Steel players are facing rising trade barriers due to lingering excess capacity in the sector. However, those that invest in digitalization and innovation while keeping a global mindset will remain competitive in a strained environment.
The outlook for the steel sector is increasingly positive with an improved global economic growth, rising steel demand and the removal of excess Chinese capacity. While trade measures are providing steel producers with some protection in their domestic markets, companies still need to understand the trends and refine their strategies, business models and portfolios according to a truly global mindset. Their long-term success depends on it.
Steel deals 2008-17
Steelmakers are reassessing their portfolios to take advantage of new opportunities. Strategic deals are likely as they seek to remain competitive. Chinese restructuring will continue in 2018. Total deal value was up from US$6.6b in 2016 to US$13.4b in 2017.
( Steel companies are either targets or acquirers.)
Steel outlook 2018
- Ongoing rationalization of steel capacity combined with improving steel demand may push plant utilization rates higher. Ongoing Chinese reforms, including regulations on new capacity and the removal of a further 30mt in 2018, mean that net crude steel capacity is likely to decline further in 2018. The focus of Chinese steelmakers is shifting to improving capacity utilization and on improving the quality of steel.
- Steel prices have risen on a tighter market, but there may be some downward pressure once Chinese production comes back online. The removal of Chinese capacity combined with winter production cuts have resulted in significant improvement in Chinese steel prices. Steel prices may, however, feel some pressure as production controls are relaxed after winter. This decline should be cushioned by declining raw material prices.
- Trade actions are likely to continue even though Chinese steel exports have declined significantly and sector profitability has improved. The combination of weaker Chinese demand and the large gap between current production and available capacity may incentivize higher exports from China in 2018. Therefore, steelmakers and governments continue to seek trade protection for their domestic markets. The US is imposing a 25% tariff on steel imports and the European Commission has also decided to levy duties on steel coming from Brazil, Iran, Russia, Ukraine and China1. India is likely to extend its safeguard duty imposed on steel products, which officially ends in March 2018.
- India remains a high-growth region, although there is potential for an increase in infrastructure spend in the Philippines, Indonesia and Africa. India has already committed US$94b to infrastructure out to 2020, which will see robust steel production and usage growth rates. Indian steel production is forecast to increase by an annual average rate of 6.6% to reach 115mt in 2019, making it the second-largest steel producer after China.2
- Steel margins will continue to improve with ongoing investment momentum, higher effective utilization rates and low inventories. Steelmakers have benefitted from higher prices to reduce debt and achieve better cash flows. This will enable steelmakers to invest in improving competitiveness through the adoption of Industry 4.0, improving productivity and higher quality product portfolios.
- Continued focus on improving competitiveness will increase consolidation in some regions as well as deals to expand portfolios. Consolidation in Europe is continuing and there have been some strategic deals to expand steelmakers’ product portfolios in the US. Restructuring in China will continue with focus on moving steel mills further up the value chain to produce higher quality steel products. There could be further consolidation in Chinese steel industry with cost synergies being the focus of deals.
1 “EU sets duties on Brazil, Iran, Russia, Ukraine steel,” Reuters, October 2017.
2 “Resources and Energy Quarterly,” BREE, December 2017.
|Y-o-Y change (%)|
|Average US domestic HRC price: 2017 (US$/t)||683||19.4 ▲|
|Average Chinese export HRC price: 2017 (US$/t)||519||34.5 ▲|
|Average capacity utilization (%): 2017||72.3||4.4 ▲|
|Crude steel production (mt) 2017:||1,691.2||5.3 ▲|
|M&A by value (US$b): 2017||13.4||101 ▲|
|M&A by volume: 2017||42||10|
Source: Metal Expert; World Steel Association; EY analysis
Working capital – a billion dollar opportunity for global steel companies
Steelmakers face intense global and regional competition in the face of large amounts of excess capacity, in an environment of increased trade and protectionism measures. In these challenging market conditions, steelmakers have been focusing on cash, cost and capital discipline.
To release additional cash flow, companies are looking at working capital (WC) performance management. WC performance has fluctuated over the last five years due to market volatility, ongoing transformation and the relative success and failure of companies to deliver efficiencies.
Our analysis of 50 of the largest global steel companies reveals aggregate levels of gross working capital (defined as sum of trade receivables, inventory and accounts payable) amounts at around US$245b. In addition, we found that there is a US$35.7b WC improvement opportunity between current (2016/7) WC performance of the top 50 steelmakers versus their historical best performance.
Despite recent initiatives to improve WC performance, we believe there remains significant opportunities for further improvement. Potentially - steelmakers could release additional cash flows of billions of dollars.
Major factors influencing changes in WC for steelmakers:
- Pricing practices for supply contracts have changed and a larger proportion of steel is negotiated on the spot market
- Raw material prices have been particularly volatile in the last year
- Declining capital expenditure
Overall steel companies need to drive continuous operational and structural improvements to manage WC more effectively. WC needs to be viewed as a strategic initiative, with the whole business engaged and incentivized to drive improvement. It could be achieved by:
- Building increased responsiveness to change
- Deploying lean and agile manufacturing and supply solutions for different products
- Making greater use of cross-functional cooperation and effective collaboration between participants in the value chain
Creating the right scale between globalization and customization
Steel companies that embrace globalization (in their strategy, supply chains, knowledge and information, processes, talent and financial flows) while balancing it with customization (their products, marketing, stakeholder relationships) will emerge as sector leaders in the long term.
Drivers of globalization
Steel companies that will ride the next wave of growth will be those that understand globalization and tailor their strategies based on that understanding. They will explore new markets and establish well-rounded global business portfolios.
Steel sector under pressure to globalize
Accelerated knowledge exchange through technology and social media
Global regulation is increasing carbon, environmental and safety
Global capital more interchangeable and free flowing across borders
Continuous shifts in manufacturing competitiveness
Increasing global trade
Multi-speed regional growth
Capital investors more sector or region agnostic
Excess capacity remains the biggest challenge in 2017. Global Steel Leader, Anjani Agrawal, shares the outlook for steel in his recent blog.
The Chinese steel sector – a waking giant: EY's Global Steel Leader, Anjani Agrawal, discusses excess steel capacity in China and the implications of several new measures.
Debt in steel
Steelmakers risk bankruptcy as debt in the steel sector reaches record highs. Unlock long-term value with EY’s strategies to reduce debt and release cash.
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