The global steel industry is at an impasse. Although its products remain critically important to a wide range of industries, few steel companies are making money, and even fewer are achieving profitable growth. In fact, the industry as a whole has been destroying value by failing to earn its cost of capital.
In general, efforts by individual steel companies to improve their competitive position have not succeeded, because systemic factors such as a longterm downward price trend have eaten up most of their results. Moreover, because all the leading players have employed similar strategies, they have continued to find themselves in the same stalemate situation. Industry regulators, for their part, have perpetuated inefficiencies by protecting domestic steel companies with tariffs and quotas. If the industry is to break this stalemate, it must address not the symptoms of its malaise but the causes.
Driving the industry’s difficulties are four root causes, which we discuss in detail in the report:
The commodity nature of steel
The flatness of the supply curve
The fragmentation of the industry
Of these root causes, only two—chronic overcapacity and industry fragmentation—offer real opportunity for significant change. In our view, that change cannot come about unless companies and regulators alike take action—individually and collectively—to break the present impasse. By collective action we do not, of course, mean to suggest any “behind closed doors” activity that could possibly be construed as collusion or any other illegal behavior. Rather, we believe that key players in the steel industry, together with the bodies that regulate them, should openly and publicly examine the constraints that currently prevent the industry from functioning effectively, and then take action to remove those constraints.
The Boston Consulting Group has identified three paths to renewed value creation for the steel industry:
Regional consolidation—to reduce the fragmentation of the industry and help eliminate overcapacity
Specialization and downstream migration—to help individual companies escape from the commodity segments of their current businesses
Deconstruction and global networking—to reduce global fragmentation and overcapacity while separating commodity and noncommodity businesses
Regional consolidation, which is well under way in Europe, will continue worldwide. We see it as a reasonable, if insufficient, next step toward rationalizing the industry. We anticipate that this trend will culminate not in the creation of regional monoliths but in the formation of companies that will control some 30 to 40 percent of their respective regions. Such companies will achieve further cost reductions of 4 to 6 percent as compared with today’s players.
The second path to value creation—specialization and downstream migration—can move companies into higher-margin businesses. At their logical extreme, these strategies become a bold move to achieve escape velocity—to transform the company’s portfolio so radically that the company is no longer perceived as primarily a steel player. Those best positioned to pursue this path are the small and midsize players already occupying strategic niches.
The most promising long-term model for value creation is a “division of labor” approach based on deconstruction and global networking. In this approach, for example, a low-cost offshore producer of slabs might collaborate with a highly differentiated conversion specialist, thus reducing the cost of steel products by 10 to 20 percent, as compared with today’s best regional players, and generating substantial competitive advantage. Despite the great promise of this approach, no company has yet made a significant move in this direction because of the high costs of closing upstream production capacity, the fear of a supply shortage, or the risk of political opposition.
To change the rules of the game in the steel industry and permit it to achieve healthy and efficient value creation, steel companies will need to take at least one and possibly all three of these paths. As first steps, they should segment their business portfolios into commodities and differentiable products or services, and then evaluate the opportunities for the former to consolidate or be consolidated and for the latter to achieve escape velocity. They should also prepare to participate in global alliances by establishing relationships with potential partners and acquiring experience cooperating in areas in which risk is manageable.
But steel companies alone cannot transform the rules of the game. Regulators must support the renaissance of the industry by developing an economic and political framework that ensures a reasonably safe transition. Governments and other regulatory bodies should focus all regulatory actions on reducing overcapacity and promoting consolidation. They should also actively encourage the international trade of steel products and effectively mitigate the risks of cross-regional cooperation.