Competitiveness and challenges in the steel industry 3. McKinsey - Competitveness in the...

Competitiveness and challenges in the steel industry

OECD Steel committee74th session

Paris, July 1, 2013

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respects accurate or complete.


Contents

▪ Challenges in the steel industry –cyclicality and increasing competition from emerging economies

▪ Competitiveness of the steel industry

– beyond cost optimization

▪ Implications for enhancing competitive-

ness – few actions to launch and promote


The development of the industrial production index shows fundamental differences by region

0

100

200

300

400

500

600

Industrial production index – mature regionsPoints (based on 2005)

Years

China: 10.1% p.a.

Europe 1.5% p.a.

202019181716151413121110092008

0

50

100

150

200

250

19181716151413121110092008

Industrial production index – developing regionsPoints (based on 2005)

Years

Dev Asia +6% p.a.

2020

▪ China and Western Europe

are the dominant players in

global consumers

▪ While projections on China

are positive, mature regions

suffer from no growth

▪ Emerging regions follow a

growth trend line over the

next few years

▪ In all of those regions next to

GDP growth, some countries

have clear growth

stimulating drivers such as

energy and resources

Africa

MENA

Latin America

Europe (EU15)

North America

SOURCE: Global Insight; McKinsey


Within major steel economies macro-economic factors indicate uncertainty for demand and utilization

0

0,5

1,0

1,5

2,0

Debt GDP ratioIndex (based on 2005)

121110090807062005

GER

EU-15

China

US

2016151413

▪ Economically uncertain markets in traditional steel-consuming econo-mies

▪ China's economy stabilizes while the debt to GDP ratio in the US and EU-15 has been increasing steadily since 2008 in combination with strongly declining infrastructural investments

▪ In addition to weak GDP growth and higher debts, infra-structure investments in EU-15 countries have declined more than 30% between 2011 and 2012

0

1,0

2,0

3,0

4,0

Infrastructure spendingIndex (based on 2005)

EU-15

US

GER

China

2016151413121110090807062005

SOURCE: Global insight; McKinsey


Current projections based on consumption forecasts indicate a global slow-down

270 293 318 354 394 439

93106

120

94

113119

122125

128

153

148153

167172

176

7265

141

14

1,500

81

686

143

18

1,702

765

141

16

1,607

12

1,413

646

141

2010

1,306

India

China

Developed Asia

North America

Europe

2020

1,797

794

141

589

134

730

2.8% p.a.

3.5% p.a.

Other1

SOURCE: World Steel Association (WSA); McKinsey Steel Demand Model

Regional growthPercent p.a.

2010 - 16 2016 - 20

0

1

1

Share of ChinaPercent

45 46 45 4546 44

1

4

1

7

2

6

4

Apparent steel demand per regionMillion metric tons

1 Africa, other Asia, CIS, Oceania, MENA, Latin America

5 5


The steel industry is very volatile and with depressed profitability since 2008 – mature regions are losing in profitability

SOURCE: Bloomberg; McKinsey analysis

EBITDA marginPercent1

Average

NAFTA

Developed Asia

Europe

China

1 Based on a sample of 84 of the largest steel companies globally

▪ Margin develop-mentfollows a negative trend line

▪ Current situation worst for a long time

-5

0

5

10

15

20

25

30

040302012000 201211100908070605

2008 - 12: margin deterio-ration and leveraging

2000 - 03: price-margin squeeze

2003 - 08: margin improvement and

upstream integration


HRC value chain1 profit pool split evolution since 1995, USD billions

SOURCE: McKinsey Steel Model, McKinsey Mining Value Pools Model

Within the entire steel value chain, profitability is challenged and margins move to mining

815 17

44 46 42

11

81

100% =

Steelmaking(HRC)

Cokingcoal

Iron ore

2017

135

27

05

125

61

22

2000

23

78

7

1995

54

32

2011

230

26

28

10

156

35

22

1 HRC assumed to represent 85% of total hot-rolled flat products. Flat production assumed to use 85% of pig iron as raw materials. Assuming 1.6 t of

iron ore per tonne of pig iron and 0.5 tonne of coke per tonne of pig iron

▪ In the medium

term, the value

pool in steel will

remain in favor of

the raw material

producers

▪ There might be

shifts in between

years, but

demand and

supply for steel

combined with

cost for marginal

producers will

stabilize EBITDA

distribution


From a perspective on the EBITDA pool, emerging regions benefited most from the China-driven boom of the last decade

SOURCE: McKinsey (BMI Value Pools Model)

13

56

28

38

37

121

14

20121

164

2009

58

2007

136

42

2003

39

16

10

157

OECD steelNon-OECD steelMining

CAGR2003 - 2012

17%

33%

9%

-1%

HRC value chain EBITDA poolUSD billions

1 Based on preliminary estimates


Contents

▪ Challenges in the steel industry –

cyclicality and increasing competition

from emerging economies

▪ Competitiveness of the steel industry – beyond cost optimization

▪ Implications for enhancing competitive-

ness – few actions to launch and promote


Margin development in steel is a major issue, driven by external factors and plant situation

SOURCE: SBB, MEPS, McKinsey Flat Steel database

Typical factors driving/challenging competitiveness

Brazil

462460

922

Price Cost EBITDA

497256

753

EBITDACostPrice

2008 2012

Western Europe

698

255

953

EBITDACostPrice

622

35

657

Cost EBITDAPrice

2008 2012

Regional factors

and conse-quences

Intrinsicindustry

playeractions

Industry-wide

factors

Development of industry attractiveness USD per ton of HRC

1

▪ Supply balance

▪ CO2 and technology

challenges

▪ …

2

▪ Access to raw

materials/resources

▪ Fx-rate and cost

inflation

▪ Regulation

▪ …

3▪ Asset quality

and actions

▪ Operational

performance

▪ …

4


150100500

400

200

200

0

Cumulative capacity, Mt

900850800750700650600500400 550350300250

600

450

800

600400200

0

800

800600400200

0

Global HRC cost curve1, ex works, USD/t

SOURCE: McKinsey flat steel cost model; steel press; VDEh; WSA

1 Operating costs excluding SG&A, considering captive raw materials, standard utilization (90%)

2 90% of capacity

Q1 2013

Marginal manufacturer

2002

2017E

Marginal manufacturer2

1st quartileEurope

1st quartileEurope

Marginal manufacturer2

~ 47%

1st quartileEurope

~ 55%

33%

Globally competitiveness of some regions gets challenged through erosion of cost position – example Europe/Germany

1

German plants

Other

Europe 1st quartile


Global CO2e emissions Steel CO2e emissions

Percent, 2010e

1 Includes mining and beneficiation of iron ore, coal, limestone, and ferro-alloy ores

2 Production of Ni, FeCr, FeSi, FeMn, SiMn and Al consumed during steel production

Direct emissions

Indirect emissions

SOURCE: McKinsey (Steel CO2 Model; Global Carbon Cost Curve 2.1)

1.7

Steel (Direct)5.6

Steel (Power)0.7

Power24.4

Forestry 15.0

Waste2.9

Building

6.8

Transport

12.1

Other

industry

3.0

Chemicals

3.9Cement

5.0Petroleum

and gas

5.5

Steel (mining1

and ferro-alloys2)

Agriculture

13.3

100% = 49.4 GtCO2e per year 100% = 4.0 GtCO2e per year

70

Ferro-alloys2

4Mining1

17

Power 9

Direct

2 Steel will remain a source of CO2 emissions which is a consequence of the process …


Total CO2 footprint

1.0

5%

33%

39%

8%

0.2

0.5

0.100.2

BF route

SOURCE: McKinsey Steel CO2 Model

▪ Technology

differences

between

integrated

route and

EAF route

result in

significant

emission

levels

▪ However,

input factor

salso change

EAF route

require

additional

power supply

BOFMining and raw material processing

Coke making

Sintering /Pelletizing

BF Downstream

Ferroalloyssmelting

Coke Fuel (includingoff-gas)

PCI coal Electricity Pig Iron Limestone Mining

0.20.2

0.8

3.4

43%

12%10%

6%4% 2%

21%

0.30.2

1.7About 0.50 for

transportation

of raw materials

not included

EAF route

About 0.18 for

transportation

of finished

products

not included

DownstreamMining and raw material processing

Pelletizing DRI making EAF

About 0.2 for

transportation

of raw materials

not included

Ferroalloyssmelting

ElectricityPig Iron & DRIMiningFuel (includingoff-gas)

About 0.2 for

transportation

of finished

products

not included

1 CO2 emissions linked to off-gas are allocated to the process step where the gas is used

2

Coke

… however, technology differences can lead to significant differences in emissions


▪ Commodity countries exposed to external factors

▪ Cost base for raw materials inflating

▪ The rationale that inflation results in devaluation does no longer seem to hold true

▪ Overall economics of raw material countries will challenge markets (higher cost makes steel less attractive)

SOURCE: Global Insight; OANDA; McKinsey

41

19

1515

BrazilAustraliaEurope1US

37

11

2

AUS/USD

REAL/USD

EUR/USD

Currency development of "commodity countries"

Exchange rate changes (2006 - 13) Percent

Price evolution

Consumer price index growth(2006 - 13)Percent

1 Eurozone countries

Some raw material supplying countries get challenged by appreciation of their currencies and cost inflation

3

McKinsey & Company | 15SOURCE: Ministério das Minas e Energia, Aneel, Economist Intelligence Unit, James F. King

Energy costUSD/MWh

Supply chain costUSD transport cost/t coking

coal

Labor costUSD/hour

46

180

+288%

20122003

12.0

+272%

20122003

3.2

17

11

+52%

20122003

Development of factor costs in BrazilMillion metric tons

Brasil shows how regionally attractivity of a production basecan deteriorated

3


1 Average applied MFN tariffs

2 In addition China, Russia, Ukraine, India, Guinea, Iran, Argentina, Kazakhstan, Pakistan, UAE and Vietnam impose export taxes

EXAMPLES

0

5

2

8

00

2

4

6

8

10

12

14

16

18

Import duties and taxes1

Percent

South

Africa

Turkey

2 - 17

12

India

5 - 7.5

China

3 - 10

Brazil

2 - 12

Finished iron & steel products

Semi-finished products

SOURCE: WTO, OECD, European Commission

Import duties for steel products Export barriers for raw materials

▪ Indonesia export

ban on iron,

except for miners

that build local

processing facili-

ties from 2014

▪ Bans on scrap

exports in Indo-

nesia, Mongolia,

Saudi Arabia, and

many other

countries2

20

Post 03/2011Pre 03/2011

5 - 10

Export duties, iron ore IndiaPercent Export bans

Also, import and export taxes influence competitiveness, while protecting or even taking away the need for continuous improvement

3


1,400

1,200

1,000

800

600

400

200

0

Year

201312111009080706052004

Capacitymt

2,200

2,000

1,800

1,600Non-OECD

SOURCE: McKinsey Crude steel capacity database

+720

OECD

+105

Due to low economic attractiveness new assets have been built manlyoutside OECD

4

McKinsey & Company | 18SOURCE: VDEh Plantfacts; Experts Estimate

Average converter size (TAB weight)

Average European steel plants, % of capacity

older 25 years Average US steel plantsAverage CIS steel plants

Average India steel plants

182t 204t 204t 217t 203t 236t 93t 139t

Age comparison BOF route

Assets had been ageing over time and lose potential structural advantages

4

18

2000

18

20132013

95

2000

77

92100

2000 2013 20013

81

2000

71


2,0001,5001,0005000

40

45

50

55

60

65

70

Average BF size, Ktpy

4,0003,5003,0002,500

15

20

25

30

35

Average BF age, years

0

5

10

SOURCE: VDEh Plantfacts; McKinsey

InlandSea portRiver portLocation:

▪ Majority of European blast furnaces have

– An average age of more than 35 years(not considering relines)

– An average blast furnace capacity of below 2 million tonnes

▪ Additionally, more than 60% of European BF plants have logistical disadvantages (located inland with either river port or rail access)

MarginalPoor Average

EUROPE EXAMPLE

Economical

challenged

In some regions the asset base calls for reviewing sustainability of assets and to be rebalanced

4


Greenfield3

▪ Once capacities are

offshored, there will

be no economies to

relocate quantities

back to Europe

▪ Greenfield plants of

new entrants will be

able to compete at

any price in Europe,

especially from

MENA

HRC costUSD/t Result

551 530 569672

59

Slab cost (incl.

Transport

to EU)

HRC

conversion

Depreciation2

Europe

4th quartile4

731

Brazil

688

5069

CIS

642

5161

MENA

603

28 24

In contrast greenfield plants can effectively compete against these low positioned plants in mature region – example Europe

SOURCE: McKinsey

1 Including EU exports; In HRC equivalent; includes HRC and all downstream products

2 Based on capex of 1,200 USD/t for integrated plant, 300 USD/t for EAF slab plant; 170 USD/t for HRC mill; depreciation period 20 years

3 Without captive raw materials

4 Incl. CO2 costs based on a CO2 price of 20 USD/t

MODEL RESULTS4


Contents

▪ Challenges in the steel industry –

cyclicality and increasing competition

from emerging economies

▪ Competitiveness of the steel industry

– beyond cost optimization

▪ Implications for enhancing competitive-ness – few actions to launch and promote


EU launched a programme to support steel industry

SOURCE: EU Commission

Regulatory framework

▪ Assessment of impact of existing and new policies and legislation on competitiveness

▪ Support sustainable steel production to boost demand and EU market share

▪ Fight VAT evasion and black markets in steel

Boosting demand▪ Promote steel end-use sectors, e.g., through simulating demand for alternative fuel

vehicles and renovation of buildings by energy and resource-efficient construction

Level playing field

▪ Ensure to eliminate or reduce tariffs and non-tariff barriers on third markets for EU steel

and raw materials

▪ Update anti-dumping and anti-subsidy regulations

▪ Monitor scrap markets and include coking coal in the list of critical raw materials

Energy, climate, resource policies

▪ Create regulatory environment conducive to sustainable growth (renewable energy,

impact of the ETS on electricity prices, energy efficiency)

▪ Support internationally binding agreements on climate change and GHG

Innovation

▪ Integrate steel industry into RDI programme for energy-efficient products

▪ Support R&D efforts for new technologies, and shift focus to up-scaling and pilots,

including steel/raw materials/recycling

Skills and restructuring

▪ Promote skills relevant to the steel industry going forward

▪ Work with member states and industry on alleviating impact of restructuring or plant

closures on local labor markets and societies

Programme elements


Competitiveness should be promoted in a focused way

SOURCE: McKinsey

Macro-economic initiatives to secure competi-tiveness

B

Company specificaction

▪ Monitor implications of competitive assets outside OECD which change the game, and reflect on unpredictable (opportunistic) tradeflows

▪ Promote industrialization levels with industrial GDP contribution and establish right incentives, permissions and timely execution

▪ Allow for consolidation in steel where possible and secure no more legacy assets remain kept up

▪ Secure level playing field to allow for sustainable production, e.g., to allow for environmental standards, avoid structural penalties and/or bottlenecks, e.g., in energy

▪ Discover market and customer opportunities for steel and adjust accordingly (specialized assets, productivity focused assets, depending on market opportunities), recognize substitution risks

▪ Optimize internal performance further and do some structural adjustments

A

McKinsey & Company | 24SOURCE: McKinsey "Lightweight, heavy impact"; advanced industries perspective 2012

15

38

5

12

9 12

Other non-

lightweight3

Steel (< 550 MPa)

HSS2

Aluminum

Magnesium

Plastics

Carbon fiber

2030

100%

20

13

5

0.5

2010

100%

19

52

Material mix in automotivePercent

67%

Lightweight29% share1

14

-70%

20302010

46

RoW

China

Europe

North America

2030

40

2010

11

+273%

Material demandin automotivemt

Steel HSS2

1 HSS, aluminum, magnesium, plastics, carbon fiber

2 High-strength steel (> 550 MPa)

3 Mainly other metals, glass, fluids, interior parts

▪ In applications, the profile ofsteel will change

– Need for light-weight appli-cations due to environmental requirements

– Need for high-strength steels for safety and power applica-tions

– Alternative solutions due to new power-train concepts (incl. BEV and hybrids)

– Feasible com-binations of high-strength structures and light panels

A In some applications, the profile of steel used will dramatically change and high value add grades will be increasing in importance due to light weight concepts

McKinsey & Company | 25SOURCE: MEPS Transaction Prices HRC; London Metal Exchange

1,000

500

20131211100908070605040302012000

2,500

3,000

3,500

2,000

1,500

Al is ~ 3.0 x steel price(2000 - 07)

Al is ~ 2.4 x steel price(2009 - 12)

Steel, European CRC

Aluminum, LME daily official

Averaged monthly price of steel and aluminumUSD per tonne

▪ Steel to aluminum spreads have been shrinking

▪ However, current gap between 2 raw materialsis over USD 1,200/tonne

A However, competitiveness of aluminum relative to steel has dramatically increased due to falling price differential …


251209

152

3054

20 156

110+41%

Net per part

costs

Increased

tooling

life

Additional

coatings/

post pro-

cessing

Increased

scrap

Net

material

cost

Lower

density of

aluminum

requires

fewer lbs

Higher per

lb landed

raw material

cost1

Price per

steel part

(indexed

to 100 for

mild steel)

Cost disadvantage in some

applications has reduced to less than 1 EUR/kg, thus provides a

real alternative

HIGH-LEVEL

ESTIMATES

SOURCE: Interviews; ISIS; SRI; The Aluminum Association; FKA Weight Reduction Report

Body panel example, high-strength steel (HSLA) to aluminum cost bridgeIndexed

A … with the result that after "cost in use" calculations the aluminum disadvantage is affordable and attractive


Specific dust emission Kg dust per t crude steel

Specific energy consumptionMetric ton coal equivalent per t crude steel

Accident rateNumber of accidents per million working hours

Specific CO2 emission (Average BF/BOF and EAF)Metric ton CO2 per t crude steel

SOURCE: Wirtschaftsvereinigung Stahl, plant facts, McKinsey CO2 model

1

0

-41%

2

1.5

0

-45%

2.5

2.0

0

2

4

6

8

10

-96%

0

20

40

60

80

-88%

1960 200770 200080 90

1960 200770 200080 90 1960 200770 200080 90

1970 2007200080 90

A Ongoing innovation has been a source for enhancing competitiveness


Capabilities of producing high value added products increase, withrequire producers in OECD countries to invest in more competiveness

= 100%224

-8.3%

EU-27 HDG

EU-27 CRC

RoW HDG

RoW CRC

2013

15%

5%

51%

29%

12

221

15%

5%

51%

29%

2010

205

15%

5%

49%

30%

05

152

18%

7%

46%

29%

2000

113

20%

8%

47%

25%

90% ofcapacities in"new world"

High value add capacity additions 2012 - 14 and capacity evolution 2000 -13kt

Loss ofshare EU-27

SOURCE: VDEh Plantfacts 2012; McKinsey Analysis

▪ Downstream steel production is signi-ficantly built up in emerging regions, with focus on value add

▪ Relevance of producers in mature world and therefore steel production in those regions is decreasing

▪ Steel mills need to have the funds to compete in these dynamic develop-ments

New HDG 8.2

New CRC 38.0

B


Less predictable trade flows require monitoring and countermeasures if the conditions do not match

Developed Asia-North

America

SOURCE: ISSB trade flow data base

13.911.3

6.07.2

20112006

Exports

12.214.7

10.511.6

China-Other developing

Asia

CIS-Western Europe

DevelopedAsia-China

23.712.9

DevelopedAsia-Otherdeveloping

Asia

16.820.7

CIS-MENA

6.37.6

4.56.4

Latin America-North America

Western Europe-North America

Major export flows 2006 and 2011Million metric tons (origin and destination region given)

Emergingobservations

▪ Productionflows due to regional imbalances change due to

– FX changes and cost advantages (e.g., Brazil)

– Country development combinedwith local consumption trends (e.g., Russia)

– Surplus capacity and change of addressable markets (e.g., Europe to US)

B

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