world steel industry -the big issues …...agreements, distort global trade, create an un-level...

World Steel Industry

-The Big Issues

Overcapacity/Materials

SubstitutionNick Sowar

Deloitte Global Metals Sector Leader

July 13, 2015

Overcapacity---How did we get here?

Copyright © 2015 Deloitte Development LLC. All rights reserved.2

2014 World crude steel production by country

China, 48.5%

RoW; 11,1%

Russia; 4,3%

Ukraine; 1,6%EU-28; 10,2%

Brazil; 2,0%USA; 5,3%

Japan; 6,7%

India; 5,0%

South Korea; 4,3%

Source: World Steel Association: World crude steel output increases by 1.2% in 2014. 22 January 2015.


Global Steel Industry is

Fragmented

Almost 50%of the Top 50 steel producers in 2013 are SOEs

Source: World Steel Association. World Steel in Figures 2014. 28 May 2014.

http://www.worldsteel.org/media-centre/press-releases/2014/World-Steel-in-Figures-2014-is-available-online.html


World crude steel capacity (nominal) and demand

Source: OECD, Overview of the current global excess capacity situation and associated policy challenges

http://www.oecd.org/sti/ind/steel.htm#excess-capacity

http://www.oecd.org/sti/ind/excess-capacity-in-the-global-steel-industry.pdf


Steel capacity utilization ratio during the last 30 months

Source: World Steel Association press release January 2015

http://www.worldsteel.org/dms/internetDocumentList/press-release-downloads/2015/2015-01-Crude-Steel-Production0/document/2015 01 crude steel production press release.pdf


Though China experienced a continuous rise in steel

production, consumption has failed to match the production,

leading to over-capacity across the industry.

Chinese steel industry facing an overcapacity challenge…

0%

5%

10%

15%

20%

25%

30%

0

200

400

600

800

1000

Crude Steel Production (LHS) Consumption (LHS)

YoY Production Growth (RHS) YoY Consumption Growth (RHS)

Mil

lio

n to

nn

es

China crude steel production v/s consumption

Source: Baoshan Iron & Steel, Morgan Stanley Research, 01 April 2013, World steel in figures 2013, World Steel Association


Steel mills profitability under pressure, particularly distressed

China. Downstream and distribution profitability insufficient in

EU, much better in USA.

What has happened globally to the steel industry

Source: Marcegaglia, Antonio; Marcegaglia; presentation to Steel Success Seminar June 8-10, 2015


Ease of finance:

• Availability of cheap credit for Chinese steelmakers.

• Chinese banks can alter payment terms even if the

steelmaker under goes serious financial strain because

such banks enjoy implicit backing from the State.

How did Overcapacity of Steel Production Occur in China?

Source: ‘Surging Steel Imports Put Up To Half a Million U.S. Jobs at Risk’, Economic Policy Institute, 13 March, 2014, ‘China’s Steel Industry and Its Impact on the United

States: Issues for Congress’, CRS Report for Congress 2010, Financial Times


Chinese exports of steel increase as the price per ton decreases

Source: Bloomberg

Overcapacity– Challenges to correcting the steel capacity imbalance

Quotes from “The Chinese Steel Industry’s Transformation”

11© 2014. For information, contact Deloitte Touche Tohmatsu Limited.

• “The dynamic change in China’s comparative

advantage in producing and exporting capital-intensive

goods has made the production of these outputs such

as steel products more competitive on international

markets through taking advantage of relatively low

costs.”

• “Since the accession (to the World Trade Organization,

2001), the (Chinese) government has removed all of the

direct subsidies to its (steel) enterprises.”


Source: Worldsteel association, World Steel In Figures 2014; Reuters.com. Big China steel thrives, stoking export fears, 27

April 2015; ISSB.co.uk, Global Crude Steel Production

Global top 5 net exporters of steel


Source: Worldsteel association, World Steel In Figures 2014; ISSB.co.uk, Global Crude Steel Production; Deloitte, 2013 Global Manufacturing

Competitiveness Index; IEA.org, Russian Electricity Reform 2013 Update, April 2013; Interfax.com.ua, Wholesale market price of electricity in

Ukraine increases by 13.7% in 2014, February 2015

Iron Ore statistics for the global top steel

net exporters


Source: Worldsteel association, World Steel In Figures 2014; ISSB.co.uk, Global Crude Steel Production; Deloitte, 2013 Global Manufacturing

Competitiveness Index; IEA.org, Russian Electricity Reform 2013 Update, April 2013; Interfax.com.ua, Wholesale market price of electricity in Ukraine

increases by 13.7% in 2014, February 2015

7,4

17,9

7,0

8,27,3

0

2

4

6

8

10

12

14

16

18

20

China Japan Ukraine Russia South Korea

US

cen

ts/ kW

h

Note: 3Ukraine electricity price is for year 2014, Average currency conversion rate used for year 2014: UAH1=USD0.0846 as per Oanda.com as

on 20 May 2015; 4 Approximate Electricity price for Industrial > 750 кVA customer class in Russia, Average currency conversion rate used for

year 2011: RUB1=USD00.0341 as per Oanda.com as on 20

May 2015

Electricity cost for industry for the global top 5

steel net exporters


Subsidies offered by the Chinese government should be deemed “Unfair Trade”

Source: ‘China’s Steel Industry and Its Impact on the United States: Issues for Congress’, CRS Report for Congress 2010

Unfair trade: includes practices such as

creating foreign trade barriers through

excessive subsidies, etc. to produce

the products and exporting them at

below cost to gain market share.

Safeguards required:

regulations to provide coverage

for producers who have

disadvantages in a free market

Key reasons why it is Chinese steel trade should be unfair:

Subsidies: Chinese government provides subsidies to its steel industry in form of cheap

land, tax rebates, support for loan payment and straight-up cash to bolster growth.

Subsidies accounted for ~80% of the profits of Chinese steel companies during first half of

2014. Government support aids Chinese steel industry export steel at lower price.

―In 2014, the United States accused China of unfairly trading its steel. The US Department

of Commerce estimated a subsidy rate of 49.15% on import of electrical steel from

Chinese exporters.

Less stringent regulations: Chinese steel industry benefits economically from less

stringent environmental requirements as compared to the U.S. and other countries.

- Chinese air and water pollution standards are less stringent

- Steel companies of China have less number of pollution control equipment


Some of the Chinese foreign trade barriers violate WTO

agreements, distort global trade, create an un-level playing

field to the detriment of steelmakers around the world.

Source: American Iron and Steel Institute, AISI comments to USTR on NTE report, 29 October 2014

China’s

foreign

trade

barriers

- per AISI

Investment barriers:

•The Chinese government strictly

regulates investment by foreign firms

within China.

Subsidies:

•Chinese government provides subsidies

through preferential loans and directed

credit, equity infusions, debt-to-equity

swaps, government-mandated mergers,

tax exemptions and rebates, and direct

cash grants.

State-owned enterprises and

government intervention:

•China has created massive state owned

and -controlled national champions that

are designed to be competitive on the

international stage.

Export restrictions:

•Government of China has imposed

export quotas, export taxes, and other

measures to limit the export of raw

materials (e.g., tungsten,

molybdenum), for the benefit of its

domestic industries

•China imposes a 40 percent duty on

exports of steel scrap, and a 10

percent duty on exports of coking

coal.

Import barriers:

• China’s Steel and Iron Industry

Development Policy, issued in July

2005, discriminates against imports of

foreign steel and foreign-produced

equipment, contrary to China’s WTO

commitments.

Material Substitutions


Weight savings will directly contribute 12% of the GHG

reductions required by 2025, and weight savings will indirectly

contribute significantly to the growth of smaller engines

Sources of Improvements in Light Vehicle GHG Emissions

Source: Shultz, Richard; Ducker Worldwide; presentation to Steel Success Seminar June 8-10, 2015


Strength; 20%

Sustainability; 14%

Durability; 4,5%

Environmentally friendly production; 4,5%

Manufacturing and maintenance; 4,5%

Cost; 52%

Steel’s advantage over aluminum markets

Infographics from AMM Steel Success Seminar , June 16-18, 2014



Cost of ownership also favors steel

Kavanagh, Lawrence, Steel Market Development Institute, Presentation to the AMM Steel Success Seminar , June 16-18, 2014

• In addition to the cost advantage steel affords carmakers…

• Purchasers of aluminum-using vehicles will spend more for insurance and repair

Pittsburgh Tribune Review Estimates: March 23, 2014

Part Steel Aluminum

Fender $208 $510

Door $510 $1036

Part costs



Vehicle Mass Breakdown

Ricardo’s Six Components of Vehicle Mass

Source: Marcus, Peter; World Steel Dynamics; presentation to Steel Success Seminar June 8-10, 2015

Source: Final Regulatory Impact Analysis, CAFE for MY2017 - MY2025, NHTSA


Dramatic Reduction in Engine Size



Mass Reduction Summary: Light Truck

Dramatic Reduction in Engine Size (continued)


*Note: Scenario assumes 10% weight reduction can be achieved by MY2025


Aluminum 6111 vs BH 340



Once all this new sheet capacity is in place, the aluminum

companies may have to lower the prices for auto sheet in

order to keep these plants running at or near capacity

Overcapacity in the auto aluminum sheet supply would be bad for steel



Nearly 50% of light vehicle hoods are already aluminum, but

most other body and closure parts will remain more than 50%

steel well into the future. Steel will lose some battles, but

because of it’s lower installed cost; steel will remain

dominant for many years to come

Ducker’s Long Term Prediction


About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of

member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed

description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about

for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be availableto attest

clients under the rules and regulations of public accounting.

Copyright © 2013 Deloitte Development LLC. All rights reserved.

36 USC 220506

Member of Deloitte Touche Tohmatsu Limited

http://www.deloitte.com/about

http://www.deloitte.com/us/about

world steel industry -the big issues …...agreements, distort global trade, create an un-level...

Documents