***THE STOCKHOLM SELECTION: The Manifesto
Steelmaking is big business. Last year the World Steel Association (worldsteel) recorded total crude steel output at 1.2 billion tonnes. This was down slightly from 1.3 billion tonnes in 2008. That makes the steel sector one of the largest in the world in terms of tonnage. In value terms, that production makes it a leader as well. Steel is a leading contributor to world GDP. It is an ingredient in almost every part of the modern built environment. And it is usually one of the key materials used in the development of an emerging economy. Unfortunately, making steel hasn’t always been a very profitable affair.
Steelmaking is big business.
Last year the World Steel Association (worldsteel) recorded total crude steel output at 1.2 billion tonnes. This was down slightly from 1.3 billion tonnes in 2008.
That makes the steel sector one of the largest in the world in terms of tonnage. In value terms, that production makes it a leader as well.
Steel is a leading contributor to world GDP. It is an ingredient in almost every part of the modern built environment. And it is usually one of the key materials used in the development of an emerging economy.
Unfortunately, making steel hasn’t always been a very profitable affair.
Over the past ten years, however, that’s started to change, and so has the industry.
Partially that’s thanks to the growing role of China. In just a few years the country morphed from the world’s largest steel importer to the world’s largest exporter. Now it produces more crude steel than any other nation and is home to some of the sector’s largest players.
The result has been a structural shift in the manner steel is produced, processed and consumed. As a product, steel has become far more international and consumers are more willing to cross borders to procure it.
Producers elsewhere have had to keep up, and the sector has changed in many other ways as well.
The merger between Arcelor and Mittal in 2006 gave birth to the industry’s first champion. Lakshmi Mittal’s brainchild controls a significant share of traded tonnage and its facilities make a plethora of products.
They’re used for applications in automotive, construction, household appliances and packaging. And the company employs more than a quarter of a million employees in the more than 60 countries to supply them.
ArcelorMittal’s strategy of greater production discipline and vertical integration has helped it to grow its profitability, making president and ceo Mittal Europe’s richest man, and one of the world’s wealthiest individuals.
It’s not the only company to have grown. Tata Steel’s acquisition of Anglo-Dutch steelmaker Corus and Severstal’s venture into North America are both examples of how low-cost steelmakers have gained a foothold in mature, established markets.
Marching forward: MB to highlight companies that excel
Others have diversified in different ways. Sweden’s SSAB, for example, has targeted a niche in the quality plate market. And Celsa has grown its share in long products, picking up Fundia from Rautaruuki. Finland’s Outokumpu has developed new grades of stainless steel, less susceptible to volatility in alloying materials prices.
This new wave has been welcome. It has made the steel industry more profitable and equipped it with superior tools with which to survive shocks from external sources. That’s been particularly fortunate over the last year or so.
Problems with sub-prime mortgages in the US began to trickle into other markets in 2007. At the time, steelmakers seemed pretty well insulated from the storm.
When this developed into an acute lack of lending liquidity, the ensuing economic malaise hit steel mills hard. But there were fewer catastrophes than many first feared.
Last year was difficult. In 2010 things have improved.
Although consumer confidence in most markets is still poor, the new year has brought some price improvement and better demand. Restocking saw steelmakers through the first few months of the year, and capacity utilisation rates have started to recover.
But the state of steel is still poor. Steel company profitability along the supply chain remains low and margins are under pressure. With more European debt problems in Europe on the horizon, the situation is unlikely to get better in the immediate future.
Sadly, this means the evolution and development of the industry will suffer – companies in survival mode are less likely to improve.
When times are tough, businesses are less willing to invest in new products or services. They become reluctant to venture into new business segments. And employees don’t get the same opportunities to develop new ideas.
This isn’t just a shame, it’s a serious problem. Companies that don’t grow or move forward are just being left behind.
Of this, the industry’s leaders are well aware.
“The crisis is in fact the world we will have to live in for some time,” Severstal ceo Alexei Mordashov told delegates at MB’s recent Russian Steel Summit as he outlined his company’s recipe for success over the next few years.
Severstal plans to head further upstream and will continue to work at increasing efficiency and reducing its costs, he said
Lakshmi Mittal has plans for his company as well.
“Those companies that can be innovative will be the fittest,” he told delegates at the Steel Survival Strategies conference in New York last month.
“There will be pressure for the industry to produce better products with better processes with greater environmental efficiency,” he said.
The pressure is already there. Even the largest businesses are suffering from a massive and sustained downturn in demand. Key sectors like construction and the automobile industry are severely deflated, and mills can’t operate at reduced capacity forever.
They have other problems as well. Fewer and fewer producers are offering fixed-term contracts to their key customers. And, without these, substitution becomes more likely.
Other companies are getting it wrong for different reasons.
In a difficult operating environment, companies can easily fall into the trap of skimping on costs. Cutting expenditure without good reason is only a short-term means of boosting financial success.
It takes bravery to stick to a strategy. It takes real guts to invest.
“Good to great companies [have] a culture that says you prepare for the bad times during the good times, and prepare for the good times during the bad times,” Nucor ceo Dan DiMicco said at the same event in New York.
When they do, the rewards can be rich. Wilbur Ross’s sale of International Steel Group (ISG) to Mittal Steel is a good example of how a clear strategy applied effectively can lead to great success.
That’s why we’re doing something new at MB. Over the next few months we will be presenting the Stockholm Selection.
Right now, we’re conducting a search. We are hunting down companies that are excelling.
These are companies that are still turning a profit even though times are tough, and not just because they’re balancing books.
Some of them will be steelmakers.
Steel may well be perpetual in the world around us now, but things can easily change. In order to guarantee sustained demand for their output, steelmakers need to invest in developing new products for new applications.
Quality is also important. Improvements will lead to more advanced uses for steel. And companies that work closely with their customers to develop the best solutions need to be applauded.
That’s not just true of steel mills. Today’s steelmakers have more pressures than ever before. In the modern world mills now have to couple production quality and efficient with low emissions and other environmental issues.
In many cases, technology suppliers are the only ones that can help them. That’s why the Stockholm Selection will profile equipment manufacturers that are working hard to develop new setups that will aid their customers.
Services are equally important. With greater market mobility, mills need to be competitive on pricing. But they also need to understand the needs of their customers and make sure that products reach them effectively.
In today’s difficult trading environment, where credit insurance is scarce and finance is difficult, that’s not easy. So we’ll be looking at the companies that make this process easier as well.
Back-to-back trading is an essential part of most commodities businesses. But, in steel, trading companies need to provide many more services as well. The ones that are thinking about which new facilities they can add to their portfolios deserve a mention.
Determining what makes a good business is hard. Regrettably, MB won’t be able to offer any easy answers. But we hope to find companies that are interesting enough to provide some inspiration for the rest of the sector.
We really want to hear from MB readers. It’s not a competition, but your opinions will be the most important when it comes to putting the final list together. The first instalment should be with you soon.