Steel – An industry in crisis
“Oversupply in the global steel market requires European businesses to focus on costs and profitability. Those affected by the crisis need to respond decisively and quickly, with capable resource, to review contract profitability and costs in detail and in some cases renegotiate contracts with customers or suppliers”
Angela Lloyd-Taylor, Partner - Restructuring Services & Steel Sector Lead
Within the last month, SSI and Caparo have entered into insolvency proceedings whilst Tata has announced circa 1,200 likely redundancies in the UK. Falling steel prices are widely being blamed but what has caused the steel industry to reach “crisis” level?
In simple terms, there are four key factors which are creating this “perfect storm” for the steel industry in the UK and across Europe;
Oversupply of steel in the market – The Organisation for Economic Co-Operation and Development (OECD) predicts that there are over 580m tonnes of global excess steel capacity in the market with most of the excess in China where steel production has outpaced consumption since 2004. As a result, the global steel market has been swamped with large quantities of cheap steel resulting in steel prices dropping c. 50% since 2010. We do not see this changing in the medium term.
National protectionism of steel industries – UK Steel reported that 15 countries around the world are currently under investigation for protectionist strategies against China Steel imports due to allegations of China Steel subsidies and dumping of steel at unrealistically low prices. The EU is the main focus for the sale of excess product, placing greater downward pressure on market prices.
Non-competitive Energy Prices –Although global market prices for oil and gas are at historically low levels, UK and European steel producers face higher electricity costs compared to other countries, partly due to UK and EU commitments to climate change levies/renewable subsidies.
Exchange rates – The strength of the British pound has further undermined the UK Steel industry's ability to compete in the global market.
So who will be the winners and losers as a result of the steel crisis?
Perceived Winners in the UK and European Steel Industry
- Construction companies will be the biggest benefactors of low steel prices allowing for an increase in appetite for capital projects
- Automotive industry and other manufacturers may see a potential short term benefit from reduced prices, however, this will be dependent on supply and sales contracts (whether reduced benefit is passed on)
Perceived Losers in the UK and European Steel Industry
- Steel producers – Aside from the big players like Tata, SSI, Caparo, there is concern that the smaller producers may be at risk as well unless they are able to maintain their niche positions
- Associated businesses such as steel stockholders and scrap metal dealers are also anticipated to come under significant pressure as a result of the current crisis in the sector.
- Suppliers into the steel industry will also likely suffer as the industry adjusts to the crisis. These suppliers include companies providing energy , labour, logistics, support services and maintenance to the steel industry
What should steel companies do?
Scaling back production in European based steel furnaces is not simple and as such European based producers need to take difficult decisions to reduce costs and improve efficiencies including:
- Reduce structural costs
- Implement operating efficiencies, including a reliability centred maintenance programme
- Allocate capital in the highest value added manner
- Renegotiate raw material contracts
- Optimise energy management
- Unlock value of captive assets
- Be customer focused on value-added products and services
- Drive innovation with your customers and suppliers
What is the UK government doing?
The UK Steel Association along with other key steel producers in the UK are looking to the government to help level the playing field for steel production. Specifically requests being made include:
- Take measures against the ‘dumping’ of cheap Chinese steel across the EU
- Provide compensation packages for energy intensive industries
- Reduce Business Rates
- Consider a ‘Buy British’ requirement
On 28th October, David Cameron announced that the UK will ‘refund energy intensive industries for the full amount of policy costs they face’, pending EU approval.
Separately, an emergency steel summit has been agreed to by the EU ministers and will be held by the 11th November 2015 to discuss how to address the steel crisis.
Outlook for 2016
We do not anticipate that the steel industry will rebalance in 2016. Consequently, we expect to continue to see pressure and failures in the industry.
The OECD predicts that there are over 580m tonnes of global excess steel capacity in the market with most of the excess in China where steel production has outpaced consumption since 2004.