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Changing Economics of Steel

Thesis · July 2015

DOI: 10.13140/RG.2.1.1981.3609

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Changing Economics of
Steel
We have discussed the changing economics of steel under demand supply and
production on a global scale. Starting with the emerging market of steel after 2008
crisis we discussed the capacity utilization and product innovation in dependent
industries. In the course a brief viewpoint is given for the increasing risk of oversupply
in the market. Towards conclusion the forecast data from EnY analysis is considered
to provide the implications to three main sectors of finished steel products.

TUSHAR MAMODIA
1. CHANGES IN DEMAND OF STEEL indicators showed a definite upswing in sentiment,
with 3% month-on-month growth. This growth is
World crude steel production has increased from expected to continue into 2014, with forecast growth
851 million metric tons (mmt) in 2001 to 1,527 mmt of about 4% compared with 1.9% in 2013. Developed
in 2011. (28.3 mmt in 1900). World average steel use markets are looking quite strong. The outlook for the
per capita has steadily increased from 150 kg in 2001 EU improved in the latter half of 2013, with higher
to 220 kg in 2010. The emerging economies such as levels of employment, rising GDP and improved
India, Brazil, Korea and Turkey have all entered the access to capital. The GDP continued to increase,
top 10 steel producers list in the last 40 years. although only by 0.3% y-o-y, in the last quarter of
Regional structure of steel demand has been 2013. The region is expected to see a gradual
changing continuously along with the evolution of recovery backed by an accommodating monetary
global manufacturing base through creation and policy, low inflation and improving consumer and
relocation of industries. Investments in steel are now business sentiment. [13]
the demand driver of the industry in all emerging
economies, urbanization and development of 1600

manufacturing base boost steel demand. The

1200
demand is strong towards upward population trends
with a higher working age population and an
800
increasing demand for infrastructure and industries
development.
400

1.1 DEMAND OF CRUDE STEEL

0
EU had a thorny way of demand recovery during 1951 1961 1971 1981 1991 2001

2003 to 2010 with a two-speed Eurozone in north and Fig.1 Global crude steel production in mmt
south Europe. On one hand Germany had a positive
In the US, corporate earnings, employment
economic outlook, strong growth in construction and
growth and credit availability are improving. GDP
automotive industry while on the other Spain and
grew at 3.2% y-o-y despite the drag caused by the
Italy were going through a crisis. Overall EU had a
shutdown of the Federal Government during the
strong rebound in the automotive sector that paved
quarter. A combination of improving household
way for steel demand. Construction industry in US
finances, stronger housing market and improved
also seems to rise but still have a long way to go with
competitiveness will accelerate US growth to an
a relatively strong rebound in the automotive
annualized rate in excess of 3% from the second
industry. ASEAN region has a positive perspective of
quarter of 2014 onward. [14]
demand recovery, Indonesia showed a slight
slowdown in 2012 after an impressive growth in 2011 “Excess capacity remains the biggest threat to the steel
and Thailand also had a very fast flood recovery. As sector. The sector needs to restructure to regain profitability
there is a lot of demand in infrastructure the but with high debt and reduced profitability, the options for
consolidation are limited. Permanent shutdown of high-cost
economic drivers for steel demand has a positive side
capacity is the only real solution to bring balance to the
in the region. Speaking about India and China
market. Both corporate and government leadership is
following the current anti-inflationary policy there is necessary to make this happen.”
limited demand for external commodities including
steel but in long run the country needs infrastructure Emerging markets showed signs of slower
and has a huge market for automobiles and growth in 2013 as a result of lower commodity prices,
mechanical machinery. [12] weak demand from developed countries and tighter
financial conditions. This slowdown is clearly
After a period of sustained weakness and uncertainty, illustrated by falling manufacturing PMI data from
the global economy continues along the road to emerging markets where a slight contraction is
recovery and may be on the verge of acceleration. At particularly evident from May 2013 onward. Despite
the end of 2013, global industrial production structural issues and volatile financial markets in

1
emerging markets, the majority of demand (apparent China’s largest stainless producers are Shanxi
steel use) was still propelled by these economies Taigang Stainless Steel and Baosteel. Taiyuan Iron &
(+4.9%), whereas demand in the EU continued to Steel, the parent company of Shanxi Taigang, has said
contract (–3.8%). There was, however, a slight it aims to produce 3.4 mmt of crude stainless in 2013,
increase in apparent steel usage in North America almost 10% more than the output of 3.1 mmt last
(+0.2%). [15] year, and to raise exports by 420,000 mt. Asian
stainless prices rose at the beginning of this year
China was the clear driver of global steel
before Chinese New Year holidays in February on
demand, recording 6% growth in 2013 compared with
strong demand as buyers stocked up in expectation of
2.9% in 2012. In rest of the world, however, demand
higher prices after the holidays. But prices fell and
for steel in 2013 failed to meet expectations and was
trading turned sluggish after the holidays as nickel
lower than previously forecast. Two factors causing
prices slumped. Market participants are generally
more rapid restructuring of the Chinese steel sector:
expecting a pick-up in business this quarter as April-
• The excessive levels of debt may allow Chinese
June is usually peak season for demand, though most
policy banks to stop funding losses as a catalyst to
remained cautious about predicting a rebound in
restructure.
prices because of fragile global economic conditions
• The use of steel stockpiles to collateralize debt to be
and weak nickel prices.
used for speculation is expected to be unwound.
Despite everything there seems a positive
While steelmakers are most threatened by
growth in the stainless steel industry. Early in 2013,
excess capacity and strive to maintain profitability,
shortly after the Outokumpu/Inoxum merger,
they are also exposed to cost related threats:
Outokumpu CEO Mika Seitovirta said he expected
• The increasing age of steel mills and the deferral of
positive growth in all main stainless consuming
required maintenance will see a sharp increase in
sectors in 2013. The company forecast global growth
future repair and maintenance costs.
of 4% in 2013 for the consumer goods sector (despite
• With economic recovery, labor costs are rising
it being particularly subdued in Europe), 2% growth
faster than steel demand.
for automotive, and 5% increase for the global
• Productivity will continue to fall as steel plants age
construction and chemical/petrochemicals sectors.
or are run at less-than-optimal capacity.
• Historic low interest rates, prevailing in most 1.3 STEEL IN AUTOMOBILE
markets, are not sustainable, with future interest
As per the World Steel Association estimates, the
burden set to be significant for the already highly
automotive sector accounts for roughly 12% of the
geared steel sector.
overall global steel consumption. ArcelorMittal is one
“While the outlook for 2014 is slightly better than 2013 and of the leading global producers of automotive steel,
2015 holds the promise of even greater improvement - the accounting for around 16.7% of the world’s
sector is in a weak position and any further economic shocks automotive steel sheet market in 2014. Steel is the
will have an extremely negative impact on steelmakers”
dominant material in automobile manufacturing,
1.2 DEMAND OF STAINLESS STEEL accounting for roughly 60% of the weight of an
average automobile. However, going forward the
Although Europe is the historical home of share of steel in automobile manufacturing is likely to
stainless steel, and recently celebrated this metal’s drop, with automakers looking to comply with
centenary, it is Asia, and in particular China, which is stringent regulations governing automobile emissions
now the powerhouse of stainless supply and demand. and fuel efficiency. [16]
Asian production overtook that of Europe more than
a decade ago, and China passed both European and As a result of the need to make their cars lighter,
rest-of-Asia output in 2009 and has continued manufacturers have been incorporating a greater
upward. Five years ago Chinese output was below 7 proportion of lighter materials such as aluminum and
mmt; last year it exceeded 16 mmt according to the plastic composites in their vehicles. A case in point is
latest International Stainless Steel Forum (ISSF) data. Ford’s iconic F-150 pickup truck. Aluminum accounts

2
for roughly 25% of the curb weight of the 2015 F-150.
Though this is a specific example, it is also indicative
of a larger trend. In North America, average
aluminum content in automobiles has increased by
44.3 pounds per vehicle between 2012 and 2015, as
compared to an increase of 10 pounds per vehicle
between 2010 and 2012. This corresponds to an
increase in the percentage contribution of aluminum
to the average curb weight of an automobile in North
America from 9% in 2012 to 10.4% in 2015. As per a
study by Ducker Worldwide, average aluminum
content in cars in North America is set to increase to
19% of a car’s curb weight by 2025. Since aluminum Fig.3 Materials in automobile industry
is a lighter metal than steel, the increase in terms of Source: US Dept of Energy, Vehicles Technology Program
volume of aluminum used in an average automobile
The current global recession has had an
is a better reflection of the increase in the scope of
unexpectedly large impact on the global car market,
application of the metal. The volume share of
which consumes about 13% of the world's finished
aluminum in automobiles is expected to rise from
steel. New registrations and sales showing some signs
6.6% in 2015 to 26.6% in 2025. [16]
of recovery. Steel’s major contender in the
70 automotive fight is what’s described as advanced
high-strength steel (AHSS). Prabhat Rastogi,
60
ArcelorMittal USA’s global automotive marketing
manager, told delegates at the March 13 Platt’s Steel
50
Markets North America conference in Chicago that a
40
vehicle using 70% AHSS in its make-up ends up being
25% lighter. Additionally, steel has long been the
30 material of choice for auto manufacturers, and most
1998 2002 2006 2010 2014 of their equipment and industrial processes revolve
Fig.2 light vehicles production in million units around that. With advanced high strength steels, a
part that weighed 100 pounds in the past is being
Major steel companies such as ArcelorMittal and
replaced by a part that weighs 75 pounds at no extra
U.S. Steel are investing heavily to produce advanced
cost. Aluminum has, however, infiltrated some
high-strength steels, in order to maintain steel’s
middle-of-the-road cars. A 2011 Ducker Worldwide
position as the material of choice for the automotive
study found that 2012 model vehicles such as the
industry. Advanced high strength steels have
Ford Explorer, Hyundai Elantra, Honda Civic, Chevy
minimum tensile strengths of 500 to 800 MPa. These
Malibu and Nissan Altima all contained a minimum of
steels offer significant weight savings as compared to
10% curb weight of finished aluminum. In addition,
traditional steels of comparable strengths. These
the 2013 Tesla Model S features an all-aluminum
materials are competitive relative to other materials,
body and the 2013 Honda Fit features an aluminum
as shown in Fig.3.
sub frame.
1.4 INNOVATION IN STEEL
One main area of concern in both markets,
Examples of success stories are ArcelorMittal’s however, is persistently low ingot sales prices versus
proprietary S in Motion steels which provide 19% firm scrap input costs. Market players said they
weight savings for a typical C-Segment vehicle. expect low scrap generation and a healthy appetite
Around 30% of ArcelorMittal’s R&D budget is devoted from China to continue at least through the rest of the
to developing solutions for the automotive market. year. “Demand will be strong from the premium
automakers in the second half as the majority are
reporting higher sales so far this year,” said a German

3
alloy producer, who explained that although many die part of stimulus measures. Emerging and developing
casters had planned for a 5% reduction in alloy economies spending USD 566 billion on infrastructure
requirements in 2013, they were actually buying the and advanced countries spending USD 378 billion.
same volumes as in 2012. Luxury carmakers such as Indirect impacts of government infrastructure
BMW and Audi are expected to achieve high sales in spending on steel consumption is having highly
2013, but the lower-value car producers such as Fiat, uncertain calculations. The potential indirect impact
PSA Peugeot Citroen and Opel/Vauxhall in particular of public infrastructure spending could be on the
are likely to continue to experience difficulties, said a order of 130 million metric tons over the next two or
European die caster. more years, the lion’s share of which would occur in
China.
1.5 CHANGING INVESTEMENTs
In OECD countries in first few months of 2009,
There is now a general expectation that countries
output fell by 20-25% in Germany and other European
such as Brazil and India, with accelerating economic
countries, 30-40% in Japan and 13-20% in the United
growth, a young population and low levels of
States. In emerging economies, the growth rate
urbanization, will follow the path of China and
slowed sharply in the beginning of 2009 in some
become the next mega steel producing countries.
countries. As a whole, the mechanical engineering
Some of this is acceptable. They are in a phase of
sector output to fall in 2009, followed by slow
economic growth and gross domestic product per
recovery in 2010, as a result of weak business
capita that historically has been associated with rapid
investment in capital equipment. The biggest
growth in steel demand, but I do not see the same
question today is “Will demand continue when the
investment in education and infrastructure in India
stimulus ends?” Structural change in steel-using
today that has been a key element in China’s growth.
industries is because the economic growth in China is
Now 70% of the steel produced in India and China is
shifting towards household spending and away from
used in construction and there is a further increase in
investment and exports. The rise in global steel
the long products for infrastructure and industry
intensity is expected to slow down significantly in the
development. This is quite against the general global
coming years.
trend but due to this there is a huge demand for mini
mills rather than continuous production which in turn 2. CHANGES IN SUPPLY OF STEEL
are highly efficient and productive with least
investment. Let us now switch to the supply side but remain
with China. Chinese crude steel production increased
34 Steel Intensity (right) 40 from 129 to 627 million tons in the last 10 years.
Although nearly a third of all steel is internationally
Kg/1000 GDP (Constant PPP $)

32 investment in emerging countries (left)

38
Investment/GDP %

30 traded, the reality is that production follows demand.

28 36 While crude steel production fell by 20% in the EU,
33% in the UK and 22% in the USA, it rose by 40% in
26 34
Japan, 35% in Korea and 152% in India. When demand
24
32
for steel collapsed in the period 2002–2004 in OECD
22
countries, the world steel market was crucially
20 30 sustained by steel imports into China. China was a
1991 1993 1995 1997 1999 2001 2003 2005 2007
major net importer of steel, particularly higher quality
Fig.4 investment over steel intensity
steel sheets from Japan and Korea and low cost semis
Recent policy developments are there to from Russia, which still had major excess steelmaking
increase the trade measures to support the industry capacity following the collapse of the Soviet
since the 2012. Tariff and Non-Tariff barriers (mostly economy. However, this was only a transitory phase.
licensing and technical) have been decreased to such The new reality is that future bulk steel production
a level favorable for unrestricted trade of steel will be concentrated in Asia and the rapidly emerging
finished and unfinished products. The governments economies stretching from Turkey in the West, Iran
of most economies are spending on infrastructure as to Vietnam, Thailand and Indonesia in Southeast Asia.

4
20
India China
3. CHANGES IN ECONOMICS OF PRODUCTION
18
15 In start of the industry dominant influence was of
13 Japanese integrated mills. Japan, with neither
10 domestic iron ore nor quality coking coals, built the
8 world’s leading steel industry in the 1960s and 1970s
5 by the construction and operation of coastal steel
3 mills on land reclaimed from the sea, with the world’s
0 largest and most productive blast furnaces and steel
2005 2007 2009 2011 2013 2015
plants feeding large continuous hot strip mills and
Fig.5 industrial growth production in %
heavy plate mills with efficient plant layout and
Due to continuous investments the industrial process flows. The interesting thing is that the
production growth % always is a positive term for the situation has not changed much in the 40 years that
emerging countries as seen is the case of India where followed. With time there was a significant decrease
supply remains constant during the crisis but always in the use of open hearth furnaces in the mills. The
increasing in other periods. With the ever increasing worldwide usage decrease by 57.4% from 2000 to
GDP (an average of 6%) of emerging economies China 2010 with China stop the use completely in 2002.
and India have a positive y-o-y growth of industrial Production of crude steel in oxygen blown converters
production which is also increasing at a rate faster also decrease in India with 36.6% of crude production
than that of the advanced economies (at 8% per by the method in 2009. China continued to produce
annum) and even the global average. The 91.6% of overall crude still produce by the similar
proportionality of industrial growth with the GDP method. By 2009 29% of crude steel was produced by
involves the risk of oversupply. Electric furnaces while India still was fluctuating
continuously between 50-55% of crude produced by
1800 production capacity
the method. [4]
1600 crude production
The largest steel mills today are operated by
finished consumption
1400 POSCO at Pohang and Gwangyang in Korea, followed
by the new coastal steel mills in mainland China. In
1200
Japan, the Fukuyama works of JFE and the Kimitsu
1000
Works of NSC now produce significantly less than at
800 their peak in 1980. This is the reason mini-mills are
600
still considered to be the best available invention to
2001 2002 2003 2004 2005 2006 2007 2008 2009 date. Integrated mills cost 2–3 billion USD to build,
Fig.6 risk of oversupply of crude steel which was beyond the resources of most private steel
companies. Mini mills could be built for 200–300
As the capacity utilization have reached quite a
million USD. The mini mill dramatically reduced the
great level of about 95% the industry is producing
capital costs of steelmaking and opened the business
more and more every day with a subdue growth in the
to new participants. [3]
demand of finished product in advanced economy.
Although the purchasing power still rests with them OBC EAF OHF
80
the price is set in the markets of emerging markets
with a heavy demand in construction and 60
infrastructure industry. With steelmaking capacity
having outstripped the growth of steel consumption 40
in recent years, and as steel demand is now
contracting due to the global economic downturn, it 20

appears that the global steel industry is facing a

0
situation of overcapacity. [12] 2008 2009 2012 2013
Fig.7 trends in production techniques (in %)

5
3.1 CAPACITY UTILIZATION • An increase in M&A activity as stronger operators
acquire their weaker competitors with the aim of
While there are signs that the outlook for
rationalizing the sector.
demand is slowly improving, excess capacity remains
• Early refinancing as steel companies seek to take
the biggest threat to the steel sector. The sector is
advantage of low rates ahead of potential rate rises
straining under the relentless pressure caused by
• Portfolio optimization as steel makers assess their
years of excess steelmaking capacity and low margins.
assets for value creation.
To counteract the investment in new steelmaking
• The complex dilemma of where to allocate capital
capacity, we estimate that about 300 million tons of
whether capital should be invested upstream for raw
steelmaking capacity needs to be closed for the
material security or downstream to capture a greater
industry’s profit margin to reach a sustainable level,
share of the value chain
and raise the capacity utilization rate for the sector
globally, from below 80% to more than 85%. 3.2 ENERGY CONSUMPTION BEHAVIOUR
100 In 2013, 1.6 billion ton of steel were produced. By
2050, steel use is projected to increase by 1.5 times
80 that of present levels, to meet the needs of our
growing population. Improvements in energy
efficiency have led to reductions of about 60% in
60
energy required to produce a ton of crude steel since
1960 in most of the top steel producing countries. [5]
40 Energy constitutes a significant portion of the cost of
2008 2009 steel production, from 20% to 40% in some countries.
Fig.8 capacity utilization ration (in %)
[6] Energy is also consumed indirectly for the mining,
Permanent shutdown of capacity is the only real preparation, and transportation of raw materials
solution to bring balance to the market but in the (about 8% of the total energy required to produce the
short term it is difficult to see this happening given steel - including raw material extraction and steel
state participation in many countries and additional production processes). [7] About 50% of an
political incentive to retain employment, regardless integrated facility’s energy input comes from coal,
of profitability. Increasing market competition will 35% from electricity, 5% from natural gas and 5%
also result from the flatter marginal cost curve in the from other gasses. [8] Up to 75% of the energy
sector. We believe about 85% of hot-rolled coil (HRC) content of the coal at an integrated facility is
production is within USD 100/ton of the marginal consumed in the blast furnace.
producer and 46% is within USD 50/ton. With little
difference between the positions of steelmakers 10

along the cost curve, small changes in the operating

environment, such as increased productivity or 5

changes in cost of capital, can produce swift changes

in positions, competitiveness and ultimately survival. 0
2006 2008 2010 2012 2014 2016
Steel companies who monitor and constantly create
new sources of value are likely to be more successful. -5
Advanced economy
World
“Steel producers should test the vulnerability of their Emerging economy
-10
business models and the resilience of their strategies to
Fig.9 world GDP growth % in different economies
ensure sustainable growth “
By-product gases from the coke oven, blast
As a highly geared sector with limited access to
furnace and basic oxygen furnace (BOF) can be fully
capital, there will be increased pressure for 10% to
reused, saving additional fossil fuel resources. They
15% of steelmaking capacity to close over the next
typically contribute 60% to total energy and are used
two to three years. The knock-on effect will be:
either as a direct fuel substitute or for the internal

6
generation of electricity. [9] In Germany, for example, energy to electricity. Each Arsolar roof module
BOF by-product gas recovery saves the equivalent of consists of photovoltaic sandwich panels assembled
300 million cubic meters of natural gas per year, onto galvanized steel roofing panels. The system
which would otherwise have to be obtained from saves 30 ton of CO a year for every 45m of
natural resources. Therefore the production installation. [11]
techniques are now oriented more towards electric
arc method and production of crude steel from open 4. CHANGES IN METHOD OF WORKING
hearth furnace have just reached to its end. The Despite growth in finished steel production,
method followed for decades the oxygen blown employment has fallen by close to 40% in the OECD
converters have also decreased their sheen as the use area since 1980. Steel manufacturing is a highly
of EAF’s has been quite optimizing and profitable for competitive global industry. Consolidation within the
the above mentioned reasons. industry and continuous improvements in the
manufacturing and operations has contributed
15
towards productivity. Two key technological
10 developments have driven this process. The first is
5 rapid expansion of the use of continuous casting and
0 the second is significant growth in electric furnace
2006 2008 2010 2012 2014 2016 steelmaking. Since 1980, employment levels have
-5
decreased by around 60% in developed regions. At a
-10
Advanced economy
world level, employment levels have decreased by
-15 World around 50% over the period from 1972 to 2012. [1]
Emerging Economy
-20

Fig.10 global industrial production growth % The import substitution of crude steel with the
finished goods in OECD countries have reduced the
Steel is such a well-used material in modern employment in the industry comprising steel and
structures that we are often unaware of the design finished goods. The decreased net exports and
efficiencies they embody. A prime example is the imports is especially due to loss of competition and
tubular steel towers used for the wind turbines now appreciating currency. During 1980 to 1995 US crude
being installed around the world. Ongoing research steel production fell but finished shipments rose (in
continues to produce new steels that are even part to increased use of imported semi-finished steel
stronger than their predecessors, and thus will and better yields), similarly EU crude steel production
minimize the mass of future towers. As a result, tower was flat while shipments rose (due to improved
weights (per installed power in kW) have declined by yields) and Japanese crude steel production fell but
about 50% during the past 10 years. A typical modern shipments were largely flat (due to improved yields).
tower in the Horns Rev wind farm in Denmark is 70 m The rising trend in US and EU shipments in part kept
high and weighs only 140 ton. This represents a 50% the decrease in employment lower than it would have
reduction in weight and a saving of more than 200 ton been otherwise.
of CO for each tower compared to its predecessors of
just 10 years ago. [10] 4.1 THE EAF EFFICIENCY FACTOR

New steels are also applied in modern solar The share of EAF also increased in all the regions.
heating systems for large buildings and warehouses. Since EAF's have neither coke ovens nor blast
For example, the Canadian SolarWall® air heating furnaces, EAF production reduces manning
system recently installed in a military base in the US requirements. Moreover, since most EAF's are mini-
is designed to save over 1,800 ton of CO a year.10It is mills with simpler, more efficient processes and
also projected to realize fuel savings of 46,000 GJ a usually produce lower quality, products are younger
year. Another advanced steel application for buildings and have more recent technologies, this implies a still
is the Arsolar solar panel roofing system, developed further decrease in manning. Assuming all the shift to
by ArcelorMittal. Arsolar roofing converts solar EAFs can be regarded as a technical improvement

7
(indirectly), and that 66% of all other productivity industry. The continued expansion resulted in
enhancing factors except interplant rationalizations workforce requirements but the rate was very less as
can also be called technical improving factors, some with technology comes the necessity of skill.
59% of the US employment reduction can be Advanced computer controls have made faster
estimated due to technical improvements, 38% due order/melt/roll/ship time’s possible, reduced
to operating improvements and 3% to structural inventories of semi-finished materials and enabled
factors. For Japan, some 87% of the employment more precise production controls and tailoring to
reduction can be estimated as due to technical orders. Approximately 65% of the MHPT
changes, 43% due to operating improvement and improvements observed in integrated cold-rolled coil
30% due to structural factors. For the EU, the production can be attributed directly to technical
percentage contributions to decreased employment change.
are 59% due to technical changes, 41% due to
4.2 HUMAN FACTOR
operating improvements, and zero% to structural
factors. Many functions that used to be done by steel
plant employees are done by contract workers,
To get a better picture of improvements in
especially in the areas of material handling,
productivity within the steel industry itself we will use
maintenance, shipping and packaging. Other
MHPT (man hours per ton) for the same and similar
functions such as coke production and semi-finished
plant making similar products. Turning to a mini-mill
steel production may be done in other countries.
(EAF-based) making wire rods, there was a 50% MHPT
Operations such as pickling, cold finishing, coating
improvement in US and Japan, and a 53% in EU, with
and warehousing, may be performed by other firms
the same employment implications. To complete the
not normally considered as part of the steel industry
matter, over the 1980 to 1995 period, integrated mills
but still in the same country.
were displaced by much lower MHPT mini-mills in
wire rod production (and indeed all long product
400
production, especially in the United States) and are China France
Korea Germany
beginning to be displaced by mini-mills in cold-rolled 300 United States Japan
coil and other flat product production.
200
Most of the decreases in MHPT in integrated
cold-rolled coil were due to increased continuous 100
casting and improved yields, plus facility-by-facility
operating improvements. In the integrated steel 0
1990 1995 2000 2005
production of flat products, there has been no major
Fig.11 reduction trend in no. of employee (`000)
technical change in the past 15 years, but there have
been many technical refinements which are Mini-mills usually locate a plant where there is no
responsible for much of the MHPT improvements steel production, so as to be near the market they
observed. Pulverized coal injection in the blast serve and/or near low cost inputs; they recruit locally
furnace plus increased oxygen and natural gas trainable young people with virtually no steel
injections, and higher blast furnace pressures and experience, and teach the necessary skills, with only
temperatures have reduced coke rates and increased a small proportion (less than 10%) of the plant's
blast furnace productivity. Shifts to more hot workforce with initial high levels of technical
charging, higher charge temperatures and greater competence (usually from other plants of the same
power and temperature-control have improved hot firm) and even fewer (less than 5% from traditional
strip mill throughput. integrated steel producers.
A lot of decrease happened in MHPT during the The mini-mill view is that it is more difficult to
shift from integrated to mini-mills. The entry of mini- retrain former workers from integrated firms than to
mills was more of a technical change, that resulted in train intelligent unskilled workers. In a mini-mill, a
production of various DRI and EAF based steel new to worker has to be highly competent, but flexible,

8
switching from job to job (or even plant to plant), Recent Cases
from operating to maintenance jobs, or even damage  Corus- 2000 job cuts 2009, BBC
control, and vice-versa, as the need requires. The  ThyssenKrupp- 4000 jobs cut 2013, Reuters
steel industry always think of beyond the plant run  Usiminas- 1326 cuts 2009, Steel Orbis Brazil
mainly about maintenance. The process is mainly, get  Tata Steel- 900 cuts 2012, Business Today
new employees (in 20’s) hire few specialists (in 30’s)
from the industry, other personnel with high 5. CHANGES IN RAW MATERIALS COST
experience. This has with occasional exceptions,
Initially metallurgical coal prices used to be set
reduced start-up times to less than one year and
once a year in protracted negotiations between
created an operating workforce which is familiar with
Australia’s leading miners with Japan and South
all the maintenance requirements. It also provides a
Korea’s large steel mills. This status quo was
workforce that can be drawn on to provide the
shattered in April 2010 as the world’s largest
"experienced personnel" for the next expansion. This
exporter, BHP Billiton-Mitsubishi Alliance, introduced
creates a highly efficient but small workforce
quarterly pricing to its global customers in an effort to
(generally about 400) to build and run a 2.0 million
better reflect shorter-term market fluctuations.
ton per year mini-flat mill.
Other major miners immediately followed suit. A year
Today the industry directly employs more than later, BMA went one step further, bringing in monthly
two million people worldwide, with a further two prices for the majority of its international buyers. BHP
million contractors and four million people in Billiton’s move was completely unsurprising. In US,
supporting industries. Considering steel’s position as miners were able to offer customers a range of pricing
the key product supplier to industries such as terms, using flexibility as a way to win customers amid
automotive, construction, transport, power and a surge in export volumes since 2011. With time China
machine goods, and using a multiplier of 25:1, the has gained a positive role as a price setter of raw
steel industry is at the source of employment for material as even during the crisis period the demand
more than 50 million people. [1] The steel industry for raw coke was greatly influenced by the Chinese
has seen a steady and notable reduction in the Lost market and steel industry. In 2012, though supply
Time Injury Frequency Rate which has gone down disruptions had some effect, seaborne prices were
from 4.55 in 2006 to 1.61 in 2013. This represents a mostly influenced by destocking and restocking cycles
significant reduction of over 64%. [2] in China, a country which accounted for two thirds of
Asia-Pacific spot hard coking coal deals.
15 6
Key raw materials needed in steelmaking include
lost time injury frequency

iron ore, coal, limestone and recycled steel. The two

employe training

10 4
main steel production routes and their related inputs
are:
5 2 • The integrated steelmaking route, based on the
blast furnace (BF) and basic oxygen furnace (BOF),
training days/ no. of employes (left)
injuries/million hrs worked (right) which uses raw materials including iron ore, coal,
0 0
2003 2005 2007 2009 2011 2013 limestone and recycled steel. On average, this route
Fig.12 employee safety factors trend uses 1,400 kg of iron ore, 800 kg of coal, 300 kg of
limestone, and 120 kg of recycled steel to produce
However, it is now the case that labor costs are a 1,000 kg of crude steel. [17]
much smaller share of total operating costs and less • The electric arc furnace (EAF) route uses primarily
fixed and more variable over the steel demand cycle. recycled steels and direct reduced iron (DRI) or hot
Those employees who remain are now flexible and metal and electricity. On average, the recycled steel-
skilled. POSCO today has 30% of its employees who EAF route uses 880 kg of recycled steel, 16 kg of coal
are university graduates. Steel is no longer a and 64 kg of limestone to produce 1,000 kg of crude
semiskilled heavy manual industry; it is high tech and steel. [18] Iron oxides, or ores, make up about 5% of
high skilled. [3] the earth’s crust. Average iron content for high-grade

9
ores is 60% to 65%, after taking into account other Steel producers globally are experimenting far
naturally-occurring impurities. more with their coal blends than seen in recent years
• Iron ore is mined in about 50 countries. The majority for two main reasons. Ensuring operational continuity
of iron ore is mined in Brazil, Australia, China, India, if a particular supply basin is taken out by a weather
the US and Russia. Australia and Brazil together event, and to reduce costs. The Queensland floods of
dominate the world’s iron ore exports, each having 2010-2011 led to one of the sharpest price spikes on
about one-third of total exports. record, forcing steelmakers to scramble for
• Worldwide iron ore resources are estimated to alternative supplies. “Anything black will do,” one
exceed 800 billion ton of crude ore, containing more European steelmaker quipped at the time. This event,
than 230 billion ton of iron. [19] together with a similar Australian flood in 2008,
• About 30% of coal can be saved by injecting fine coal created scarcity and extreme price volatility for
particles into the blast furnace, a technology called certain types of coal, pushing mills to reexamine their
Pulverized Coal Injection (PCI). One ton of PCI coal overreliance on any given brand or coal type. Some
used for steel production displaces about 1.4 ton of market observers have compared this change to the
coking coal. transformation in the oil sector in the late 1970s and
• Around 70% of total global steel production relies early 1980s, when a wave of investment enabled
directly on inputs of coal. Around 1.2 billion tons of refineries globally to handle new streams of crude.
coal are used in global steel production, which is Refiners had in the past been heavily reliant on local
around 15% of total coal consumption worldwide. supplies, but depletion and price shocks drove them
[20] to reconfigure their plants, enhancing their blend
flexibility. In the 1990s, steel companies always tried
Causes of volatility in iron ore and
to fill their mills by lowering prices and producing
metallurgical coke prices:
steel until prices equaled marginal cost. However,
• Shorter-term pricing of key raw materials
since marginal costs were below average costs, mills
• Enhanced risks and uncertainties in global seaborne
ran at a loss. Now, the marginal cost is greater than
trade, supply chain disruptions, socio-political events
average cost and mills are more willing to cut
in new resource countries, etc.
production than price in a falling market. The new
• Economic and financial uncertainty in the global
business model has prevented large losses in the
economy and the increasing inter-linkages between
current recession, and fewer mills have gone to the
developed and rapid-growth economies
wall despite this being the worst recession since the
• Distressed steel pricing in an oversupplied market in
Second World War.
an unconsolidated industry. [21]
In 2013, global seaborne iron ore demand grew
by about 9% y-o-y on the back of robust Chinese steel
production, which experienced approximately 7%
growth on 2012 levels and increased to 755 million
tons. The rise in Chinese steel production rates kept
the iron ore price (62% Fe, CFR North China) at an
elevated level, with prices averaging US$133 per ton
during the year. China’s ability to meet its domestic
share of iron ore supply may be at its lowest with
grades now below 20% Fe content. At these levels or
lower, it is likely that China can only supply a quarter
of its iron ore requirements. However, the outlook for
seaborne iron ore supply is different (led by Vale, Rio
Tinto and Fortescue Metals Group) with growth
expectations of 8.4% per annum from 2013 to 2018
Fig.13 strategic structure for profit and with expected annual growth rates of 4.4% in its
demand during the same period. This will result in an

10
oversupplied iron ore market, with the market because of low domestic demand and cheap Chinese
balance moving from a deficit of more than 8% of imports. EU’s share as a proportion of global steel
seaborne demand in 2013 to a surplus of almost 9% production is likely to continue to decline.
by 2018. This is likely to dislodge an equivalent
USA- Residential construction is driving steel
amount of marginal cost production in
demand to be followed by non-residential
China, with a resultant downward pressure on iron
construction in the near term. The automotive sector
ore prices.
and shale gas-related infrastructure will provide
Similar to the iron ore market, the seaborne further impetus to steel demand. Domestic prices
coking coal market is also expected to run into may remain subdued due to oversupply and import
oversupply. The market balance is expected to grow competition. Capacity utilization reached 77% in 2013
from a surplus of about 1% of seaborne demand in and has the potential to reach just under 90% over
2013 to a 6% surplus in 2017 and back to about 4% by 2015-18. The US steel industry is set to consolidate in
2018. The US will continue its status as the swing the near term and the focus will remain on enhancing
producer, affecting the market balance in the the productivity and efficiency of existing plants.
medium term. However, the tapering of quantitative 45
easing is likely to push up the US dollar, making US
coking coal more expensive and therefore less viable 40

in the seaborne coal market. China will remain the 35

biggest importer of coking coal, accounting for about
30
a quarter of coking coal imports in 2018. Coking coal
supply will be driven by large-scale expansion in 25

Australia. [Projections by Morgan Stanley] 20 China India

Indonesia Thailand
Vietnam
15
“Opportunity in volatility- A way steelmakers and steel
1980 1985 1990 1995 2000 2005 2010 2015
consumers can address volatility is through better
Fig. 14 investment as % of GDP in emerging economies
collaboration and communication. This would require
steelmakers to become more customer-focused and
respond to their customers’ desire for price certainty from
order to delivery. Steelmakers will need to know their Brazil- Steel demand is forecast to grow at 3.6%
customers’ plans and requirements as well as their own per annum, driven by the growth from the
inventory cycles and steel distribution strategy. A infrastructure, construction and automotive sectors.
derivatives based strategy can allow producers to give Despite a positive outlook for demand, current
pricing certainty to their customers and build out the cost of
overcapacity and low utilizations (about 72%) will
this into the price quoted. This tool may indeed become a
keep prices muted. Many Brazilian steelmakers have
differentiator in attracting and retaining a long-term
customer with a higher degree of mutual trust and
integrated mining into the value chain to protect
confidence.” margins.

6. PREPAIRING FOR FUTURE Africa- Construction, driven by population

growth and infrastructure development, is driving
European Union - Steel consumption in the EU is steel demand. Africa’s urban growth of 3.5% during
expected to expand by about 2.0% to 138 million ton the last two decades is expected to continue into
in 2015. Germany and Italy remain the two largest 2050. About US$93b per year until 2020 is required
steel producing nations in Europe and economic for infrastructure development in Africa. Africa will
activities in these nations could be instrumental in the import steel to fulfill demand as the two largest steel
revival of the domestic steel industry. German steel producers, South Africa and Egypt, lack enough
demand will be driven by the construction sector as capacity to supply. The region has the demand and
the automobile sector continues to be under pressure the availability of natural resources for steelmakers to
due to a sluggish export market. Italy’s steel set up plants.
companies will remain under pressure over 2014–17

11
 Russia has a better platform to manage management. The industry should understand
oversupply. Domestically, the steel sector is downstream markets which will add to an
consolidated. Steel consumption could be boosted by understanding of demand in rapid growth countries.
the number of large-scale events being hosted by To win in the ever increasing competition firms
Russia, such as the upcoming 2018 FIFA World Cup. should map supply chains and trade flows to ensure
Steel consumption expected to grow at 2.9% per year operational agility to ensure flexibility and rebalance
until 2017. An increase in capacity is expected to portfolios when necessary.
lower the utilization rates to below 75%. The market
7.1 CONSTRUCTION
could be affected by the ongoing geopolitical events.
As China moves toward a consumer-led economy, Implications for global steelmakers in the
steel demand will stabilize at about 4% per annum construction sector
The Chinese Government is focusing on removing • Increasing investment in construction and
excess capacity. Low utilization of just about 75% will infrastructure led to an 8% y-o-y increase in global
remain a concern. Steel margins will remain under demand for long products in 2013, but this varied
pressure due to overcapacity and weak demand. considerably between countries and regions.
Japanese steelmakers face weak domestic • China will retain importance in the long products
demand and cheap Chinese imports. Steelmakers market despite slowing growth in Chinese
shifting production bases in emerging markets are construction sector. Chinese long product demand
losing out on high-margin special steel for growth is expected to settle by 2018 to below 5%.
automotive. Domestic shipbuilding remains under • Geographic hotspots are emerging for construction
pressure in light of shrinking orders and competition demand e.g., the Asian construction market accounts
from Chinese and South Korean shipyards. Some for approximately 40% of total global construction
improvement in steel demand as Abenomics provides spending. This is translating into significant steel
a boost to automotive manufacturers, the demand in various countries, e.g., in Indonesia in the
construction industry and civil engineering firms. first half of 2013 demand for long products increased
India- Despite the fact that surplus iron ore had 73% to 3 million tons. Steelmakers can increase sales
resorted to imports, constrained iron ore availability by diversifying sales channels, including export
impacted capacity utilization. Integrated as well as channels, to take advantage of these hotspots.
standalone steel majors have dominance in market • New product development to increase
share. A depreciating currency has supported margins competitiveness with substitute materials, e.g., Tata
through a surge in exports. Industry margins generally Steel plans to introduce “Ground Granulated BF Slag”
are healthier than global peers. Urbanization and (GGBS) for the construction sector. This product is
demographic changes will support long-term steel sustainable, cost effective, increases compressive
demand. Substantial capacity additions are planned. strength and reduces carbon foot-print significantly.
Many global steel players have formed joint ventures • There are significant opportunities for product
with domestic steel companies in India. innovation and branding to differentiate construction
steel products in the market.
7. CONCLUSIONS AND RECOMMENDATIONS
• While long product volumes are expected to
The survivors in today’s steel market will have a increase, to profit from these increases it will be
better footprint in terms of market access, a more necessary to have either flexibility in supply chain to
efficient cost curve and better access to raw supply hotspots in emerging markets or specialist
materials, resulting in more efficient value chains. steels to improve margins in developed markets.
Increasing vertical integration of the steel value chain
7.2 AUTOMOBILEs
and diversification of product portfolio is a big
question in today’s Brazilian market, as local players Implications for global steelmakers in the
are still unsure of right path forward. Carrying out Automobile sector
optimal capital management will be of great help • Automotive steel demand accounts for around 12%
while considering derivatives to mitigate price risk of global steel consumption.

12
• Flat steel demand is expected to remain stable or • South Korean pipe mills’ efficient logistics and mill
decrease slightly due to continued weight reductions design, easy access to HRC and cheap financing are
and material substitution offset by the increase in the driving their ability to compete with US producers
number of new vehicles manufactured. However, the despite freight.
lightweight strength attributes of these products will • Imports into the US are declining after anti-dumping
attract higher margins. levies were imposed on Taiwanese and Thai OCTG.
• Steel accounts for 68% of passenger car material. • Line pipe demand in the US is expected to pick up
While the use of other materials is increasing, steel due to replacement of aging pipeline infrastructure.
could remain the largest used material in automobiles • Steel pipe and tube volumes are expected to
for the foreseeable future. increase over the next five years. Margins will be best
• Increasing use of AHSS in automotive production in those regions where drilling and pipeline
even though aluminum and carbon fiber reinforced construction activity is most active.
polymer (CFRP) are lighter. This is largely because on
Other
AHSS offers the right balance on a cost-weight- Automotive
Transport
12%
strength basis. 5%

• Implementing strategic joint ventures to take Metal

advantage of increasing automotive demand in Products Construction
13% 51%
certain regions, e.g., ArcelorMittal and Nippon Steel
& Sumitomo Metal also recently acquired
Mechanical
ThyssenKrupp’s Steel America assets in Alabama for Machinery
US$1.6b to gain greater market share in the 14%

US auto sector. Domestic

Electrical
• Regulation to increase industrial activity, for Equipment Appliances
3% 2%
example the removal or lowering of excise duties on
vehicles in India, will have a positive effect on flat Fig.15 industrial division of steel usage
steel demand.
• Efficient procurement of steel is vital for automotive
manufacturers and they are often willing to share in
the cost of ensuring a stable supply of steel.

7.3 OIL AND GAS REFINERY

Implications for global steelmakers in the Oil and

Refinery sector:
• Globally, the pipe and tube sector accounts for
around 8% of total steel consumption.
• Premium OCTG casing, tubing and connections are
used for more challenging drilling environments.
Major players in this sector have advanced
connection technology which prevents over-torquing
and maintains a gas-tight seal in extreme drilling
environments.
• Pipes are being designed for specific situations and
challenges, for example, corrosion-resistant alloys.
• In the largest markets, the US and Canada, demand
for both electric resistance welded pipe (ERW) and
seamless OCTG products is expected to increase from
2012’s level of about 7.1 million short tons to 8.4
million short tons by 2018.

13
 8. REFERENCES 19. Sustainable Steel: At the core of the green
economy, p.18, worldsteel, 2012.
1. World steel estimate, based on Safety reporting
data 20. Mineral Commodity Summaries, US Geological
Survey, p. 85, 2014
2. Safety and Health Recognition Program 2014,
world steel 21. Coal and Steel Statistics 2014, World Coal
Association, worldcoal.org
3. I Christmas Bessemer Gold Medal Lecture, 2011
22. EnY analysis, Thomson DataStream
4. Steel Statistical yearbook 2010
REFERENCES FOR FIGURES USED
5. Steel’s contribution to a low carbon future,
worldsteel, 2014. 1. OECD Council Working Party report on Shipbuilding,
2009
6. The State-of-the-Art Clean Technologies (SOACT)
for Steelmaking Handbook, 2nd Edition, Asia Pacific 7. 2. Vehicle production database website*
7. Partnership for Clean Development and Climate,
3. Source: US Department of Energy, Vehicles
2010, asiapacificpartnership.org
Technology Program
8. LCA methodology report, worldsteel, 2011
4. Steel Statistical Yearbook 2013, Worldsteel
9. Energy intensity project report and energy intensity
5. Global Steel outlook 2013, EnY Analysis
system, worldsteel, 2014

10. Energy use in the steel industry report, worldsteel,

2014

11. When compared to the world average emission

factor for electricity of 0.504 tCO2/MWh, worldsteel
CO2 Emissions Data Collection User Guide, v. 3

12. Company Websites, ArcelorMittal & SolarWall,

Research and Ongoing Projects

13. OECD Working committee report, 2009

14. Modest Eurozone recovery on track as Q4 GDP

growth improves to 0.3% q/q,” IHS Global Insight, 5
March 2014.

15. Eurozone Report, EY, December 2013

16. “Short Range Outlook,” WorldSteel, October 2013

17. Trends In Steel Usage in the Automotive Industry,

5/20/2015, Trefis Team, Forbes contributor

18. Sustainable Steel: At the core of the green

economy, p.13, Worldsteel, 2012

14

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