Worrisome View of the Future for Steel Producers

The global steel industry is facing some tough decisions during the next five years, according a number of articles in the FT this week.

The first reported that ArcelorMittal, counter to previous pledges that it would keep its main European factories open, has refused to rule out further site closures in Europe as the global steel industry enters what many fear could be a severe slowdown in demand and consumption in China.

ArcelorMittal’s responses to probing on these issues comes on the heels of the announcement two months ago from ThyssenKrupp of Germany that it is looking for buyers for two massive steel mills in the US and Brazil.

These steel mills were planned before the crisis of 2008 as the route for the steel group to reduce costs and achieve economies of scale within what they perceived as a growing US and European market place. In fact, the financial crisis of 2008, the ensuing debt crisis in Europe and cost over-runs and delays in construction have undermined Thyssen’s growth strategy and illustrates a profound lack of faith in the future as they had previously seen it.

Other companies – for instance JFE of Japan and Voestalpine of Austria – are putting more emphasis on developing new forms of the material, moving yet further up the value chain, rather than adding capacity or increasing market share. But nowhere are the questions more profound than in China, where steel growth has slumped to 5.7 percent last year — this against a national GDP increase of nearly 9 percent last year and maybe 7.5 percent this year.

A second FT article reports the views of some in the industry that global steel production is already approaching its peak, and while there will be winners and losers in the new order, total capacity could peak at its current 1.5 to 1.6 billion-ton level. Meps estimates that even China’s steel production could peak in a few years at 800 million tons, up slightly from current levels of 750 million tons, but a glacial rise compared to the five-fold increase form 2000 to 2010.

If they and others are right, the industry will face some tough decisions on capacity and product mix as they fight for market share in what will become a stagnant growth market.

Arguably US and European steel producers may fare better at this than emerging market producers who have known only year-on-year growth. For steel mills that have flourished in spite of falling or stagnant home markets, the tools for survival are well-honed, although in Europe in particular life is likely to get tougher still before it reaches some form of stability.

For miners and resource exporters, though, those massive capital investments made in the belief that ‘tomorrow’ would be simply ‘yesterday plus 10%,’ the rest of this decade could look a lot less rosy than last.

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