In conclusion, a new global steel industry is emerging, though still it is in its emergent stage. Most of the players and the technology that will be critical in the next decade are already on the field of play. However, there will be plenty of changes within these bounds.
The industry currently stands at a very difficult point in its development. The crisis in Europe, slowdown in China, and less than robust growth in India are all working to create an imbalance in supply and demand that that has taken the steel industry by surprise. Flat rolled prices in North America have fallen from a peak of $740 per ton to about $630 and could bottom out as low as $550.
The European financial crisis has hit steel hard. It is facing a collapse in steel demand with expected demand of 160 MTs but capacity of 220 MTs. Temporary and permanent closures of steel facilities are mounting and assets are being offered for sale at fire sale prices. Thyssen Krupp SA’s leading-edge slab processing venture in Brazil and Alabama is said to be in play because of financial problems in its European parent as well a rebounding of competitiveness of domestic US producers who have their own iron ore resources.
The largest steel company in the world, Arcelor, has seen its stock drop 50% in a year. They are idling plants, focusing on their most efficient plants and continued vertical integration in iron ore and coal. There has even been speculation that they may be taken over by a Chinese buyer in the next decade.
The fragile US recovery in steel turns largely on energy development of shale gas and the slow recovery in automotive. Tubular products for the energy industry are booming. Surprisingly, declining gas prices are having an important cost impact on the industry. It is seriously reducing costs for steelmakers. For instance, U.S. Steel consumed more than 100 million BTUs of gas in 2011. This allows them to boost injections of gas into the blast furnace and decrease consumption of coke. The latter should allow steel companies to reduce or even eliminate exposure to the volatile seaborne coal, coke, and iron ore markets. It will also allow consideration of alternative iron and steelmaking capacities such as using iron ore reserves to make directly reduced iron (DRI). Natural gas presents steelmakers with the opportunity to readjust the dynamics of the value chain, which has been tilted toward raw materials for some time.
Within the new internal competition among local managers for capital, there is an even greater emphasis on trying to frame public policies that best support future investment decision-making in the industry. Ideally, there should be a natural, supportive alliance between local steel executives and domestic policy makers.
In addition, there are significant lessons that observers and managers can take up from the steel case and apply to manufacturing and to the economy as a whole.
Steel Industry Restructuring
Further consolidation in steel is inevitable. Otherwise the margins of steel companies will not be sufficient to offset the lack of pricing power upstream to raw material producers and downstream with the automotive industry. In the next decade, we will probably see half dozen steel conglomerates of 100 million tons capacity and all operating in the key markets of North America, Europe, Asia, and the BRIC. The surprises will probably come from the number of emergent Indian and Brazilian companies that will be among that top tier group.
A reverticalization of steel production will take place. Ownership or joint ventures in iron ore, coal, and scrap is to be expected. Closer integration with customers through reacquiring or displacement of service centers will happen, largely because of the need for greater information and technical interchange with final users in advanced manufacturing.
The steel company of the future may look more like Boeing—a systems integrator.
Meanwhile, some service centers and fabricators will evolve to become value-added business service companies.
Materials Competition in the New Economy
A complicated but equally important issue is how steel positions itself for materials competition in the new economy. Certainly in Europe and North America a major growth market will be in the construction sector. In tons of steel consumed, it will probably account in volume for as much as the auto industry. However, materials competition is different in construction than in automotive. It is not clear that this has properly registered on steel management. Materials producers will have to compete not just on metallurgical properties of the product but on technical provisions in Building Codes and the knowledge and skill of construction workers, architects, and civil engineers. At the root, it will be a transition in the business model from physical commodity production to enhanced business services. Steel will essentially become a service business of a specialized kind.
As steel evolves into the materials sector of the new economy, it will be reaching out into related domains. Much greater use of the informational content of steel, that is, “application development” will change the technical competencies and skill requirement at all levels in the steel operations from the shop floor to metallurgical engineers. Steel will have to share the materials space with other materials including carbon, advanced alloys, and other metallic and even steel–plastic composites.
Public Policy and a New Steel Story
When you currently ask North American steel company executives about public policy issues, most list a conventional program of reduced taxes, constrained electricity rates, effective actions on dumped imports and concerns about the pace of environmental regulation. By contrast, the Europeans have a very elaborate European Steel Technology Platform that they are developing and have every intention to implement, to guarantee a place for the industry in the future of their economy.
There is now much commentary in the business media about “on-shoring” and the reindustrialization of America through a renaissance in manufacturing. Because steel is the backbone material, it has to find a place in this narrative. The steel industry will require something more like the European policy example in order to survive and grow in the new economy.
It may sound trite to some engineers but the steel industry has to find some poetry to inject into its story. An example can be seen in the new ArcelorMittal steel exhibit in the Guggenheim Art Museum in Bilbao, Spain.
Lewis Mumford described iron as the material substrate of the emergent urban industrial lifestyle of the 19th century. The most obvious transformation was in the new revolution in transportation of rails, so famously captured in JMW Turner’s painting Steam, Rail and Speed portraying a locomotive speeding across a bridge through the English country side and capturing the power and thrust of the Industrial Revolution.
The modern lifestyle of the 20th century was built on and of steel. It was steel in the railways, ships bringing the new immigrants to our shores, and steel skyscrapers to our cities. Ironically, the skyscraper emerged as an architectural solution when some brainy engineers turned the design of a steel railway bridge on end to enable them to build taller buildings. They took the idea from Chicago to Manhattan and the rest is history.
We are now all actively engaged in the early stages of debating the directions and implications of a new postindustrial economy and society; this time at a global level.
Some of the components are already clear:
• Light, fuel-efficient cars
• Recycling
• New and renewed energy sources
• Urban design
• New and renewed infrastructure.
For all of these, steel is a critical component.
Steel should be a central part of the materials infrastructure of our future sustainable economy and society. The design and production of the materials we need is only limited by our imagination and dialogue about the environment, lifestyle, and economy we want for ourselves and our children. The materials will be there to match the vision.
In the OECD’s scenario for steel, the main issues for public policy will include:
Environmental legislation: achieving effective environmental legislation based on consensus among all players and creating a level playing field so companies can base their decisions on appropriate economic factors.
Labor market policy: elaboration of labor market policies ensuring appropriate support for steel workers, particularly policies for those who might lose their jobs.
Competition policy: to prevent mergers from restricting competition in critical steel product segments as well as access to steel raw materials.
Preservation of markets: to enhance and strengthen existing trade rules to avoid market restrictions and trade frictions resulting from policies in other domains such as environmental regulations.
The OECD Report concludes by pointing out that the future importance of steel industries in all countries will be determined by its’ and others’ capacity to engage in an effective and inclusive dialogue with other parties in society. The OECD perspective and list of issues provide a useful script for the start of those discussions.
The impact on the economy of the future by the steel industry will not be determined by econometric input/output tables. The steel industry will have a future to the extent that it is able to become a continual, active partner and participant with other social and economic groups in the dialogue about what kind of economy and society we all want for the future.
It is beyond the scope of this book to develop a comprehensive policy framework for steel, let alone the increasing part of that agenda reaching across jurisdictions. That said, the research points to several areas where supportive public policy will advance the competitive conditions for an economically and environmentally vibrant steel industry.
First is to recognize that the “new economy” includes steel. As discussed, steel can indeed be considered an early mover in the knowledge-based economy. The industry is not a 20th-century relic. It is in fact essential to many of the innovations that will drive the economy in the future, for example, conventional and new sources of energy, more fuel-efficient automobiles, enhanced environmental performance, and more efficient life-cycle construction.
The second point is about the competitive environment. Most obviously, this is about competing in domestic and export markets, and ensuring a fair basis for domestic producers to do so, through trade rules and their enforcement.
More generally, it is critical to recognize that the steel industry is now truly global, and investment decisions are also now competitive. In this respect, the industry transformation that resulted in the steel industry becoming part of global multinational enterprises means that local mills must compete for investment capital in that context. From a public policy viewpoint, this means that national governments must offer supportive policies to attract future investment and reinvestment.
This is not a complete or a detailed policy “Agenda” for the steel industry. It is presented here simply to put forth some public policy implications that derive from this research, by indicating key dimensions and types of public policies that can support—or if not addressed, undermine—a sustainable steel industry and its customers. A sound, balanced mix of policy will strengthen the competitive conditions for steelmaking, so that we will continue to benefit from steel’s potential as an innovative, competitive industry in the 21st-century economy.