Steelmakers hope special products can save them from Chinese onslaught

MANILA/LONDON — Steel producers in high-cost countries say their best hope for surviving the global glut is to develop higher value specialised products. But they will still face a tough time competing with low-cost Chinese producers that are breathing down their necks.

The announcement that India's Tata Steel is abandoning Britain has hammered home the threat to developed countries' steel industries from a glut caused by overcapacity in China, which has led to a collapse in the global price of commodity steel used mainly in construction.

Firms from Europe, Japan and South Korea say they are trying to keep afloat by increasing the share of higher-value products in their output, focusing on specialty steels used mainly in manufacturing, which command a premium over lower grades.

Some companies are venturing further down the supply chain to make their own aircraft or auto parts. Others are forming tighter relationships with their customers as a way to keep their order books full.

"Sticking to technological and quality leadership will be the only solution for European steel producers to secure profitability and future growth," indicated Wolfgang Eder, chief executive officer of Austrian steelmaker Voestalpine..

Voestalpine is aiming to become less dependent on traditional steel markets by raising its production of finished parts for the aerospace, rail and automotive industries. The auto sector alone generates around 30 per cent of group sales.

"Given the cost structure that European steelmakers are facing, they will not be able to produce steel commodities in competition with countries such as China, Russia, Turkey or Ukraine in the long run," Eder said. 

"Energy, labour and regulatory costs in Europe have reached a level at which mass production has become utterly unattractive," he added.

But the strategy may not be a permanent solution to the crisis that has caused plant closures around the developed world. 

Making specialised high-end steel still requires huge, capital-intensive smelters that mostly produce the lower value commodity material. And China, which now produces half of the world's steel, is developing more sophisticated production of its own.

Paul Gait, an analyst at Bernstein, said Voestalpine's strategy means the company "essentially provides an engineering service, a solution to a manufacturing process. It is not just selling steel".

But even at a high level of sophistication, the Chinese can catch up.

"Specialty steels will help Voestalpine survive for a few years, but eventually the Chinese will probably be able to produce the more bespoke, more tailored steel," Gait added.

High value specialty products by themselves can't save European steel, says European Steel Association Eurofer, which wants Brussels to do more to protect the industry from what it says is dumping by China. 

To be cost effective, a steelmaker still needs to produce large quantities of the lower-margin commodity product, and needs a market for it.

Balance sheet

"Steelmaking isn't on the whole that cost effective if you only concentrate on the high grade or speciality product lines. High end is also usually lower volume, and the rest of the balance sheet is made up of a diverse range of lower grade or non-speciality products," said Eurofer spokesman Charles de Lusignan.

"If China takes the 'commodity' end of the market, and it's not as if they are only focusing on that, then it takes with it the specialty segment, because it is impossible to sustainably operate on high grade or specialty alone," he added.

According to Heinz Joerg Fuhrmann, chief executive of German steelmaker Salzgitter, an integrated steel plant only makes sense at a scale of at least 3 million tonnes, and must be used to full capacity to be cost-effective.

"If it's only half used, its production costs are far too high. This means that they can't just serve the top 5 or 10 per cent where indeed the direct competition is lower, but they also have to include the premium standard product," he said.

For the world's No. 2 steel producer, Japan's Nippon Steel and Sumitomo Metal Corp, increasing the volume of high-value products is part of a strategy that also includes boosting volumes of mid-range steel.

"We expand the middle-end to take advantage of economies of scale while maintaining leading position in high-end steel," said Toshiharu Sakae, executive vice president.

Practical limits

In India, there is also a shift towards producing more high value-added steel. 

"Clearly the world is moving in that direction," said H. Shivramkrishnan, chief commercial officer at India's Essar Steel.

Seshagiri Rao, joint managing director at India's JSW Steel Ltd., said: "Every steel company, particularly the major companies, they're looking at value addition, meaning high-end value-added steel products - tin plates or automotive steel, or high-strength steel or electrical steel."

But ultimately, he remarked, there are practical limits to how much of a company's output can be higher end steel.

"I don't think anybody can do more than 30 per cent, 35 per cent so the balance 65 per cent remains commodity grade steel," Rao added.

Meanwhile, Chinese firms are moving up the value chain too.

Baoshan Iron and Steel Co. Ltd., China's biggest listed steelmaker, expects its huge, modern Zhanjiang steel production base with annual capacity of about 9 million tonnes and which it calls its "dream factory" to operate later this year.

The companies that survive, especially in high-cost countries, will have to find creative ways to develop closer relationships with their customers. They can do this even when the steel they produce is commodity grade, provided there is a level playing field, said Eurofer's de Lusignan.

"Profitability is all about value creation for your customers. Commodity producers can for example excel in services provided to their customers: short delivery times, small order quantities, 24-7 order intakes, client-specific product dimensions, etc," he indicated

According to Jeremy Platt, an analyst at UK-based consultancy MEPS, both producers and their customers could benefit from closer relationships up and down the supply chain.

"In future, you could see greater cooperation between steel producers and steel manufacturers. It happens to an extent already but it's something that could be expanded upon in future to the benefit of everyone really. Steel end-users should be looking to do this more and more," he said.

Separately, Europe's steelmakers called last week for sharply higher anti-dumping tariffs to protect against a flood of cheap Chinese imports, blamed for plunging the future of Britain's biggest steelworks into doubt.

Steelmakers blamed slow, ineffective action by the European Union (EU) for failing to stop other countries, particularly China, from massive steel dumping, exporting their excess production at below-cost prices.

Tata is putting all or part of its British business up for sale, including the nation's leading Port Talbot steelworks, because of a global glut, plunging prices and a "significant increase" in cheaper imports to Europe.

The United States takes just four to five months to deploy anti-dumping duties, compared to 16 months in the EU, said De Lusignan.

US anti-dumping tariffs are also significantly higher than those in Europe.

The United States recently levied a duty of 266 per cent on a Chinese steel product while the comparable tariff in Europe was 13 per cent, De Lusignan told AFP.

"The European Union is certainly putting out lots of action plans and it is making all the right noises. The issue is that the methods that can be used to defend against injurious dumping are too slow to deploy and result in measures which are too small to be effective," De Lusignan said.

"This means that whereas the United States vigorously defends against dumping, the EU is seeing its markets drowned out by the effects of pricing pressure from abroad," he added.

Europe's steel sector, which has an annual revenue of 166 billion euros ($189 billion) and accounts for 1.3 per cent of the bloc's total economic output, directly employs some 328,000 people, according to the European Commission.

Last month, EU heads of state and government vowed to take strong action to support the industry.

'Flooding the market' 

Steelmakers say they need that support urgently.

Luxembourg-headquartered ArcelorMittal, the world's biggest steelmaker, announced in February it had lost $7.95 billion in 2015, blaming deteriorating global prices because of excess production capacity in China.

"If you look at the operating results of steel companies, the level of Chinese exports and the impact on prices in our main markets, it is clear that there is an urgent need for action," Finance Director Aditya Mittal told reporters at the time.

Philippe Chalmin, head of the Paris-based Cyclope commodities research institute, said Europe had no comparative advantages in basic steel production.

"There is 300-500 million tonnes of excess steel capacity in the world. The Chinese are suffering, too, but they have exported their problems," he added.

Though worldwide steel production fell by 2.8 per cent in 2015, China's share of that edged higher to 49.5 per cent from 49.3 per cent.

Steel prices may have hit the bottom already, said Chalmin. "But you should not expect too much. It is a bottom that could last quite a long time," he added.

In Britain, where Tata Steel's operations employ 15,000 people, the threat to the steel industry has provoked heated political debate.

Prime Minister David Cameron said the country is doing "everything it can" but he dismissed opposition calls for the loss-making industry to be nationalised.

Following Tata Steel's announcement, analysts at Hamburg-headquartered investment bank Berenberg said they believed the Indian group's British steel assets could be merged with those of Germany's ThyssenKrupp Steel Europe.

"A potential consolidation between the two companies' European steel assets would give the combined entity more pricing power and better market coverage," Berenberg said.

Consolidations aside, European steelmakers say they could already be competitive if market distortions were removed.

"European steel is competitive. It is just that it is competitive in a global, fair market," said De Lusignan. "But we are not looking at a fair market. We are looking at a market which has an overcapacity of 400 million tonnes, twice EU demand, that is flooding the market."