In the global steel industry, there is growing cause for optimism, as we continue to edge away from the recession. There are a number of factors that are leading to improved conditions for steel companies—but there are also several lingering, fundamental issues that the industry will need to address if it is to see sustained, long-term growth.
In the coming year, the World Steel Association’s forecast and Accenture’s own analysis both see global steel production increasing by about 3.3 to 3.4 percent. This would be in line with the 3.5% growth, seen in 2013.
Meanwhile, after a difficult period for steel company stocks, financial market sentiment has clearly turned bullish on the sector, as evidenced by the number of upgrades of steel company stocks during 2013 and the significant movement in share prices at the end of the year. Such improvements were especially pronounced in the U.S. where, for example, AK Steel showed a full-year increase of 78%, SDI saw a 42% rise and U.S. Steel saw a 28% jump.
The story gets even more interesting when we look at some of the trends within the overall growth picture. For example, 2014 will be an important transition year for the global steel industry, because it will mark the first time since 2011 that all major steel-consuming countries show positive growth. The year will also mark the first time since 2006 that the growth rate in China (about 3 percent) will be exceeded by the rate for the rest of the world (about 3.5 percent). This pattern is likely to persist for the indefinite future as China shifts to a services and consumer-driven economic growth model, and growth in the other emerging economies takes stronger hold.
These developments suggest that the industry has turned the corner and is headed into recovery, and several current trends point to continued improvements in 2014. These include:
Gradually improving capacity utilization, (78.1% in 2013 vs 76.2% in 2012), as excess capacity is slowly absorbed or closed. Here, there is potential for dramatic improvement if China decides to accelerate the closing of aging plants and facilities with especially pollution-intensive operations.
Less disruption in steel trade as Chinese exports slow, in response to the anti-dumping rulings that have come down in many countries throughout the world. Indeed, the OECD report 2013 saw a record number of anti-dumping and countervailing trade cases filed since 1999.
Expected further softening of raw material prices—especially iron ore—as new supply enters the market. This should provide some relief from the “squeeze” created by higher material costs and the inability to pass those costs on to customers.
Those are all important and welcome developments, and there are strong grounds for expecting a brighter future. However, industry optimism needs to tempered by an awareness of the continued challenges that could counter these trends and stifle growth. For example, the industry still faces potential volatility in terms of sudden spikes in raw material prices or abrupt declines in steel prices in the event of regional or even global political, economic or natural disruptions. And with public-sector austerity programs still very much in place in many countries, subdued government spending will continue to affect the market.
Ultimately, the largest and most challenging obstacle to continued growth and profitability is still the large amount of excess capacity in the industry. Certainly, there has been some progress on the restructuring needed to address the issue, as seen in the recent Nippon Steel-Sumitomo Metal Corporation (NSSMC) merger and the ArcelorMittal-NSSMC takeover of ThyssenKrupp’s Alabama plant in the U.S, coupled with the recently announced planned merger between SSAB and Rautaruukki. But the industry remains highly fragmented compared to other global businesses, and the restructuring and consolidation needed to eliminate overcapacity is likely to continue to be slow in coming.
In short, the industry is getting healthier, but its condition is still somewhat tenuous—and it will be important to keep a cautious eye on events as they unfold in the coming year. The industry will need to maintain the discipline to keep eliminating excess capacity, even as demand creeps up. And as always, companies will need to focus on operational excellence and efficiency. Efforts in those areas will be valuable regardless of whether the industry’s growth stalls in the near term or continues for the long term—and they will be key to taking advantage of today’s opportunities while preparing for an uncertain future.