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Steel must address overcapacity: Mareels

Keywords: Tags  McKinsey, steel overcapacity, steel consumption, Sigurd Mareels, World Steel Association, WorldSteel, Catherine Ngai

SÃO PAULO — The global steel industry must address systemic overcapacity issues to remain sustainable in the next decade, according to Sigurd Mareels, a director in the Belgian office of consultancy McKinsey & Co. Inc.

Demand growth isn’t necessarily going to help, he said. With global steel consumption expected to rise around 3.1 percent this year and some 3.3 percent in 2014, according to a forecast by the World Steel Association (WorldSteel), it will take years before it makes any dent in the global capacity overhang estimated at around 300 million tonnes.

"At 3-percent growth, it’s not going to happen. We need a lot more," Mareels told delegates Oct. 7 during WorldSteel’s annual conference in São Paulo.

He offered three solutions aimed at reassessing the way the industry achieves growth: raising the awareness that the industry can’t continue "bleeding cash;" positive momentum on mill closures and capacity reduction through increased consolidation; and a stronger focus on profitable growth.

"You need all three of these together to make it work. Is it hopeless? I don’t think so. Is it difficult? Absolutely," Mareels said.

"This is no longer an issue about what’s nice to have—this is an issue about survival of the industry," he said, pointing out that steelmakers across the board need another $50 per ton in margins to make the industry more profitable. "That number is for existing capacity. In the last couple of weeks, I visited a number of countries where they’re seriously considering building new steel plants. If you want to build a new steel plant, the $50 extra margin isn’t going to do it. You need $150 of extra margin for you to justify a new steel plant."

Some 65 percent of "large" global players have operated with a negative cash flow over the past two years, which needs to be reversed because steelmakers are likely to face difficult economic conditions in the next five to 10 years, Mereels said.

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