement in supply chain efficiencies, leading to shorter lead times and reduced overall inventories. And market readiness has moved forward as well, as steel buyers’ experience with B2C platforms shapes their expectations for B2B commerce.

Platforms will also connect the full set of value-chain participants, from the design stage through the manufacture and recycling of end products. This will upend today’s commercial and operating systems and disrupt the boundaries between “mill business” and “service center business,” with both groups vying for a common set of customers.

Truth #5: Industry scale economies are being disrupted.

Scale is important in the industry—and even as electric-arc furnace (EAF) mini-mills have made inroads, the pursuit of operating scale has continued. But so too has the development of advanced, smaller scale configurations. The mandates of the circular economy and climate change will encourage the proliferation of reduced-scale plants that are sized to match new low-carbon production processes and take advantage of renewable energy sources.

Meanwhile, additive manufacturing technologies have been improving rapidly. A year ago, the predominant view was that these technologies would work for small, precision-machined components made from high-cost alloys, but not for larger volume carbon steel applications. Today, that view is being challenged, potentially creating further disruption in the industry.

What will it all mean?

These inconvenient truths will be felt across the industry, but their impact will vary for different groups. Raw material suppliers, for example, are likely to see global iron ore demand peak during the next decade as steel demand growth slows and the EAF share of production increases in response to circular economy and climate-change mandates. Steel producers will see further pressure on margins and on the viability of existing business models—and executives will have to fundamentally rethink what it means to be a steel company. And for service centers, steel marketplace platforms will undermine traditional business models that rely on ready inventories and price arbitrage as core elements. Service centers will need to find new ways to create value—or else disappear.

Across the industry, the size and required skillsets of the workforce will shift dramatically. Digital disruption will reduce steel company headcounts through automation, machine-to-machine integration, analytics, robotics and remote monitoring/control. The main driver will not be cost savings from smaller payrolls, but rather the increases in reliability, efficiency and productivity that that can be driven by digital technology.

These five inconvenient truths are already starting to reshape the industry. Thus, they demand attention soon, even if the details on how they will unfold are not yet clear. Trade and overcapacity remain an important issue, but they must not become a distraction from the deeper strategic disruptions that are just around the corner. Executives need to realize that everything about their business will change, and then develop effective responses—starting today.

For additional reading on trends in the steel industry, see our point of view, Steeling for disruption: Global steel producers must reinvent themselves as demand growth disappears.

Note: This blog is based on comments made at the Steel Survival Strategies conference in New York City on June 27, 2017 by John Lichtenstein, now retired Global Metals lead for Accenture. Download the full text of his remarks.


Sources:
1 Accenture Strategy forecasts using historical data from the World Steel Association.
2 Ibid.
3 In Greek mythology, Sisyphus was noted for his trickery. His punishment, for eternity, was to push a large boulder up a hill, only to watch it roll back down just as it reached the top of the slope.
4 Accenture Strategy forecasts using historical data from the World Steel Association.
5 Zhu, Yi and Kenneth Hoffman. “Steel Demand May Improve on One Belt One Road,” Bloomberg Professional, June 23, 2015, https://www.bloomberg.com/professional/blog/steel-demand-may-improve-on-one-belt-one-road/ (accessed June 1, 2017).
6 Ibid.
7 “Global Steel Equities,” Credit Suisse Securities Research & Analytics, September 6, 2012.
8 Accenture Research analysis of data from the U.S. Bureau of Economic Analysis and the U.S. Bureau of Labor Statistics.

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