IABr CONFERENCE: Ebitda margin needs to be 16% to sustain steel industry
The steel industry requires an Ebitda margin of “at least” 16% to be economically sustainable in the long term, an industry expert said on Thursday May 9.
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“However, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins [in the global steel industry will] only reach 13% in 2015,” Sigurd Mareels, director at management consulting firm McKinsey & Co, told delegates at the 24th Brazilian Steel Congress, organised by the country’s steel institute, IABr, in Rio de Janeiro.
For 2013 and 2014, steelmakers’ average Ebitda margin is expected to come to 10% and 12%, respectively, compared with only 9% last year, he said.
A 9% margin is feasible in the short term, and 13% is feasible in the medium term, “but, in the long term, it must be 16%”, Mareels said.
Given the expected speed of margin recovery, the capital required to improve the financial position of the steel industry would have to flow in from outside investors, according to the expert.
“No self-help is possible as companies need to restore [the] main fundamentals,” he said.
Average free cashflow has been negative in the industry for the past five years, which is “not sustainable”, Mareels said.
And the amount of money required to “reconfigure” the global steel industry is huge.
“We would need much more than $100 billion, probably $150 billion,” Mareels warned.
To improve their margins, steel producers have, therefore, three different options, he said.
The first would be a significant cut in production, so that utilisation rates would increase in the whole industry.
“It would need to be 100 steel plants with a minimum of 3 million tpy capacity each.
“That’s mission impossible,” he said, mentioning the difficult political implications of closing a mill.
Another solution would be reducing raw materials costs, he said, which is also difficult since most of the supplies do not come from the steel industry.
Finally, steelmakers could increase their steel sales prices to be sustainable.
“[There is] no easy way out,” Mareels added.
In Brazil, steelmakers have been facing low Ebitda margins too.
Flat steel and iron ore producer Usiminas has been working to increase its margin, which reached 9.3% in the first quarter of 2013, up from 6.7% in the same period last year and 6.9% in the fourth quarter of 2012.
This positive result was mainly due to improved operational performance and greater efficiency in the industrial sites, according to Usiminas.
Long steel producer Gerdau, in turn, saw its Ebitda margin decline to 9% between January and March, compared with 11% a year ago and 10% in the fourth quarter of 2012.
The reduction was due to a fall in its consolidated gross profit, it said.
CSN, meanwhile, has high levels of Ebtida margins as it is self-sufficient in iron ore, which significantly reduces its raw materials costs.
The steelmaker’s Ebitda margin was 27% in 2012, down from 39% a year earler.
CSN is yet to publish its first-quarter 2013 financial results.