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Steelmakers continue to battle overcapacity

Keywords: Tags  overcapacity, global steel industry, Ernst & Young, Mike Elliott, Steel Manufacturers Association, Thomas Danjczek, vertical integration, efficiency Samuel Frizell

NEW YORK — Steelmakers continue to battle global overcapacity, which is likely to exceed 479 million tonnes this year, according to Ernst & Young.

Overcapacity remains one of the greatest challenges to the industry, with global capacity utilization rates falling to below 80 percent by the end of 2012 vs. more than 90 percent in June 2008 just before the start of the financial crisis, and is expected to remain below 80 percent this year.

The U.S. market has proven adept at dealing with the financial crisis by increasing production efficiency and allowing plants to close, Mike Elliott, global mining and metals leader at Ernst & Young, told AMM.

"In some areas, (the United States is) leading the world in terms of productivity performance," Elliott said. "(U.S. producers) need to be some of the most efficient producers in the world. The innovation that is going on in the U.S. is addressing that."

Labor productivity in the U.S. steel sector has increased fivefold since the 1980s, improving to an average of two work-hours per finished ton by 2010 from an average of 10.1 work-hours, according to the Ernst & Young report released Jan. 20, with many U.S. steel companies now producing a ton of finished steel in less than one hour of labor.

"Today the U.S. is truly recognized as one of the low-cost producers in the world," Steel Manufacturers Association president Thomas Danjczek told AMM. "We have scrap, we have as low an energy cost as anyone in the world, we have very high labor productivity, we have a lot of mills running at less than half a man-hour per ton."

Plant closures in the United States have allowed the steel market to remain healthier and avoid the higher levels of overcapacity that European countries are facing, Elliott said. A strong recovery in the auto industry and modest improvement in the construction sector also have supported the U.S. market.

Chinese producers have dealt with overcapacity by closing smaller and less-efficient plants, and the government aims to boost the market share of its top 10 producers to 60 percent by 2015 from 48 percent in 2010. "The Chinese market is getting its act together," Elliott said, but even with consolidation "it will still have more capacity than is needed for domestic production."

Many steelmakers have responded to price volatility and high raw material costs by vertically integrating raw materials into their supply chains, Elliott said.

But the significant economic benefits of vertical integration have evaded many companies. "Those (companies) that had greater self-sufficiency were not that much more profitable than their pure steel producer peers," Elliott said, referring to a study of the top 30 global steel producers. "Moreover, there was actually a negative correlation when it came to value creation."

The pure steel producers were more likely to restructure their business models in the wake of the financial crisis, while vertically integrated companies might have had less urgency because they were more profitable upstream.

"We’re not saying (vertical integration) shouldn’t happen. I think what we’re saying is that those that are most integrated need to reassess their business model ... and make that an ongoing critical assessment," Elliott said.

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