The late 1990s and early part of this decade were woeful times for the steel industry, but “conditions have changed for the better,” says Louis Schorsch, the CEO of Mittal USA.
But for corporate performance to keep improving, the industry will need to continue to consolidate and keep a lid on capacity, the executive told attendees of the Platt’s Steel and Ferroalloys Conference, which took place in Pittsburgh in mid-June.
The rapid growth of the Chinese economy has bolstered global demand for steel, but has also spurred the addition of massive new steelmaking capacity in that nation. Schorsch says his company is hopeful that China’s central government is “determined to rein in some of the less responsible steel industry development” there.
Globally, Schorsch pointed to five key developments that Mittal Steel sees as critical for the industry to avoid a sustained downturn similar to the one it experienced in the 1998-2002 time frame.
· Further consolidation will be necessary, ideally with a global view in mind, along the lines of Mittal Steel’s multi-national presence or U.S. Steel’s holdings in central Europe.
· Relationships along the supply chain need to be re-assessed so that steel producers can more readily be willing to charge a premium for good quality and good service. The industry must avoid OEMs dictating another “era of bankruptcy pricing.”
· The industry needs to invest to defend and expand its markets in developed nations, to compete more effectively with aluminum or polymers in construction, automotive and other applications.
· Eliminating government subsidies should remain a priority. Schorsch labeled subsidies as “the single greatest factor in overcapacity.”
· Steel companies need to change their mindset of volume coming first, and need to consider “profit rather than production.”
On the feedstock side of the equation, Schorsch said he is never surprised at volatility in the ferrous scrap market, since it is a “textbook case of a spot market that functions on supply and demand.”
But in terms of pricing having fallen recently, the executive said, “Fundamentals say we don’t have a growing scrap pool,” and that the current slide downward is probably “an inventory situation,” and that the market could tighten up again soon.
On the consolidation issue, Peter Matt of CSFB (Credit Suisse First Boston) says that with the exception of the high-profile Mittal acquisition of the former ISG, “consolidation has been cautious; I don’t think there has been a boom.”
Matt portrayed the industry as fragmented compared to its customer base, such as the automotive industry or tin can producers.
And against other commodities, the world’s five largest steelmakers produce just 19 percent of all steel, compared to 42 percent made by the world’s largest aluminum producers, 47 percent by the largest copper producers, and 52 percent by the global nickel industry leaders.
Among the barriers preventing more consolidation has been companies spending capital on integrating vertically rather than acquiring rivals, and the notion that smaller scale steelmakers, such as Steel Dynamics Inc., Fort Wayne, Ind., remain very competitive producers.