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January 26, 2017
State of the global steel industry: The struggle to survive and thrive
By: John E. Lichtenstein

The global steel industry is engaged in a two-pronged battle that must be won. Losing either of these battles could have a crippling impact on the industry for many years to come.

The issues at stake are:

  • Containing the flood of low-priced exports (mainly from China) that has wreaked havoc in nearly every steel market around the globe.
  • Retaining the industry’s position as the material of choice for automobiles in the face of aggressive efforts by aluminum producers.

Escalating steel trade conflict

The global steel trade war continues to gather momentum and is actually being waged on three levels: direct trade, indirect trade and acquisition of stakes to increase capacity.

Starting with direct trade, the consensus is that the root cause is Chinese excess capacity. Between 2013 and 2015, steel exports as a percentage of global steel output reversed its 20-year declining trend and surged from 27 percent to 31 percent. This equates to a 54-million-ton increase in global exports, of which China’s increase was 50 million tons.1

Governments around the world are responding. The G7 countries specifically issued a strong announcement regarding the crisis although China was not singled out. At the same time, a record number of trade cases have been launched, with nearly all major steel industry associations aligned around a common set of messages.

In terms of effects, we expect China steel exports to recede this year from last year’s 112 million ton peak due primarily to the trade cases that took effect in the second half of 2016.2 While this is a positive development, the industry will experience the lingering effects of shuttered mills, damaged balance sheets and increased trade friction among other steel-producing countries caught up in the trade cases.

The second level, indirect trade—exports of steel-intensive manufactured goods—has been rising since the turn of the century. According to World Steel Association (WSA) statistics, indirect steel exports reached 320 million tons in 2011/2012. China’s share of global indirect steel trade was 21 percent in 2013.3 Although the country’s indirect export growth has slowed in the past two years, it is likely to accelerate again as direct exports are constrained by trade cases. These indirect imports can restrict local market growth and weaken both steel customers and producers.

The third level is the acquisition of stakes outside of China to increase capacity, especially in Europe and Brazil. Far from an arbitrary development, overseas growth by Chinese steel companies is a specific policy objective. From a global perspective, this is counterproductive to the goal of eliminating global excess capacity. It is, however, understandable from China leadership’s objective to maintain strong economic growth.

“Steel versus aluminum” battle in automotive

While the steel trade battle has been a high profile topic, a second struggle has been playing out in the automobile industry between steel and aluminum producers. Some carmakers are responding to regulatory and consumer demands to improve fuel economy by using lighter-weight body panels in their vehicles. The good news? The rapid response of the steel industry—coupled with innovation in the form of advanced and ultra, high-strength steels—is averting the dire scenarios and market share losses predicted a few years ago.

At the same time, the ability of carmakers to reduce weight means that steel companies face a huge challenge in being compensated for the value that their products generate. For years the industry has discussed the need to move from a weight-based pricing system (tons) to an application or value-based system. As the new steels consume comparable line time but generate lower sales revenue on the basis of tons, this becomes even more essential for the financial health of the industry.

Finally, it is worth noting steel’s unabated declining share of the automotive value chain. In 1947, every dollar of automotive industry output contained 26 cents of ferrous industry inputs. By 2014, there was only six cents’ worth of ferrous industry input per dollar of automotive output. Conversely, the automotive industry consumes almost 20 percent of steel industry output and accounts for a much higher percentage of profits for many companies.4 This disequilibrium puts steel (and aluminum) in a permanently disadvantaged position, which could worsen in coming years. 

Conclusion

Winning the global steel trade and unique industry battles will likely take a strategic combination of operational and technological changes. The steel companies that start innovating now—with some short-term breathing room being afforded by current trade cases—are most likely to emerge victorious.


Footnotes:

1 World Steel Association, “World Steel in Figures” reports from 2014 and 2016.
2 World Steel Association, “World Steel in Figures 2016."
3 World Steel Association, “Indirect Trade in Steel,” March 2015.
4 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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