Posted: 06 Nov. 2020 4 min. read

Building steel’s future

By Dr. Andrew Zoryk, Deloitte

The impact of the steel industry on global GDP and economic development cannot be overstated, especially when you consider its critical role in buildings and infrastructure. Together these two sectors consumed an estimated 52% of produced material in 2019.[1] Steel’s support of global construction helps fuel a market valued at around $11 trillion and is expected to grow to $14 trillion by 2025. An integral part of infrastructure, steel also helps to connect people to education and social opportunities as well as support health, safety, and security. This is all in addition to buildings and infrastructure’s important correlation with other steel consuming sectors.

Given steel’s role in the global economy, it is important to understand the forward-looking factors influencing the sector as well as steel producers—particularly in light of the recent global COVID-19 pandemic. Prior to the pandemic, the global construction industry was forecast to rise by 3.6% in 2020,[2] with estimated revenue of US$15 trillion by 2024. But despite construction having continued to function (albeit at a much lower level of activity) during the first half of 2020, expected growth will be impacted as governments face the challenge of dealing with rising deficits and residential and commercial projects are adversely affected by unemployment and negative GDP growth.  

Beyond these macro-level trends, it is also valuable to have insights into the dynamics of the numerous construction companies that operate in this sector. There are significant regional variations in steel production, depending on the relative levels of steel intensity driven by the economic growth patterns of individual countries. Indeed, demand in India and China is significantly higher and faster-growing than in more mature economies like Germany and the United Kingdom. Interestingly, of the top 100 listed construction companies, which generated total revenues of US$1,462 trillion in 2019,[3] the top three Chinese companies represent more than 30% of that revenue. In contrast, Europe’s share is more diversified, with some 40 companies contributing to the Top 100.

Despite a backlog of construction projects, the pipeline is expected to be weak for the foreseeable future as a result of the current crisis. Early estimates indicate that growth in the construction industry in 2020 will drop to around 0.5%,[4] with emerging regions expected to have a faster rebound in 2021 as compared to advanced economies.

Some possible consequences of this situation for construction companies may include:

  • A liquidity crisis for those with high levels of debt and low cash reserves, exacerbated by increased price competition for projects
  • Smaller businesses and sub-contractors possibly failing rapidly, creating supply chain disturbances and bottlenecks
  • An increased focus on contract management, as business partners seek to renegotiate or even terminate existing contracts

Since steel represents a significant share of the material used in construction—for example, in the United States[5] structural steel has around a 46% market share in non-residential and multi-story residential buildings—such dynamics will in turn have a direct knock on effect on the majority of steel producers.

However, these effects from the current COVID-19 environment may be mitigated by the recent trend of internationalization in construction. Over the past few years, to combat the increasingly complex and competitive environment in which construction companies operate in, there has been a clear trend towards expansion into international markets—a process led mainly by European companies, although Chinese and Korean companies have also recently made significant acquisitions. This is allowing companies to leverage their leadership in the infrastructure sector to achieve sustainable and profitable growth. In turn, highly internationalized companies are able to reduce and diversify their risks since the impacts of the crisis on the construction industry have varied regionally.

Yet the results of the internationalization process have been mixed, and many players have found it difficult to adapt their business models to foreign markets. In any case, the international presence of construction companies is expected to continue broadening in the coming years as supply of services exceeds construction demand in domestic markets.

Furthermore, profit margins in the construction business are traditionally lower than in other (interrelated) businesses operated by the larger construction companies, while operating risks are higher. As a result, most construction groups have diversified their portfolio to perform activities throughout the entire infrastructure cycle. This allows construction groups to increase synergies and harness their competitive advantages and knowledge of the sector, resulting in higher profitability.

Beyond the immediate economic volatility currently experienced by the global economy, there are a number of underlying trends driving the future demand for steel in the building and construction sector. At the heart of many of these trends is progressive urbanization and the growth of so-called megacities that have a population of more than 10 million inhabitants. A recent example is the proposed greenfield Neom megacity development in Saudi Arabia, with a planned size 33 times that of New York City.[6] In order to counter the potential negative effects of urbanization (high energy usage, safety and security, and environmental pollution, among others), there is an increasing focus on the development of smart buildings—that is, structures that use technology-driven processes to automatically control a building’s various operations and functions within an integrated management system.

These developments create a significant opportunity for steel producers to evolve their thinking of how steel materials can play a role in the buildings and cities of the future. It is no longer sufficient to think in isolation about the basic material requirements. The material must embrace full, end-to-end lifecycle thinking, starting with the architect’s vision and design thinking through to the end-of-life or perhaps re-purposing of a building many years in the future. From a functional viewpoint, it is necessary to understand how steel materials can play a role to support key requirements of a smart building, including:

  • Energy efficiency. As part of the continued focus on climate change globally, there is increasing demand that buildings are designed to have greater energy efficiency and lower emission levels during their operation. For example, within the EU, buildings currently account for about 40% of overall energy consumption and produce around 36% of related greenhouse emissions.[7] Steelmakers need to consider how steel materials can be leveraged as part of an overall energy concept. This extends also to a consideration of the full lifecycle of “embodied carbon” greenhouse gas emissions, i.e., the carbon dioxide equivalents from the manufacture and transport of steel materials (and other building materials) to the construction process and end-of-life and recycling of a building.
  • Building certifications. These include green buildings certifications such as LEED (Leadership in Energy and Environmental Design) and health-related certifications, such as the WELL Building Standard, and Fitwel, where, again, the design of steel materials can play a positive role.
  • Occupant experience. This includes health, comfort, and productivity of employees, visitors, and other occupants. Here again, as part of an overall building design, steel materials can be an important contributor, particularly when a building may at some future time be re-purposed, for example, from a residential focus to a commercial office focus while minimizing the need to re-build.
  • Operational improvements. This means better space utilization and easier asset management and maintenance. Steel framing structures support designs with almost any shape as well as the flexibility to provide interior spaces for cabling, plumbing, heating, ventilation, and fire protection systems that are easy to access for maintenance and repair.

Construction companies themselves are also moving towards standardization, modularization, and prefabrication of building and infrastructure components to drive efficiencies and minimize potential project schedule overruns. Such modularization is expected to improve the productivity and margins for contractors, while standardization is driving improvements in quality and shortening project schedules.

For steel producers, there are clearly parallels with the automotive sector that are driving innovation in the development of higher performance steels (for example, Advanced High Strength Steels). These steels address the need for greater strength, toughness, formability, and weldability. For construction steels, there has already been a number of developments in the area of high strength steels, which have greatly improved structural performance. Meeting requirements for corrosion resistance and fire resistance also plays a significant role, focusing on steel cleanliness, microstructure control, advanced thermo-mechanical controlled rolling processes, and innovative rolling technologies.

Such innovative developments are fundamental to supporting the future evolution of steel materials in building structures. Architects and designers are also playing a key role in challenging the steel industry to continue pushing the boundaries of steel properties and rolling technologies. In an industry where over capacity is likely to remain a dominant theme, those steelmakers that can offer the building and infrastructure sector higher value-added material solutions will likely have a significant competitive advantage.

 

[1] https://www.worldsteel.org/steel-by-topic/statistics/World-Steel-in-Figures.html

[2] Global Construction Outlook to 2022: Q3 2018 Update: https://www.globaldata.com

[3] GPoC 2019: Global Powers of Construction, Deloitte 2020.

[4] Global Construction Outlook to 2024. GlobalData report.

[5] American Institute of Steel Construction – Structural Steel: An Industry Overview, 2018.

[6] https://en.wikipedia.org/wiki/Neom

[7] European Commission: https://ec.europa.eu/clima/policies/strategies/2030_en

Key contact

Dr. Andrew Zoryk

Dr. Andrew Zoryk

Metals Leader, Deloitte Germany

Dr. Andrew Zoryk is a Deloitte Metals Leader based in Munich, Germany. Andrew's professional experience includes more than 30 years working within steel, metals and mill products industries in the areas of enterprise and supply chain management, manufacturing and business operations.