NEW YORK Steelmakers
continue to battle global overcapacity, which is likely to
exceed 479 million tonnes this year, according to Ernst &
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
"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
"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
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
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
"Were not saying (vertical
integration) shouldnt happen. I think what were
saying is that those that are most integrated need to reassess
their business model ... and make that an ongoing critical
assessment," Elliott said.