China’s influence in the steel industry, particularly stainless, will continue to grow despite an inevitable reduction in direct exports in the coming years. Digital technology will continue to disrupt all facets of the stainless industry, particularly its supply chain, John Lichtenstein, managing director of and natural resources lead at Accenture said yesterday at the 29th AMM Stainless and its Alloys Conference in suburban Chicago.
“Direct trade in stainless has been declining as a percentage of total production for a long time,” Lichtenstein said. “That trend is expected to continue as more production is concentrated in China. The government there will not crack down on production for environmental or economic reasons. The untold story is that indirect steel exports from China — as appliances fasteners and other products — will continue to grow in the coming years.”
Lichtenstein pointed out that, according to Accenture data, the top ten companies producing 76% of stainless from 1990 to 2005. Today, 15 of top 20 producers are from Asia, 11 from China.
Despite its high value and unique properties, stainless steel has, to a great extent, become commoditized due to several discernible factors.
“Stainless is very much a commodity and, in this situation a race to the bottom is inherent,” he said.
Lichtenstein said the industry got here by chasing lower and lower margins for the last 2 decades and relying on mergers and acquisitions to fuel profitability.
A quest for production efficiency drove a higher degree of product standardization. Small end-user order quantities, in turn, drove a high percentage of sales to service centers. Lichtenstein said data showed this reinforced standardization so that service centers could limit inventories. The ensuing low value-add opportunities drove sensitivity to small changes in pricing which drove arbitrage-seeking behavior… and increased volatility.
A global congruence in standards, due to such a high percentage of trade standardization, made the market perfectly suited for a disruption by overseas supply
“The indirect trade is hitting the US market market harder than direct steel exports,” he said. “The impact is even greater on other emerging markets. India and Brazil are desperately trying to build a manufacturing base, but they can’t build something like a washing machine more cheaply than China can.”
Lichtenstein also pointed out a recent change, largely under-reported, will allow foreign investors to take a controlling interest in Chinese steel companies. This would, he said, allow further expansion of Chinese steel companies around the world.
“Until very recently foreign companies were not allowed to have a controlling interest in Chinese steel companies,” he said. “The government changed that and now anybody that wants to invest in a Chinese steel company can do so. The Chinese government has a strong desire to export excess capacity. Chinese companies can now build plants around the world. That reciprocity barrier is gone.”
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