Posted on 04 January 2007

 

Source: SEAISI

IISI Chief Economist, Dr Nae Hee Han presented an interesting paper at a conference in Osaka, Japan on 27 November 2006.  The paper is titled " Future Challenges and Opportunities for the World Steel Industry".  This article summarises the paper which  is a good overview of the current state and future prospect of the industry.

The steel industry is directly driven by economic expansion.  The growth of   the global economy is broadly shared: strong US economy, continued expansion of the Japanese economy, EU economy gaining momentum, and rapidly growing emerging economies.  BRIC's (Brazil, Russia, India, China) economies will be a growth engine for the global economy in the coming decades. They share common characteristics: lower GDP per capita, large population, abundant natural resources, rapid economic growth. Goldman Sachs (2003) forecasted that by 2040, BRICs economies will be bigger than the G6 economies and China will surpass US economy in 2039.

BRICs economies (2005)

	GDP in bn US$	Per Capita GDP in US$	GDP '01~'05 (CAGR %)	Population (million)
Brazil	443	4,320	2.4	184
Russia	632	5,349	6.4	143
India	636	705	7.0	1,094
China	958	1,709	9.8	1,308

GDP=CONSTANT PRICE in 2005 * AVERAGE F/X in 2005

Per Capita GDP = CURRENT PRICE in 2005

GDP growth rate = CAGR of GDP in constant local currency

The emergence of BRICs has major implications:

• Shift in economic power, especially toward Asia
• Growth of middle class in emerging economies
• Currency realignments
• Increasing variability of global economy: political instability, weak financial system, corruption

Global economy is expected to grow by 4.9% in 2007 and more than 4% growth annually is forecasted during the next decade.  However, global economy is not without downside risks: hard landing of US economy, China bursting, disorderly adjustment of global imbalances, oil price surge and tight monetary policy in reaction to rising inflationary pressure.  

The gloomy period of the steel industry is over.  The steel industry today is characterised by growth, profits, and optimistic future.  The steels industry is now profitable with an upward shift in steel price trend since 2003.  Steel price is expected to remain high at US$ 400-600 range until 2015.  Non-Chinese steel companies' profit is now more than US$ 90 per ton.  The renaissance of the steel industry is possible with the support from sustained global economic growth, strong demand in the new emerging markets (esp. China), industry restructuring and globalisation, and success in taking inter-material competition. 

BRICs (esp. China) has been and will be leading the world's steel consumption growth.  The center of gravity of the steel industry is moving East. Asia has 53% consumption share in 2005 compared to 42% in 1995.  In terms of production, Asia's share is 51% in 2005 while it was only 36% in 1995.  

One important trend in the industry is globalisation and consolidation.  Globalising customers, IT technology and emerging economies' growth have been prompting consolidation on a global scale. 

Within National/ Regional Boundary	Cross Continent Consolidation	Mega-Merger on Global Scale
Riva Group (1995)	Ispat Inland(95~99)	Arcelor Mittal (2006)
Thyssen-Krupp(1997)	LMN Holdings(1997)	Corus + Tata or CSN?
JFE(2001)	Arcelor- CST(Brazil)

The implications of global consolidations include:

§ Increased negotiation power against upstream and downstream industries

§ Synergy and scale in R&D and marketing

§ More stable market behaviour

The top three steel producers only enjoy 15% market share when top three automakers have 38% and top three iron ore miners control 70% market share.

The main opportunity for the industry is the positive market outlook for the coming decade (see SEAISI Newsletter October 2006).  Furthermore, a positive growth will create a virtuous circle of:  growth & profit – investment & excellent workforce – better products to meet customer needs.  The new big opportunity will be in the emerging markets.  It will be characterised by steel consumption growth and the exploration of  new market opportunities to overcome maturing home market. 

On the other hand, challenges will come from:

§ Increasing volatility and uncertainties

§ Preventing overcapacities

§ China switches from net importer to net exporter

§ Competition for raw material

§ Globalization of the steel industry

§ Achieving sustainable growth

§ Kyoto protocol

      § Inter-materials competition 

Steel industry tends to build overcapacity in order to fulfill supply lags and competition for scale.  China's fast growing steel capacity has been raising concerns of overcapacity.  In addition, massive capacity build up during 2002-04 (264 mtpy) created a surge in Chinese steel exports. China will remain a major source of disruption in world steel supply.

Globalisation will produce winners and losers.  The question for all steelmakers is how to be a winner in the borderless competition era.  Moreover, steel industry will have to deal with environmental issues (climate change, chemical emission, and waste related problems) in order to achieve sustainable growth.

Kyoto protocol is very important as steel industry is one of the largest emitters of CO2 (10-15% of industry total).  The problem is that energy reduction is already at theoretical limit.  There is an urgent need for a solution for CO2 reduction without deterioration of competitiveness.  

In conclusion, opportunities and challenges for the steel industry are just like the two sides of the coin.  Positive market outlook driven by emerging country growth may lead to market volatility, excessive capacity building, and raw material bottleneck.  Therefore, some challenges need the industry's common efforts.

IISI 's initiatives to meet the challenges include:

?     Better Understanding of Demand & Supply Dynamic

-Better demand forecasting, information on capacity development

?     Sustainability

-Clean Steel, Improve the yield, Life Cycle Assessment Forum

-CO2 break through program, By-product, water management

-Safety and Health

?     Market development

-World Autosteel, Living Steel, Packco

?     Communication

                  -Sustainability Report, Recycling,  Steel University

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