An industry-wide obsession with trade and overcapacity is masking a handful of developments—from digital disruption to a downward spiral in the relative value of steel—that are reshaping the global steel industry, Accenture Strategy warns.
Its no secret that trade and overcapacity are by far the most pressing issues facing the global steel industry today. Together, the twosome overshadow other less immediate concerns, particularly any that challenge conventional industry wisdom or that will only become urgent further in the future.
What are these second-tier concerns? What key trends must industry leaders be mindful of now?
Together, this gathering storm of developments or inconvenient truths is already reshaping the global steel industry by questioning the viability of existing business models and promising to prompt a fundamental rethinking of what it means to be a steel company.
Failing to confront any or all of the following truths comes with its own risk.
Truth No. 1: Growth in global demand for steel has dramatically slowed.
In the decade prior to the recent recession, global demand for steel grew at an annual rate of 5 percent. Yet, based on Accenture Strategy forecasts using World Steel Association data, we anticipate growth of only 1.1-percent per year over the next two decades. That represents an increase of just 300-million tons in global demand from today and is substantially less than current excess global capacity.
Why is growth slowing? A number of factors are at play including:
Global demand, which previously has been driven by Chinas rapid ascent. That ascent was a unique phenomenon, one we cant expect to be repeated in other countries.
Material substitution, shifts in design parameters and the success notched by steelmakers in producing lighter, stronger steels, all of which are accelerating the overall decline in steel intensity.
Future economic development in emerging economies, which will be far less steel-intensive than in the past due to several trends, including the globalization of manufacturing.
The arrival of the circular economy combined with changes in consumer preferences, which will disrupt future demand for end products.
Truth No. 2: The overcapacity problem could potentially persist for decades.
Overcapacity is not going away. Indeed, the steel industrys progress is continually hindered by varied and powerful forces and considerations such as:
Its unlikely that reductions in Chinas excess internal capacity will keep pace with declining demand domestically, which is expected to fall by 50- to 100-million tons by 2035.
The addition by China of excess capacity outside its borders as referenced in a June 23, 2015 article by Zhu, Yi and Kenneth Hoffman in Bloomberg Professional. China is also building and acquiring unneeded plants outside of Central Asia. Add to that, the One Belt, One Road strategy, which calls for the construction of new steel plants in neighboring countries.
The likely acceleration of capacity creep going forward as companies increasingly deploy digital technologies to boost mill productivity.
Truth No. 3: A downward value-capture spiral continues to trap the industry.
The relative value of steel is reduced as lighter and stronger steels reduce the mass required in a given application. For example, based on Accenture Research analysis of data from the U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics, iron and steel accounted for less than 6-percent of the value of motor vehicles in 2014. The figure represents a marked decline from 70 years ago, when steel accounted for nearly half the value.
Not surprisingly, this reduction has weakened the pricing power of producers. Even given the higher prices associated with advanced, higher-strength steel products, mills cant compensate for the lower tonnage that comes hand-in-hand with the shift to lighter gauges. Despite these higher prices, the investments required to produce such advanced products often result in the failure to generate adequate returns.
This value-consuming, downward spiral will continue as long as steel is priced by the ton. Case in point, virtually none of the value derived from the decline in the volume of steel in autos due to the introduction of advanced high-strength grades has gone to steelmakers.
Shifting to value-based pricing is crucial when faced with slower demand growth and overcapacity. But its a lot easier said than done.
After more than a century of traditional pricing relative to costs dominated by raw material costs on a unit-of-weight basis, shifts in pricing to capture more value such as delivering more steel-efficient buildings instead of just steel will be difficult to achieve.
Truth No. 4: Over the next decade, digital channels will become crucial for steel commerce.
The prevailing belief in the steel industry is that the sector cant participate in digital platforms. Industry players point to the failure of steel marketplaces during the dotcom era as evidence of this as well as concerns that steel specifications are too varied and service requirements too exacting for such platforms to work.
While those attributes may not have changed, the technologies underpinning marketplace platforms have made a quantum leap forward. The result is increased transparency and a step-change improvement in supply chain efficiencies, resulting in shorter lead times and reduced overall inventories.
Steel buyers experience with B2C (business-to-consumer) platforms, where branding plays a larger role, shapes their expectations for B2B (business-to-business) commerce, where lower total cost of ownership is paramount.
Truth No. 5: Industry scale economies are being disrupted.
Given the importance of scale in the steel industry, the pursuit of operating scale has continued, as has the development of advanced, smaller-scale configurations.
The rise of the circular economy and growing concerns over climate change will encourage the spread of reduced-scale plants that are sized to take advantage of renewable energy sources and match new low-carbon production processes.
Additive manufacturing technologies have also been improving rapidly. Previously, many thought these technologies would only work for small, precision-machined components made from high-cost alloys, but not for larger volume carbon steel applications.
The scale is already growing larger. For example, mobile 3-D printers have been used to help build a small house in 24 hours. While the pace in parts-per-hour of 3-D printing has yet to even come close to that of a stam- ping press, the technology is still in its relative infancy.
So, whats next for the industry and how can steelmakers adapt?
Although the fallout from these inconvenient truths will be felt across the board, their impact will vary considerably:
Raw material suppliers are likely to see global iron ore demand peak during the next decade as steel demand growth slows and the share of production accounted for by the electric arc furnace (EAF) increases in response to the circular economy and climate-change-related mandates.
Steel producers will see further pressure on margins and on the viability of existing business models, prompting a fundamental rethink of what it means to be a steel company.
There will not be a standard formula; however, each company will need to become some combination of masters of the supply chain, mass customizers to lower costs and maximize value to end consumers and providers of industry-specific materials solutions.
Service centers will need to find new ways to create value or risk becoming obsolete as steel marketplace platforms undermine traditional business models that rely on ready inventories and price arbitrage as core elements.
Digital disruption will prompt a dramatic shift in the size and required skill sets of the workforce. Steel company headcounts will be reduced through automation, machine-to-machine integration, analytics, robotics and remote monitoring/control.
The main driver will not be cost savings from smaller payrolls, but rather the increases in reliability, efficiency and productivity that can be driven by digital technology.
These concerns are already starting to reshape the industry. Although trade and overcapacity remain challenges, they shouldnt and cant become a distraction from the deeper strategic disruptions that are just around the corner.
Everything about the steel business will change. And executives must realize this as soon as possible so they can develop effective responses now, before its too late.
By Richard Oppelt and John Lichtenstein