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Global Warning


The global steel industry faces a host of opportunities in the next decade. The industry will undoubtedly benefit from the continuing development of China and India, the two most populous countries in the world; North America’s industry likely will become even more competitive due to some of the lowest energy costs in the world; and European steel, which is still struggling to recover from the 2008-09 global recession, will continue to fight to maintain its position in the world steel hierarchy.

However, the industry also faces immense challenges in the years ahead. Overcapacity is a growing problem and one that is likely to get worse before it gets better; steelmakers are dealing with environmental concerns in the developing world, often at enormous cost, which likely will become more prevalent; and competition from lightweight metals, composites and new-generation plastics is a growing threat, especially in the flat-rolled marketplace.

“The industry is getting healthier, but its condition is still somewhat tenuous and it will be important to keep a cautious eye on events as they unfold in the coming year,” said John E. Lichtenstein, managing director of Dublin-based Accenture Plc’s metals industry group.

Lichtenstein’s group generally is in agreement with the World Steel Association’s latest forecast that global steel production will increase about 3.3 to 3.4 percent in 2014, just under the 3.5 percent reported in 2013. Trends are positive for continued future growth in the industry, Lichtenstein said. “2014 will be an important transition year for the industry because it will mark the first time since 2011 that all major steel-consuming countries showed positive growth.” The year also will mark the first time since 2006 that the growth rate in China (about 3 percent) will be exceeded by the growth rate for the rest of the world (about 3.5 percent).

Brussels-based WorldSteel released its short-range outlook in the spring, forecasting global apparent steel use will increase 3.1 percent to nearly 1.53 billion tonnes this year and another 3.3 percent to almost 1.58 billion tonnes in 2015.

The optimistic short-range outlook follows a strong finish to 2013, Hans JŸrgen Kerkhoff, chairman of WorldSteel’s Economics Committee, said. “In 2013, world steel demand grew higher than our previous forecasts due to a stronger-than-expected performance in the developed world in the second half of the year. In particular, the recovery in the United States gained strength. In addition, the downturn in the (European Union) bottomed out, and we now expect that steel demand in the eurozone will move into positive growth in 2014.”

For all of the bright spots, WorldSteel sees a recovery beset with challenges. The recovery in Europe plods along as the E.U. is plagued with debt and high unemployment, while volatility and unstable political regimes mark many of the emerging economies, with China’s slowdown remaining particularly worrisome. “In short, the global steel demand recovery continues, but growth is stabilizing at a lower rate with continued volatility and uncertainty leading to a challenging environment for steel companies,” Kerkhoff said.

No other steel industry in the world is more closely watched than that of China. Chinese steel production has nearly tripled in the past decade to 779 million tonnes last year from 273 million tonnes in 2004, accounting for more than 72 percent of Asian production today vs. about 40 percent in 2000.

China’s steel industry reported double-digit annual gains in production even through the Great Recession that wracked the economies of North America and Europe in 2008 and 2009. But the rapid growth of Chinese steel production has slowed dramatically since then to less than 5 percent annually in each of the past three years. The slowdown has been driven by Chinese government policies that emphasize integrating the country’s population into an urban middle class with aspirations of consumer consumption, especially in the all-important electronics market. The policy shift has come at the expense of the former emphasis on heavy industrial and infrastructure development, both of which consumed huge volumes of steel. The Chinese government has moved to consolidate smaller, more-inefficient steel producers due to dwindling domestic demand, a liquidity crisis and finished steel prices that have been drifting downward for more than a year.

Still, China’s daily crude steel output continues to set records. The country produced an average of just under 2.3 million tonnes per day in April, up 1.3 percent from the previous record of nearly 2.27 million tonnes per day in March and 2.1 percent higher than in the same month last year.

But an indication of the slowdown in Chinese steel production growth is evident in the country’s scrap purchases from the United States. As a developing country, China is scrap short and must rely on imports to help feed its electric-arc furnaces. China imported 4.2 million tons of ferrous scrap from the United States in 2011, but that total fell by more than half last year to 1.83 million tons and imports in the first quarter of 2014 totaled just 161,000 tons, off more than 70 percent from the same period last year.

China’s steel industry has been facing environmental problems. Much of the nation’s steel sector still uses blast furnaces and even some open hearth furnaces. The Chinese government has made a commitment to reduce pollution, but the control of such pollutants as sulfur dioxide, heavy metals, particulate matter and dioxins could increase the cost of making steel by 10 to 20 percent or more.

Nobody expects China’s steel industry to remain overly bearish forever, but the next three to five years could see further industry consolidation and a continued shrinking of the industry’s growth rate.

“With China’s fast-growth era ending, the steel industry may lack a strong growth engine in the near term,” said Nae Hee Han, WorldSteel chief economist and director of economic affairs. “However, longer-term fundamentals for steel demand growth remain robust.”

Elsewhere in Asia, the steel industry in India may have received a strong boost in May when Narendra Modi’s Bharatiya Janata Party won more than 280 of 545 seats in the lower house of India’s parliament and relegating the Congress PartyÑwhich has ruled India for two-thirds of a centuryÑto the status of minority backbenchers.

Modi, a Hindu nationalist, is widely perceived to have a pro-business attitude. During his tenure as chief minister of India’s Gujarat province, he encouraged job creation and economic development, and worked closely with industrialist Ratan Tata to bring an auto assembly plant to the province.

The Congress government was not known for working well with India’s steel industry, the world’s fourth largest, which produced more than 81 million tonnes in 2013, up 5.1 percent from the previous year. But the Congress Party suffered from its inability to bring new steel mills online; plans by South Korea’s Posco Ltd. to build a $12-billion steel complex in India were derailed in 2010 when nearby forest dwellers complained to the government about the project.

India’s steel industry has been a strong performer during the past decade, more than doubling crude steel capacity, but has been stymied by government regulation and has not enjoyed the same spectacular rise as the steel industry in China. Accenture India recently identified five key capabilities the industry needs to achieve to compete in the near term: resource acquisition and development, human capital management, efficient capital project management, differentiated supply chains, and customer-centric sales and marketing.

Tata Steel Ltd., the largest steel producer in India, has made significant strides in market penetration and branding to improve customer connections, including strengthening its marketing network of 62 distributors, more than 6,000 dealers and 48 service partners. The company’s marketing presence across India includes a strong portfolio of seven brands in steel and three brands in ferroalloys. “This proactive market development has helped in expanding our domestic customer base,” the company said in its fiscal fourth-quarter earnings presentation. “Exports constitute only 2 percent of total sales in fiscal 2014.”

Tata Steel’s domestic market is obviously able to absorb the vast bulk of the company’s steel production. But that’s not the case with many global steel producers, particularly those in China. Excess capacity plagues steelmakers worldwide, with much of that excess capacity flowing from developing countries to developed countries.

Thomas A. Danjczek, former president of the Washington-based Steel Manufacturers Association (SMA), described the problem in a recent presentation. “The United States is unique among major steel producing nations,” said Danjczek, now a senior advisor to the SMA. “It is the largest net importer of steel, despite significant unused competitive capacity.”

U.S. steel production of 87 million tons last year was down 1.9 percent from 88.7 million tons in 2012 and 11.2 percent below more than 98 million tons in 2007, the last year before the onset of the Great Recession. U.S. steel consumption totaled 102 million tons in 2012, according to steel trade data, which means that 13.3 million tons of foreign steel made up the balance of U.S. consumption. “The message is that a significant amount of imports should have been replaced with domestically produced steel,” Danjczek said.

Steel imports have become a hot topic for the U.S. industry. For the first time since the 1990s, the industry has implemented a full-court press to level the world playing field.

“Global excess steelmaking capacity currently exceeds 500 million tons. With massive excess capacity and weak markets in several regions, the U.S. has become a market of last resort for many of our trading partners. This cannot continue,” Richard P. Teets Jr., president and chief operating officer for steel at Fort Wayne, Ind.-based Steel Dynamics Inc., said in testimony to the House Steel Caucus this spring. “The U.S. is the world’s largest net importer of steel, and much of this imported material is illegally traded. Achieving balance in our nation’s steel trade would support as many as 87,000 new jobs in the U.S. economy.”

Those sentiments were echoed by Mario Longhi, president and chief executive officer of Pittsburgh-based U.S. Steel Corp. “Rule-breaking is cheating,” he told the House Steel Caucus. “And trade based on deception can never be ‘fair’ trade.”

Longhi noted that U.S. Steel and other domestic oil country tubular goods (OCTG) producers filed a trade case in July 2013 against nine countries based on a rapid surge of imported OCTG products, primarily from South Korean companies. “The evidence in this case clearly shows that OCTG products are being illegally dumped in what remains the most open and attractive market in the world at prices below fair value and in ways designed to circumvent our trade laws,” he said.

Leo W. Gerard, president of the United Steelworkers union, urged congressmen to duplicate the trade legislation of March 1999 that provided for a reduction in the volume of steel imports and established a steel import notification and monitoring program.

“Once again, it appears as if no one is paying attention to the warning signs,” Gerard told the House Steel Caucus. “The filing of trade cases has recently accelerated, with active cases in OCTG, rebar and grain-oriented electrical steel in the steel industry alone. Import penetration, lack of enforcement, poorly negotiated trade deals with trading partners that flaunt the rules and a myopic refusal to initiate a comprehensive industrial policy are once again threatening not only steel jobs, but industrial jobs all across America.”

U.S. steel producers filed 38 trade complaints in 2013, the highest number since 2001. U.S. trade officials have begun to implement dumping actions against foreign steelmakers, but the global nature of steel ownership sometimes blurs the lines between domestic and foreign steelmakers. Russia’s Novolipetsk Steel, which has operations in northwest Indiana and Pennsylvania, is the target of an anti-dumping duty investigation, and the steelmaker asked the U.S. Commerce Department to suspend the investigation, offering to make necessary price revisions to eliminate the basis for the complaint.

Despite its problems with imports, the U.S. steel industry is an increasingly competitive player on the world stage. It is self-sufficient in raw materials, especially iron ore and ferrous scrap; with the continued boom in shale gas production, the industry benefits from relatively low energy prices; labor productivity is the highest it has ever been; and the industry continues to enjoy unfettered access to the world’s largest capital market.

Charlotte, N.C.-based Nucor Corp. is “betting on the American economy for the long run,” chairman, president and chief executive officer John J. Ferriola said, noting that his company has invested nearly $8 billion in new and existing U.S. facilities since 2008.

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