Success for steelmakers globally will depend on being agile and nimble in responding to market opportunities that provide growth and better margins, according to EY's Global Steel Leader, Anjani Agrawal.
Agrawal says that while there are signs the demand outlook is improving, excess capacity remains the biggest threat to the steel sector.
"Permanent shutdown of inefficient capacity is the only real solution to bring balance to the market but in the short term it is difficult to see this happening given state participation in many countries and additional incentive to retain employment, regardless of profitability," he said.
Steelmakers globally are continuing to maximize cost-cutting, are seeking to improve productivity and are shifting focus to high-end value-added products.
"This is going to significantly increase market competition in most products, so those steelmakers who can respond quickly and nimbly to future opportunities that create a new market or provide a better margin will be best placed to survive," he added.
Global demand for steel is forecast to grow faster in 2014 at 3.3%, with more demand growth expected outside China, including India, Brazil, and Russia, as well as emerging markets in the Middle East and North Africa.
Growth is expected in key end-use sectors including: infrastructure and construction (driven by urbanization and a growing middle class in emerging markets); automotive (demand hot spots US, Brazil, Japan and China have forecast annual growth of 5-11% to 2016), and; oil and gas (in particular, average forecast annual capital investment globally of USD 657 billion is expected to drive demand for premium oil country tubular goods).
"The Chinese economy continues to be a determining factor for the global steel market in the medium-to-long term. If urbanization projects continue, accompanied by a strong domestic economy and a growing middle class, it will shift demand to more sophisticated consumer products such as cars and home appliances which will benefit steelmakers with high-end, value-added products."
Agrawal says steelmakers must continue to optimize their product mix and determine which new geographic markets to invest in.
"As demand continues to shift to developing nations, the steel sector is focused on China, Brazil, Russia and India. Moreover, as Africa experiences stability and accelerated economic growth, future scramble for African demand could further shift the landscape in years to come," he said.
While some capacity is expected to be removed over the rest of this decade, the announced addition of capacity by steelmakers out to 2020 shows that investment is still increasing rapidly.
EY estimates that about 300 million tons of steelmaking capacity needs to be closed for the industry’s profit margin to reach a sustainable level, and to raise capacity utilization rates for the sector globally from below 80% to more than 85%.
"The steel sector globally is highly geared with limited access to capital and this will increase the pressure on steelmaking capacity to close over the next two to three years," Agrawal added.
"The knock-on effect of this will be rationalization in the sector as stronger operators acquire weaker competitors. We also expect more steelmakers to be examining their assets more closely and seeking to optimize their portfolios."
The report notes that the global steel sector today has a flatter marginal cost curve.
"The difference between the best and worst performers in the sector has narrowed, so there is little comfort in being at the low end of the cost curve," said Agrawal.
"This means factors such as changes in state subsidies, operating efficiencies, changes in the cost of capital, and success on managing volatility of commodity prices and currencies, can all quickly shift the competitiveness of a steelmaker in the market."
