Steel – Overcapacity in 2013

Commodities , Metals , Steel Jan 23, 2013 No Comments

SteelThe steel sector still shows a significant global over-capacity according to Ernst & Young’s report, Global steel: A new world, a new strategy, highlighting the issues and challenges facing the sector.

The planet will still produce too much steel this year. Europe may well have closed many furnaces last year, emerging markets have not cut their production and instead increased it! China has an overcapacity of around 40 million tons of steel: its economy can not absorb all this metal since construction as well as the automobile industry slowed down and will only gradually start picking up.

So, to get rid of this surplus production capacity, China, like Russia, is trying to export its way out of the issue, especially basic grade steel which is highly competitive on the global marketplace, given the low wages of Chinese steelworkers. But this is what has contributed to make the global steel glut worse and prevented prices from recovering.

Many steelmakers have recently integrated raw material mines(iron, coal) into their supply chains, believing they would protect value by removing volatility in the cost of raw materials but it didn’t necessarily bring the expected rewards. China will have to make its own steel revolution. Major Chinese companies will gradually absorb the multitude of small, inefficient furnaces and focus on moving upmarket. A process that will likely take several years.

Starting next year, however, Brazil could show a more positive outlook for its steel production due to the Brazilian government’s decisions related to the country’s exchange rate, including a trade protection policy and a more aggressive package to reduce the cost of electricity. India could also see the beginning of a steel “golden age” fueled by its iron ore resources. But for now, the fight against illegal mines slowed down the growth. The demand for steel in India is however huge: public programs have been launched to address the lack of infrastructure in rural areas and the development of the automotive industry will also help.

To conclude, it will not be before 2014 or even 2015 before the steel glut goes away.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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