Overcapacity - Tomlinson

Steel Industry Responses to
Overcapacity
OECD Steel Committee

June 5, 2014
By Philip Tomlinson
Philip Tomlinson Metals and minerals economics consultant
www.philiptomlinson.co.uk
The three ages of post war steel

World crude steel production (million t)
1800
1600
1974-98: 0.5% p.a
1400
Only Korea +
Chinese Taipei
(60m pop) rapid
growth.
1200
1000
800
1999-2013: 5.4%
p.a. China (1.4bn)
1950-73: 5.6% p.a
E Eur/FSU
collapse in 1990s
Europe, USA,
USSR, Japan
(750 m pop)
600
Crisis
overcapacity
400
Chronic
overcapacity
200
0
1951
1956
1961
1966
1971
1976
1981
Data: World Steel Association

1986
1991
1996
2001
2006
2011
A consensus forecast is that global growth

slows to 2-3% p.a in the next decade
Steel consumption (crude steel equiv.) million tons
2500
Growth rate 2014-2023 2.7% p.a
2000
1500
1000
But it could well be slower, as
breaks of trend are usually
underestimated will we see a
500
repeat of the 1980s?
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
China
India
Africa
Other developing
Data: World Steel Association, P.Tomlinson forecast

Currently developed
Western European growth suddenly ended in 1975

Decennial growth rates % p.a.
6
4
GDP
Steel Prod
0
-2
1965-74
1975-84
1985-94
Oil crises hit GDP growth, but steel performed much worse market maturity
With capacity expansions still geared for growth, massive overcapacity , falling
prices and big financial losses.
Given the political sensitivity of integrated steel production employment, the
result was a subsidy war
Exports rose, but met anti-dumping actions (especially from the USA)
One side effect was unplanned nationalisation virtually the whole integrated
industry outside Germany and Netherlands. The alternative was bankruptcy
4
The ECSC Manifest Crisis and after

West European capacity
(mio.t)
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
260
240
220
200
180
160
140
120
100
Capacity
Utilisation%
Data: OECD database
The situation had got so bad by 1980 that

100.0% the ECSC stepped in and declared a
manifest crisis, allowing production quotas
80.0%
and price controls, and forcing capacity
closures. Under the Treaty of Paris, the
60.0%
ECSC had greater powers than the EEC
40.0%
under the Treaty of Rome
It more or less worked, the surviving plants
20.0%
were modernised and profits returned by the
late 80s. Controls were lifted by 1988.
0.0%
... At, however, a huge cost. Between 1975
and 1990 steel subsidies were around 1.5%
of European GDP
Some further closures in 1990s early
2000s (Germany, UK, France, Belgium) but
capacity has risen slightly in recent years
Capacity utilisation peaked in 2007, now
back to mid 90s level
5

North America was a different story

Subsidies were not an option, except
170
100.0%
160
investment incentives for new competing

EAFs
80.0%
Most integrateds had high legacy costs:

underfunded pensions, healthcare costs
140
60.0%
High wage rates due to union power
130
40.0%
Liberal use of anti-dumping actions kept

US prices (and capacity utilisation) higher
than elsewhere, but mills still lost money
because of high costs
150
120
20.0%
110
100
0.0%
1995
2000
2005
Capacity
Data: OECD database
2010
Utilisation%
Most producers entered managed

bankruptcy (chapter 11), restructured
and capacity closures in early 2000s
US remained net importer, and
modernisation lagged meanwhile new
EAF capacity expanded

Eastern Europe and CIS: escape through exports

CIS (mio.t)
180
160
140
120
100
80
60
40
20
0
-20 1990 1993 1996 1999 2002 2005 2008 2011
Consumption
Exports
Eastern Europe (mio.t)
60
100.0%
80.0%
40
60.0%
After the collapse of central planning
after 1990, consumption collapsed, and

steel mills were inefficient.
Old OHFs closed, but BOFs did not
because of export surge , and modern
control equipment and automation could
modernise Soviet technology more
cheaply than expected
Mittal and US Steel main acquirers of
E.European mills, CIS split into five main
producers in Russia + two in Ukraine
Since 2008 low utilisation in E.Europe
some closures likely
40.0%
20
20.0%
0
0.0%
1990
1995
2000
Production
2005
2010
Cap. Util%

Meanwhile, Chinese capacity

exploded after 2000
Crude steel capacity, mio.tpy
2500
2000
1500
1000
500
0
1995
1998
2001
2004
Developed
Data: Metal Bulletin, OECD database
2007
China
2010
Other
2013
Plant modernisation and cost reduction

Continuously cast % of global
crude steel production
Continuous casting (now virtually

universal)
Coal injection (PCI)
100
90
80
70
60
50
40
30
20
10
0
Larger.more efficient blast furnaces

Higher quality imported raw
materials
Automation and process control
1975 1980 1985 1990 1995 2000 2005 2012
Environmental: sinter plants, coke

batteries, offgas collection, waste
water

The rise of the EAF- but not in China
Crude steel production by process, 2013
Electric arc (EAF) old technology,
constraint is scrap supply, especially

old scrap
Others
China
This is scarce when production rising

fast from low base (China today) as
average recycling time 10-15 yrs
Japan
N America
CIS
Europe
0
200
400
EAF
600
BOF
800
1000
Other
EAF share of production %
70%
60%
50%
Plentiful in developed world,

especially in N.America (steel
importer), less so in Japan (exporter).
Mainly commodity long products, but
US producers also make flat products
Mainly different producers to
integrateds, less consolidated
Capacity adjustment easier (smaller,
fewer labour or environmental issues),
less variable margins, but low value
added
40%
30%
20%
10%
0%
1988 1991 1994 1997 2000 2003 2006 2009 2012
Europe
N America

Gas fuelled DRI based EAFs important

in Middle East, SE Asia, coal based DRI
in India
Privatisation
Dates of main
privatisations in
European steel
1992
1994
1988
2003
1995
1995 2003
1995
2001
1997
Following the successful

privatisation of British Steel in 1988,
most state holdings in Western
Europe were sold off in the 1990s,
mostly by flotation
in Eastern Europe in the 2000s,
mostly by direct sale, with Mittal
and US Steel the main buyers ,
some CIS mills also bought assets
Brazil: Siderbras sold off to five
producers 199-93. Highly
successful, especially in export
markets, but capital costs had been
sunk; economics of greenfield
projects in Brazil more dubious
South Africa: Iscor floated in 1989.
Acquired by Mittal 2003.
11

1994
1995
1996
Consolidation Timeline
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Krupp Stahl
Hoesch
2013 mio.t (2012)

TKS
15.1
Thyssen
Riva
Ilva
Riva
16
SAM
Hoogovens
Boel
2012
Corus
British Steel
Tata Steel (India)
Tata Steel
Arbed
23
Sidmar
Klockner
Aceralia
Arcelor
Usinor
Cockerill Sambre
Polsky Hut (PL)
Hamburger Stahl
Arcelor
Mittal
93.6
Sidex (RO) Iscor (ZA)
Karmet
Mittal Steel (1)

ISG
Acme
LTV
BethlehemWeirton GST
Dofasco
National
Stelco
US Steel
Kosice (SL)
US Steel
21.4
NKK
JFE
JFE
30.4
Kawasaki
Nippon Steel
Sumitomo Metal
Minor transactions omitted

(1) Had been known as Ispat
International, then LNM Industries

NSSM
47.9
Tangsteel
Hebei Iron and Steel
Handan
Hebei I&S
42.8
Top ten global steel companies, 2012 (Mio.t crude steel)

Arcelor Mittal
Nippon Steel & Sumitomo Metal Corporation (1)

Hebei *
Baosteel Group*
POSCO
Wuhan Group*
* Chinese companies
Shagang Group*
Shougang Group *
JFE
Ansteel *
0
20
40
Data: World Steel

Association
60
80
100
Cumulative share of top 10 28%, compared to 20% in 1990. Still very low
compared to e.g automotive (top 10 >90%) or seaborne iron ore (top 4=70%)
Greater local concentration in some regional markets, especially flat products,
but market power constrained by trade

The pros and cons of consolidation

For:
Rationalisation of Assets. Yes, but less than expected

Improving underperforming assets. Especially evident in E.Europe. Arcelor Mittal
stress spreading best practice
Market Power. Still low against automotive customers and raw material suppliers,
construction industry never had purchasing power
Economies of scale. Overheads, R&D, marketing, purchasing, but production only
up to 8m tpy for an integrated mill
Managing demand and price leadership. Some evidence of that in Europe, USA,
none in China
Against:
Poor return on investment, especially on assets overpaid in merger manias e.g

2004-8
Corporate culture clashes
Benefits not sustainable Barriers to entry low in steel industry.

Some smaller European producers have been more profitable than major
consolidateds by focussing on high value downstream niches
Average EBITDA/Sales Ratios for European Steel
Producers, %
Co
ru
s
Ra
ut TKS
ar
uu
Sa kki
lzg
itt
er
vo SSA
es
B
ta
lp
in
e
n/a
Ar
ce
l
or
*
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
1997-2006
1997-2011
High cost mills, usually at remote or

inland locations. They did not close, but
survived by niche added value focus,
often with barriers to competition:
Rautaruukki downsteam construction,
engineering
Salzgitter pipes and tubes, trading
SSAB heat treated plate, high strength
steels, prefabricated construction
Voestalpine rails, profiles, pipe and
tube
Dillinger (15% average margin 200411) only 5 metre wide plate mill in
W. Europe
Not all downstream investments have
been successful, and few emulators
elsewhere (Bluescope of Australia in SE
Asia, USA, with limited success)
* Includes Arcelor Mittal flat carbon Europe 2007-11.

Data: company reports, 10Ks
Data: company reports
Low level of upstream integration

into raw materials
Global average only ~15% for iron ore, The only significant integrated regions are:
Russia and the Ukraine, where all the major producers own iron ore mines,
except MMK;
North America, especially Arcelor Mittal and AHMSA (Mexico)
Brazil, where CSN, Usiminas and Gerdau own mines, but only CSN is currently
self sufficient (indeed a major ore exporter)
India (SAIL and Tata)
Even less for coal (only USA, Russia)
Steel mills sold mines before 2003 when iron ore cheap
Arcelor Mittal have ambitious plan to raise self sufficiency to 75%
Constraints on investment: cost, quality of available assets, lead times, expertise,
timing (downturn possible)

Trade and protectionism

Net exports, 2012 (mio.t
crude steel equivalent)
Protectionist tools:
tariffs low or zero in major
markets
Other
Middle East
Japan
China
Latin America
North America
Europe
FSU
-70
-20
30
Data: GTIS,ISSB
Anti-dumping
Distribution systems
Quotas (not allowed for

WTO members)
Technical
barriers/certification
Chinese market supercompetitive
Chinese prices lowest in the world,

mills currently producing below cost,
some closingbut reported data
suggests utilisation rates above world
average?
But
Capacity probably underreported
Highly competitive market
structure
Commodity products at low
margins
Chinese market focus of overcapacity
problem
Reported crude steel capacity

utilisation, %, 2013
90%
85%
80%
75%
70%
65%
60%
55%
50%
Developed world
China
World average

Barriers to consolidation in China
Of the largest Chinese steel

companies, only Hebei Iron and
Steel achieved this through
consolidation, the others through
organic growth.
Major barrier to consolidation:
most producers SOEs, but owned
at different levels of government.
Seems to be very difficult to
Anben
merge across levels
Hebei I&S
Ansteel (centrally owned) ordered
to merge with nearby Benxi
(provincially owned). Merger has
not been effective
Conversely, Hebei I&Ss
Tangsteel and Handan Steel both
provincially owned
Europe after 1975 v China Today

Similarities
The largest competitive market in the world, private and state
producers, imported raw materials .
In theory central power (EEC Commission or Chinese central
government) has strong powers, in practice local powers important
Because of importance of integrated mill employment, local
subsidies as growth declined
Market forces alone would lead to closures being focussed on
weaker regions, politically unacceptable
Differences
EEC industry invested in new cost reducing technologies (e.g
concast), most Chinese industry new and modern but
environmental enforcement is lax
No significant EAF sector
Some ideas for China
Consett steelworks, UK, closed

1980
Consetts
largest
employer
today
Accurate production and capacity data

Encourage/assist weaker regions to
create alternative consumer-focused
employment (as in France, UK after
1975) not fight steel closures to the last
(as in Belgium, Italy)
Exports not a solution
Enforce environmental regulations,
starting with centrally owned mills
Privatisation? (may not be ideologically
acceptable)
Focus on value added
Seek to avoid the wasteful subsidies
that happened in Europe!


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Steel Industry Responses to

OECD Steel Committee

The three ages of post war steel

1974-98: 0.5% p.a

1950-73: 5.6% p.a

Data: World Steel Association

A consensus forecast is that global growth

Growth rate 2014-2023 2.7% p.a

repeat of the 1980s?

Data: World Steel Association, P.Tomlinson forecast

Western European growth suddenly ended in 1975

The ECSC Manifest Crisis and after

Data: OECD database

The situation had got so bad by 1980 that

Philip Tomlinson Metals and minerals economics consultant

North America was a different story

investment incentives for new competing

Most integrateds had high legacy costs:

High wage rates due to union power

Liberal use of anti-dumping actions kept

Most producers entered managed

Philip Tomlinson Metals and minerals economics consultant

Eastern Europe and CIS: escape through exports

Eastern Europe (mio.t)

After the collapse of central planning

after 1990, consumption collapsed, and

Philip Tomlinson Metals and minerals economics consultant

Meanwhile, Chinese capacity

Plant modernisation and cost reduction

Continuous casting (now virtually

Larger.more efficient blast furnaces

1975 1980 1985 1990 1995 2000 2005 2012

Environmental: sinter plants, coke

Data: World Steel Association

Philip Tomlinson Metals and minerals economics consultant

The rise of the EAF- but not in China

Crude steel production by process, 2013

Electric arc (EAF) old technology,

constraint is scrap supply, especially

This is scarce when production rising

EAF share of production %

Plentiful in developed world,

Data: World Steel Association

Gas fuelled DRI based EAFs important

Following the successful

Philip Tomlinson Metals and minerals economics consultant

2013 mio.t (2012)

Tata Steel (India)

Sidex (RO) Iscor (ZA)

Mittal Steel (1)

Minor transactions omitted

Philip Tomlinson Metals and minerals economics consultant

Top ten global steel companies, 2012 (Mio.t crude steel)

Nippon Steel & Sumitomo Metal Corporation (1)

Data: World Steel

Philip Tomlinson Metals and minerals economics consultant

Data: World Steel Association

The pros and cons of consolidation

Rationalisation of Assets. Yes, but less than expected

Poor return on investment, especially on assets overpaid in merger manias e.g

Philip Tomlinson Metals and minerals economics consultant

High cost mills, usually at remote or

* Includes Arcelor Mittal flat carbon Europe 2007-11.

Data: company reports