STRATEGIC OPPORTUNITIES FOR THE

STRATEGIC OPPORTUNITIES FOR THE
STEEL INDUSTRY IN THE 21ST CENTURY
Paper Presented at
The 1999 Middle East Steel Congress
The Sheraton Doha Hotel & Resort, Qatar
23 May, 1999
Strategic Opportunities for the Steel Industry in the 21st Century
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Roger Emmott
Director
STRATEGIC OPPORTUNITIES FOR THE STEEL INDUSTRY
IN THE 21ST CENTURY
Introduction
Mr Chairman, Ladies and Gentlemen. I would like to speak to you today about strategic opportunities in the steel
industry in the twenty first century. In order to do this I will first focus on historical developments and the current
shape of the world steel industry. I will then describe some of the broader developments in the privatisation and
restructuring of the industry. Finally, I will turn to some implications for success for future steel industry
participants. By way of example, I will highlight some opportunities I see for developments within the Middle
East.
A growing industry
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Steel is often thought of as a mature industry. We contend that there is no such thing as a mature industry; only
mature companies. As we will see, we believe there will be many opportunities for the steel industry over the next
25 years and beyond. Why do we believe the steel industry is not mature? One reason is that production has not
slowed down at all. In fact, half the steel ever made in the world has been produced in the last 25 years.
Chart 1 indicates the cumulative production of steel up to the present day.
Chart 1: 50% of all steel ever made has been produced in the last 25 years
Source: IISI, Beddows & Company
Between 1910 and 1999, the world steel industry will have made over 32 billion tonnes of steel. 1910 is the first
year for which we have detailed records but we know that cumulative volumes of steel before this date were very
small in comparison to our total.
The halfway point occurred in 1974. How long will it take for output to double once more? We will return to
this question later.
There have been periods of turbulence, as in most resource-based industries. Over the long-term, steel has been a
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growth industry (Chart 2) as defined by production output. Compound annual growth rates have averaged 3%
compound since 1910.
Chart 2: World steel production has grown by 3% compound since 1910
Source: IISI, Beddows & Company
The steel industry is not noted for speed or innovation; yet consider some of the changes since 1974 when a
significant proportion of steel was made in inefficient, small and highly polluting open hearth furnaces. Since
1974, BOF steelmaking has continued its strong growth, based on the availability of commercial volumes of
oxygen at affordable prices. In 1974, ingot casting had yet to be replaced on a widespread basis by continuous
casting, and metallic coated and organic coated steels were virtually unknown.
In 1999, open hearth furnace steelmaking is virtually obsolete, driven out by environmental, operational and cost
factors. The blast furnace has remained the principal ironmaking route, and the BOF remains the principal
steelmaking route. Both have been the subject of significant technical advances over the period, and these process
routes are now used increasingly for the production of flat products only.
Electric arc furnace steelmaking is now the dominant method of steelmaking for long products and is making
significant inroads into flat products production. EAF penetration is set to grow further. Continuous casting is
now the norm; thin slab casting is well developed; and we anticipate commercial strip casting very shortly.
Coated steels have become sophisticated and commonplace, and are increasingly specified by a wide range of
end-users across the spectrum of end use industries. Steel products themselves have been the focus of much
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research and development; many of the grades of steel now available commercially were not available 10 years
ago.
This is hardly the world of Microsoft and Intel, where Moore’s Law predicts microprocessor chip speeds will
double every 18 months enabling ever more complex software to be released; but neither should the changes be
underestimated. Manufacturing improvements have enabled steel to remain on the map; to be the engineering
material of choice for a very wide number of applications, in the face of intense competition from competing
materials.
No other material can boast this kind of record and it’s worth pausing to reflect why steel is still at the forefront.
There are a number of reasons, including:
- excellent strength/performance characteristics
- price/performance
- ease of fabrication and joining
- formability
- recyclability
- quality
- ability to meet increasing safety requirements
These characteristics combine to make a convincing case for steel.
An industry in need of restructuring
In spite of growing demand, the steel industry has faced a number of issues and challenges as it has grown (Chart
3). One of these is overcapacity in formerly planned economies.
Source: IISI, Beddows & Company
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Chart 3: Between 1960 and 1980, world steel capacity more than doubled. Over half the new capacity was
added by countries with planned economies
Between 1960 and 1980, world steel capacity more than doubled. Over half the new capacity was added by
companies in countries with planned economies. These countries added capacity at almost 6% compound over
this 20 year period, double the long-term trend. During the early and mid 80s, this was not a significant issue as
the capacity was well utilised. Problems arose once these planned economies started to make the transition into
market-based economies. Suddenly, internal markets collapsed and exporting became the only option to maintain
mill loadings. The consequences on the world’s steel industry are still being felt, and it will be some years before
this excess capacity works its way out of the system.
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Chart 4: Between 1960 and 1999, crude steel capacity was added faster than the market could absorb it
Source: IISI, Beddows & Company
Capacity utilisation has also been an issue for the industry. In 1960, world steel capacity was 411 mt, running at
81% utilisation. About 78 million tonnes of capacity was not utilised. That’s about three times the capacity of
Posco, currently the world’s largest steelmaker. By 1999, world capacity had risen to 1055 mt, but capacity
utilisation is expected to be only 66%, leaving almost 360 mt of capacity unutilised. That’s 14 Poscos. Of course,
not all this capacity is effective or efficient, and much of it is in need of investment, modification or closure.
However, the thesis that the steel industry is plagued with overcapacity looks hard to argue with, at least in
aggregate at the crude steel stage. The position becomes more complex downstream as individual facilities are
considered; many are not optimised for throughput nor market demand, often as a result of historic decisions.
Chart 5: From 1950 to 1998, 26 hot strip mills were built in Western Europe; all
but 3 of
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these were built before 1973
Source: Metal Bulletin, VDEH, Beddows & Company, industry sources
The industry not only added capacity, it added complexity. Chart 5 shows the evolution of hot strip mills in
Europe. Each layer represents one hot strip mill. 26 mills were built in the period 1950 to 1998, with a total
capacity of some 80 million tonnes, an average of just over 3 million tonnes per mill. Each mill has a product
mix which covers all the principal product categories and markets; there is little or no focus. Capacity utilisation
probably averages 75%. Buyers are not slow to recognise the over-supply position and bargaining is intense. The
industry response is defensive; sectors and specific customers are deemed “strategic” to justify low returns on the
basis that, one day, these will become high returns.
Were the industry starting afresh in Western Europe, a very different industry structure might emerge. For
example, there might be just 10 hot strip mills (each of 5 million tonnes capacity), with specific regional and
market foci; and perhaps a number of smaller mills for specialised products. These would be located close to the
centres of product demand; not always the case today. There might be perhaps 15 mills in total rather than 26.
The transition to private ownership helped to remove some of the complexity, but in itself proved to be a long and
complex process. A case study using British Steel helps to illustrate the difficulties as well as the opportunities.
Chart 6 shows how, in 1980, British Steel was a complex UK business. There were 33 facilities, employing
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almost 180,000 people. By 1997, there were 21 UK facilities and international expansion. Employee numbers
had fallen to around the 50,000 level, yet volumes of finished steel were some 45% higher than in 1980.
Chart 6: Between 1980 and 1997, British Steel implemented a massive restructuring and
rationalisation of its UK businesses and started to expand internationally
Source: Company reports
For British Steel, privatisation was one event in a long-term re-structuring process that continues today:
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Chart 7: Restructuring British Steel took 25 years (and continues)
Source: Company reports
Is the entire world steel industry ripe for the type of re-structuring British Steel has undertaken? There is no doubt
that many established steelmakers face enormous challenges to meet economic and other expectations.
Historically there has been less emphasis on financial performance than there is today.
Such widespread re-structuring is unlikely given the existing assets, organisations, political and economic
environments (although there have been some recent encouraging developments to load mills on a dedicated
product basis by one large European steelmaker). However, it’s clear that the existing industry structure is hardly
optimal. The extremely long life of these assets means that it is difficult for steelmakers to justify adopting new
technologies when there are existing assets and depreciation schedules - the phenomenon of “asset inertia”. The
issues in other parts of the world, for example, North America, and Japan, are not dissimilar.
With half the world’s steel production compressed into 25 years, this would appear to be a panacea for economies
of scale, amortisation of fixed costs over huge volumes, global businesses, and all the benefits that size brings.
What has really happened over this period? The financial performance of the steel industry has been lacklustre,
with very few exceptions. Rather than creating value, the industry has destroyed it – some would say in
spectacular fashion – as Chart 8 indicates. What has gone wrong?
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Chart 8: Over the last 25 years the world’s largest steelmakers have consumed over $250 bn of capital and,
on a cumulative basis, are still loss making
Source: Paine Webber, Beddows & Company (based on financial comparisons of the world’s largest 63
steelmakers)
There are a large number of reasons, including:
- state ownership
- lack of profit motive
- export dependency to load mills, low prices
- wrong scale of assets
- political decisions to locate plants in inappropriate locations
- overcapacity
- little or no co-ordination between mills and markets
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- inappropriate logistics/locations
- ineffective management
- ineffective leadership
- overmanning
- poor investment decisions
- lack of innovation
- lack of investment
Whatever the reasons, the fact remains that very few steel companies (fewer than 10) have exceeded their costs of
capital consistently over the last 25 years.
A further important issue for the steel industry has been that of price cost squeeze (Chart 9). Over the last 25
years, prices of hot rolled coil, the principal feedstock for the flat products business, have declined by over 1% per
year in real terms.
Chart 9: Since 1974, hot rolled coil prices have declined by 1.2% CAGR on a trend-line basis
Source: Metal Bulletin, Beddows & Company
We do not have equivalent data for costs but the financial results of the industry as a whole indicate that costs
have not been brought fully under control.
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It is clear from this, and other charts in this paper, that the steel industry is highly cyclical. Successful companies
know this and adapt to it; they do not fight it. Too often, the steel cycle is blamed for poor performance when in
reality inappropriate cost structures and lack of competitiveness are the real issues.
What the future holds
Against this backdrop, what does the future hold? We are optimistic about prospects for the steel industry. To
make the most of these, a new and fresh approach is needed to shake off some of the legacies of the past and
embrace innovative practices.
Chart 10 shows some of the drivers for change and performance measures high performance organisations will
adopt.
Chart 10: Globalisation is driving structural change and the challenge of creating high performance
organisations
Globalisation of customers, capital, technology (to name some but not all of the drivers of change) are forcing
organisations to think about how to manage and respond through the turbulence of cycles, markets, currency risks,
trading environments and politics. There is no single, “right” response. High performing organisations are likely
to optimise assets to markets, have well thought out ownership structures, and to place an emphasis on the creation
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of shareholder value and its measurement and control.
Chart 11 shows how we think demand for steel will develop over the next 25 years. We foresee another 25 years
of 2.5% compound growth.
Chart 11: In the absence of unforeseen substitution, world steel demand could double by 2025
Source: IISI, Beddows & Company
Chart 12 shows, geographically, where this is likely to come from. Asia leads the way. There is significant
growth in the Middle East; this is not large enough to displace other regions in terms of volume.
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Source: IISI, Beddows & Company
Chart 12: Growth in world steel demand will be fuelled to a large extent by market growth in China and
other parts of Asia
Let’s look at the logic behind this growth by examining future consumption on a per capita basis.
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Chart 13: How realistic is a 1,380 mt scenario by 2025? Consumption per capita needs to rise 45% for this
to occur
Source: World Bank, Beddows & Company
World population will rise from 5.9 billion now to 8.1 billion in 2025. Population forecasting is a relatively
certain science and we can have a high degree of confidence in these numbers. The world consumes around 117
kg of finished steel per capita now; in developed nations the average is over 300 kg/capita. If we assume that the
average rises by 45%, to 170 kg/capita (still around half the per capita consumption of developed nations), then
world finished steel demand will rise to 1,380 billion tonnes by 2025. After allowing for existing capacity to
become fully utilised, this still implies that much new capacity will be required.
Source: World Bank, Beddows & Company
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Chart 14: In GCC countries, demand for steel could treble by 2025
In the Gulf Cooperation Council (GCC) countries, there is the potential for significant growth. The population of
the GCC countries alone will more than double by 2025, from 29 million to 60 million people. Demand for
finished steel, currently 5 million tonnes, could rise to some 15 million tonnes over this period given relatively
conservative assumptions.
Strategies to exploit growth
What are the specific measures steelmakers can employ to take advantage of growth, and at the same time run
high performance businesses? It’s easier for those starting with greenfield operations; existing steelmakers often
face legacy costs and legacy decisions which act as unwelcome baggage and inhibit the desirable magnitude of
change.
By way of example, I would like to spend the remainder of this paper considering how the GCC countries might
capitalise on some of the opportunities which present themselves:
- to grow profitable businesses by exploiting low factor costs
- to grow new, international businesses
The region has very favourable factor costs. This is already recognised, but not fully exploited (Chart 15):
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Chart 15: GCC countries have potentially competitive factor costs for steel production
Source: Beddows & Company
We use the term “GCC Potential” in these charts as we are aware that some reserves have yet to be developed, and
not all factor costs are equal.
Natural gas and electricity costs in the region are among the lowest in the world. Gas reserves are vast. The
potential exists to use these low factor costs to manufacture steel which serves local and international markets. To
date, there have been relatively few exports of steel products from the region. There has been much activity in the
field of DRI/HBI, where the benefits of low energy costs are a significant competitive advantage. There has been
less activity in other parts of the value chain.
We believe that there are further opportunities to exploit the energy cost advantages. Whilst labour is not a
significant part of steelmaking costs (typically less than 10%), the relatively low costs in GCC countries are an
additional benefit. The relatively advantageous iron ore costs may come as a surprise to some (given the lack of
local iron ore). These costs are based on shipments in Capesize vessels to deep water ports with adjacent mills;
many existing steelmakers face additional transport costs once the ore has been shipped to the local port.
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We believe that, in addition to the factor cost benefits, there are real opportunities for Middle East steelmakers to
transform steelmaking into high performance businesses, through a focus on selected international opportunities.
We believe this can be achieved avoiding the complexity inherent in serving existing markets, using focused
marketing, and manufacturing a limited range of products.
Opportunities to focus
For example, existing hot strip mills frequently have complex order books; driven by years of history. In starting
an international business, there is the opportunity to avoid much of this complexity; focusing on the 80% of
volumes which can be made from a very small percentage of slab combinations. Such focus improves efficiencies
and throughput to a very high degree.
Chart 16: There are opportunities to focus on simpler product mixes
Source: Beddows & Company
We believe there are further opportunities to reduce complexity, by creating an order book which focuses on a
limited number of product combinations.
This will create marketing challenges, and potentially the need for downstream partners in a number of
international locations.
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Chart 17: There are opportunities to focus on profitable products and avoid unprofitable
Products (Illustrative)
Source: Beddows & Company
There is also a major opportunity to focus on product profitability, and to align facilities and markets.
Ultimately strategic opportunities are, of course, only viable if the business is managed to achieve that viability.
Experience suggests that the industry today remains predominantly technically and production driven. This must
change. Historical performance within the industry has been impeded by high levels of complexity. In the future
steelmakers must eliminate all unnecessary complexity and focus on selected products and markets to achieve
high performance. Benefits will include improvements in:
- capacity utilisation
- productivity/yield
- asset utilisation
- customer loyalty
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- financial returns
Conclusion
Mr Chairman, Ladies and Gentlemen. In summary, steel is a growth industry, still in its relative infancy as an
engineering material, in the context of world materials development timescales. Long-term, high performing steel
companies will need to be agile and responsive, and to innovate constantly to maintain competitiveness. Steel
demand in the Middle East will grow significantly and this will create many local opportunities. The extremely
favourable energy costs in the region open up a new range of possibilities for dynamic, focused steel companies,
based in the region, supplying international markets.
Mr Chairman, Ladies and Gentlemen. Thank you for your attention.
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