FUTURE MEGATRENDS AND THE STEEL INDUSTRY JUNE Measuring and Forecasting Steel Market Conditions with the POSRI Steel Index

Transcription

1 03 JUNE 2017 INTERVIEW with worldsteel Chairman Beyond Survival to Success John J. Ferriola Chairman, CEO and President of Nucor ON THE COVER Future Megatrends in Steel-consuming Industries and Their Impact on the Steel Industry FEATURED ARTICLES Chinese Steel Moves along the One Belt, One Road SPECIAL REPORT Autosteel and the New Materials Competition Dr. Peter Warrian FUTURE MEGATRENDS AND THE STEEL INDUSTRY MARKET TREND AND ANALYSIS Measuring and Forecasting Steel Market Conditions with the POSRI Steel Index

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3 03 J U N E ASIAN STEEL WATCH

4 03 J U N E ASIAN STEEL WATCH Bi-annual C O N T E N T S Publisher Kwag, Changho Published by POSCO Research lnstitute Editor-in-chief Chung, Cheol-Ho Editing Advisor Jun H. Goh Managing Editor Sojin Yoon Editorial Board Moon-Kee Kong Dong-Cheol Sa Ji-mi Chu Chang-do Kim Designed by Kwon, Junglim Ko, Seunghyeon 04On the Cover FUTURE MEGATRENDS IN STEEL-CONSUMING INDUSTRIES AND THEIR IMPACT ON THE STEEL INDUSTRY 06 Future Megatrends and the Steel Industry 12 Understanding the New Mobility Paradigm 20 Will the Shipbuilding Industry Flourish Again? 26 Eyes on Energy Transition 32 Future Cities and Changes in Steel Materials 38 The Steel Industry over the Next Two Decades Printed by Gaeul Planning Date of lssue June 30, 2017 Copyright 2016 POSCO Research Insititute All rights reserved. Production in whole or in part without written permission is strictly prohibited. Registration number Gangnam, Ba00170 Registration date September 7, 2015 How to contact asiansteel.w@ posri.re.kr

5 Interview with worldsteel Chairman Beyond Survival to Success 46John J. Ferriola, Chairman, CEO and President of Nucor Report Autosteel and the New Materials Competition 54Special Dr. Peter Warrian 66Featured Articles 88 Market Trend and Analysis 90 Measuring and Forecasting Steel Market Conditions with the POSRI Steel Index 68 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry 78 Chinese Steel Moves along the One Belt, One Road

6 On the Cover FUTURE MEGATRENDS AND THE STEEL INDUSTRY Future Megatrends in Steel-consuming Industries and Their Impact on the Steel Industry ONGOING AND EMERGING MEGATRENDS Source: POSCO Research Institute Ongoing Trends Emerging Trends Motorization Global Climate Action Globalization Fourth Industrial Revolution Industrialization Urbanization Future Megatrends and the Steel Industry Choi, Dongyong Understanding the New Mobility Paradigm Park, Hyung-keun Will the Shipbuilding Industry Flourish Again? Dr. Lee, Eun-chang 4 Asian Steel Watch

7 Future Megatrends and the Steel Industry AUTOMOBILE SHIPBUILDING ENERGY CONSTRUCTION Demand / Investment Steel Contents / Intensity Needs for Steel Products Eyes on Energy Transition Park, Hyung-keun Future Cities and Changes in Steel Materials Dr. Kim, Hoon-sang The Steel Industry over the Next Two Decades Dr. Hang Cho, Dr. Moon-Kee Kong Vol.03 June

8 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Choi Dongyong Senior Principal Researcher, POSCO Research Institute Future Megatrends and the Steel Industry 1 Z-punkt GimbH, a German consulting firm for strategic foresight consulting 2 Firstly, megatrends can be observed over decades. Quantitative, empirically unambiguous indicators are available for the present. They can be projected with high probabilities at least 10 years into the future. Secondly, megatrends have a comprehensive impact on all regions and actors governments and individuals and their consumption patterns, but also businesses and their strategies. Finally, megatrends fuel fundamental, multidimensional transformations of all societal subsystems, whether politics, society, or the economy. What is a megatrend? To understand future megatrends, the definition and characteristics of megatrends must first be made clear. Megatrends are a long-term process of transformation with a broad scope and dramatic impact. They are considered powerful factors shaping future markets. 1 Megatrends have three main characteristics through which they are distinct from other trends: their time horizon, reach, and intensity of impact. 2 Companies can gain insight into what areas will emerge or grow in the future by analyzing and predicting future megatrends. In doing so, they are able to uncover clues for business portfolios, new future businesses, and R&D themes. Ongoing trends in the steel industry This article deals purely with megatrends which will significantly impact the future steel industry rather than general megatrends. In this article, megatrends with a great influence over the steel industry are divided into ongoing trends and emerging trends, considering the lapse of time. The time horizon of 20 to 30 years is considered here to reflect new megatrends worsening global warming and the spread of the Fourth Industrial Revolution which bring fundamental changes to global industrial structures. Looking back on the last 50 years of the global steel industry, the expansion of steel-consuming industries has driven the growth of the steel industry. In order to review the history of quantitative growth from the perspective of steel demand, the share of steel demand within each industry should first be considered. The largest consumer of global steel is the construction industry, which absorbs nearly 50% of global steel production. This industry accounts for a large share of the global economy. As urban infrastructure such as commercial and residential buildings, bridges, and pipelines has been 6 Asian Steel Watch

9 Future Megatrends and the Steel Industry Figure 1. Global Steel Demand Share by End-use ( average) 12% Automotive 47% Construction Shipbuilding & Other transportation 15% Mechanical machinery 5% 7% 14% Metal product & Domestic appliance Source: worldsteel Energy installed in major cities worldwide, steel demand for construction has continued to increase. The second and third largest steel-consuming industries are the machinery industry and the metal products/domestic appliance industry, which consume about 15% and 14% of global steel, respectively. These industries have relatively many end-user companies, therefore an indivisual company purchase a small volume of steel but require a wide range of steel products. Next, the automotive industry accounts for 12% of global steel demand. The automotive industry has experienced increasing demand for auto sheet and wire rod, such as for exhaust pipes and inner and outer automobile panels. The shipbuilding, other transportation and the energy industries combined account for 12% of global steel de- mand. These industries consume only a few types of steel products, but do so in large amounts. Table 1 shows the annual average proportion of steel demand by industry over the nine years from 2007 to The steel industry has been propelled by four main drivers of steel-consuming industries: urbanization, motorization, globalization, and industrialization. First, urbanization is the most important construction trend impacting the steel industry. Closely intertwined with rising population and incomes, the number of urban dwellers has increased steadily. In 1960, only 33.7% of people worldwide resided in urban areas (1.02 among 3.03 billion people), but by 2015, 54% of the world s population was urban (3.96 among 7.33 billion people). 3 Second, the key trend for 3 UN World Urbanization Prospects (2014 Revision) Table 1. Characteristics of Megatrends Characteristics Time horizon Reach Intensity of impact Details Can be observed over at least 10 years Have a comprehensive impact on every sector of society (including policy authorities, customers, and companies) Megatrends deeply and extensively influence technology, society, the economy, politics, and the environment Vol.03 June

10 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 2. Four Main Drivers for Steel-consuming Industries Urbanization Motorization (%) (Vehicles per 1,000 people) Urbanization Rate 140 Motorization Rate Steel consumption Steel consumption Source: worldsteel, World Bank, POSCO Research Institute Note: The right axis abbreviated denotes annual global steel consumption 4 Automobiles are durable goods with a lifecycle similar to that of general goods (introductory, growth, maturity, and decline stages). 5 The International Monetary Fund (IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movement, migration and movement of people, and the dissemination of knowledge. the automotive industry is motorization. Led by high income earners, the motorization rate (vehicles per 1,000 people) generally grows gradually at the introductory stage 4 but rises rapidly during the growth stage as cars become popular among general customers responding to rising incomes and improved road infrastructure. This is called the stage of mass motorization. Car ownership rose ten-fold over the period from 1960 to 2015, from 127 million to 1,262 million units, bolstered by increased household incomes and a relative decline in car prices. The global rate of motorization (vehicles per 1,000 people) also increased significantly, from 42 units to 172 units over the same period, indicating that the era of fullscale motorization has arrived. Third, globalization is the most important trend for the shipbuilding industry, on the ground that globalization is characterized by increased trade between countries. 5 After World War II, the global trade environment gradually improved thanks to voluntary cooperation among member countries of the General Agreement on Tariffs and Trade (GATT, 1948) and World Trade Organization (WTO, 1995). As a result, the export-to-gdp ratio increased profoundly, from 12% in 1960 to 30% in Finally, under the influence of rapid industrialization, the machinery and domestic appliance industries have sparked global steel demand. These ongoing megatrends will continue to affect the steel industry in the future. Emerging trends for the steel industry Together with these ongoing megatrends, global climate action and the Fourth Industrial Revolution are the emerging trends that will affect the future of the steel industry. At the 2015 United Nations Climate Change Conference held in Paris, known as COP21 or CMP11, all 196 Parties agreed to adopt the Paris Agreement. It creates a new legally-binding framework for coordinated international efforts 8 Asian Steel Watch

11 Future Megatrends and the Steel Industry Globalization Industrialization (%) Export/GDP Steel consumption (2010=100) Industrial Production Steel consumption to tackle climate change. Since then, global climate action has accelerated although U.S. President Donald Trump's decision to withdraw from the Agreement would damage its solidarity. This will promote the development of innovative renewable energy, CO₂ emission controls, and green production. The Paris Agreement is meaningful in two ways. First, it has an expanded scope of application. The Kyoto Protocol was applicable in only 37 industrialized countries and the European Community, while all 196 Parties to the United Nations Framework Convention on Climate Change (UNFCCC) are subject to this Agreement. Second, it includes a long-term target: Keeping global temperature rise well below two degrees Celsius above pre-industrial levels or limiting the temperature increase even further to 1.5 degrees Celsius. To meet these goals, global greenhouse gas emissions are to be reduced to at least 10% below 2010 levels by 2030 and 55% by Therefore, the Agreement will have a long-term impact on the steel industry in terms of demand, products, and production process. The Fourth Industrial Revolution, the second emerging trend, is accelerating based on key technologies such as IoT, big data, and AI. With the progression of these technologies, companies will convert themselves into smart enterprises, pursuing smart factories and smart management. As a result, new industries and services such as smart cars, smart energy, and smart buildings will all gain ground. This will bring about profound changes in the steel industry by both direct and indirect means: an indirect impact on steel demand through steel-consuming industries and a direct impact on steelmaking process. For smart factories, production costs will be reduced due to increased work efficiency, reduced waste, and swifter decision-making. 6 In addition, 6 According to a survey by PwC in 2016 (cost reduction effects for five years, ), smart factories contribute to an annual cost reduction of USD 54 billion. Vol.03 June

12 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 3. Emerging Trends Reshaping the Future of the Steel Industry GLOBAL CLIMATE ACTION + 2ºC 196 countries agreed to act on global warming Renewable Energy Disruption Emission Control Green Production FOURTH INDUSTRIAL REVOLUTION Technology Disruption Robotics IoT Smart Enterprise Smart Factory Smart SCM Smart Management AI Big Data 3D Printing New Industry / Service Smart Car Smart Energy Smart Building knowhow for smart factories will become explicit knowledge. These emerging trends will impact the ongoing trends, resulting in a multiplier effect, which refers to a ripple effect through which changes in one factor transform another. In this article, two factors climate change and the Fourth Industrial Revolution will be closely intertwined with ongoing trends and become a driver of change. In other words, the two emerging trends of concerted action on global warming and the Fourth Industrial Revolution will have a significant impact on the future of the ongoing trends of urbanization, motorization, globalization, and industrialization. Impact of Megatrends on the Steel Industry The ongoing and newly emerging trends will in combination change the landscape of steel-consuming industries and ultimately impact the entire steel ecosystem. Changes in megatrends will influence both product/investment demand and steel content, the steel intensity in respective industries. First, in the case of the automotive industry, global demand for new cars will increase over the long term apace with widespread motorization; however it will not grow to the degree that might have been expected given the impact of 10 Asian Steel Watch

13 Future Megatrends and the Steel Industry Figure 4. Impact on the Steel Industry ONGOING TRENDS Motorization Globalization Industrialization Urbanization EMERGING TRENDS Global Climate Action Fourth Industrial Revolution AUTOMOBILE SHIPBUILDING ENERGY CONSTRUCTION Demand / Investment Steel Contents / Intensity Needs for Steel Products STEEL DEMAND Automobile Energy STEEL PRODUCTS Shipbuilding Construction High strength & toughness High corrosion resistance High performance STEEL PRODUCTION PROCESS Eco-friendly steelmaking process Smart factory management Source: POSCO Research Institute autonomous driving technologies and the rise of the sharing economy. Steel content per vehicle is expected to decline as automobile materials become lighter and stronger owing to stricter fuel efficiency standards, electrification, and safety concerns. Second, in the shipbuilding industry, the current oversupply situation will run its course until However, the shipbuilding market will grow after this point due to the expansion of global trade and rising demand for vessel replacement. Steel intensity by ship s tonnage will fall continuously as vessels become larger and lighter, and it will further decline with the rise of electric propulsion and unmanned and autonomous ships. Third, the trend of urbanization will cause global construction investment to rise continuously over the long term. However, the steel intensity of construction investment will continue to decline given that for smart and green cities software requires greater investment than steel. Fourth, in the energy industry, global energy investment will continue to increase thanks to rising populations and eco- nomic development in emerging countries. The steel intensity of energy investment will be sustained by rising investment in transmission and distribution (the sector with high steel intensity), despite declining investment in energy infrastructure (the sector with low steel intensity). These impacts on product/investment demand and steel intensity will eventually affect future steel demand. As new megatrends develop, there will be a considerable shift in customer needs for steel products. In particular, demand is rising for high strength and toughness, high corrosion resistance, and high performance steels. Under global climate action the steel industry will continue to develop energy saving and recycling technologies and new eco-friendly steelmaking process. The 4th Industrial Revolution will profoundly change the future of the steel industry. The steel industry will move beyond plant automation, toward smartization across all process using smart technologies. Through this smart transformation, the global steel industry will create new values. Vol.03 June

14 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Park Hyung-keun Principal Researcher, POSCO Research Institute Understanding the New Mobility Paradigm The evolution of the car industry Based on its appearance, the Consumer Electronics Show (CES) held in January of 2017 might have been described as a Car Electronics Show. Starting out 50 years ago as an electronics show for displaying home appliances, the CES has emerged as major arena for IT competition. Recently, however, it seems to be evolving into an automotive showcase. The Detroit auto show (NAIAS), once the mecca of the automobile world, was held in the same month but seems to have lost its sparkle compared to the CES. In April 2017, Tesla, the definitive maker of electric vehicles (EVs), overtook Ford and GM in terms of market cap to further undermine the position of the Motor City. It is fair to state that the center of attention in the automotive industry has shifted from Detroit to Silicon Valley as IT companies such as Google spin-off Waymo, graphics processing units maker Nvidia, and microprocessor fabricator Intel are actively working to develop autonomous driving technologies. The popularization of cars began in the 1920s when the Ford Model T first hit the road. The automobile market of the time was so lopsided that carmakers were able to offer customers only a single color option (black). Today this unbalanced consumption structure has shifted to a more customer-oriented market in which car buyers can choose from a vast range of brands, dozens of models, and thousands of options. The automobile industry must manage further innovation through the rise of new mobility services. Such mobility services allow the production of a car customized to a single individual, and can even blur the lines between what is shared and what is owned. Driving the fundamental changes in this industrial structure is the exponential advancement of technologies such as AI, Big Data, IoT, and 3D printing that together comprise the Fourth Industrial Revolution. These deep changes are most evident in the automotive industry. The rise of electric vehicles Tesla was the first company to begin pulling down 12 Asian Steel Watch

15 Understanding the New Mobility Paradigm Figure 1. Plug-in Electric Vehicle Sales Trend Figure 2. Plug-in Sales and Growth Rate (1,000 units) Global annual PEV sales PEV share (1,000 units) % % % % 0.17% % 0.07% Growth rate 162% 57% 53% 68% 42% China Japan Europe USA Other % -11% +13% +36% +11% Source: EV-Volumes Source: EV-Volumes the entry barriers into the traditional automotive industry. When others were still doubtful as to whether EVs could gain ground in the market, Tesla was releasing electric luxury cars with sleek designs and elevated performance comparable to sports cars: Model S sedans and Model X sport utility vehicles. The company is now heading toward the 200,000 sales milestone. 1 Tesla delivered 25,000 cars in the first quarter of 2017 alone and plans to release the more affordable Model 3 in July of this year. Tesla is now surely on a par with traditional automakers in many regards. The Renault-Nissan Alliance, although further from the spotlight than Tesla, had sold a total of 425,000 EVs worldwide by 2016, contributing greatly to the popularization of the category. The company is taking steps to appeal to a broader audience with a wide range of lineups, including the Nissan Leaf (which has topped 250,000 in total sales), Renault Zoe, and Mitsubishi Outlander. 2 Moreover, China is also gearing up for the EV competition. Backed by robust support from the Chinese government, more than 350,000 EVs were sold in China last year alone, roughly half of the global total. With this fast-growing trend, global plug-in vehicle sales reached 773,600 units in 2016, 42% above the total for Although EVs currently account for less than 1% of the overall market, they should become as competitive as internal combustion engine (ICE) vehicles by around 2020, and will be increasingly preferred by customers. The success of Tesla has awoken traditional carmakers. Major global automobile companies are rushing to develop their own EVs. As the first among the major players, GM has rolled out an affordable, second-generation all-electric vehicle, the Chevrolet Bolt. It has doubled the battery capacity of the first-generation plug-in hybrid Volt and achieved a range of 380 km on a single charge. By solving the most significant barrier, it has significantly improved driver convenience. The USD 30,000 price tag after subsidies is also competitive compared to ICE vehicles. 1 Tesla Beats Estimate With 25,000 Deliveries as Model 3 Nears, Bloomberg, April 3, Renault-Nissan maintains dominance in global electric car market, driveev.net, February 8, Global Plug-in Sales for 2016, EV-Volumes.com Vol.03 June

16 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 3. EV Battery Pack Price Trend (USD/kWh) Figure 4. EV Sales Forecast by Region (million units) 25 1, EV penetration by ~47% of new cars Rest of the world Japan China USA Europe Source: Bloomberg New Energy Finance Summit, April 25, Source: Bloomberg New Energy Finance 4 Bloomberg New Energy Finance Summit, M. Liebreich, BNEF, April 25, 2017 This price competitiveness can be attributed to the rapid decline in battery costs: The average battery pack has fallen in cost from over USD 1,000/ kwh in 2010 to USD 273/kWh in By 2030, it is expected to drop below USD 100/kWh. This means that EVs capable of surpassing 300 km on a single charge could possibly be produced for less than ICE vehicles. The effect of the widespread acceptance of EVs is clearly evident in Norway. Thanks to tax incentives, EVs there have reached at a price point similar to ICE vehicles, and their market share has surged dramatically from 1.4% in 2011 to 29% in Assuming charging infrastructure is available, the global EV market should expand rapidly. Bloomberg New Energy Finance forecasts that the market share of plugin EVs will top 35% by One step closer to the age of robotic vehicles Driverless cars were once a subject of science fiction, but today they have already hit the road. High-end luxury brands such as Mercedes-Benz, Audi, and Hyundai Genesis EQ900 come equipped with Advanced Driver Assistance Systems (ADAS), such as Adaptive Cruise Control (ACC) which automatically adjusts vehicle speed to help maintain a safe distance from vehicles ahead, and a Lane Keeping Assist System (LKAS) which prevents motorists from drifting out of a lane. Some countries are attempting to legalize Auto Emergency Braking (AEB) to combat collisions on the roads. This kind of driver assistance is classified as Level 1 or 2 driving automation for on-road vehicles. The development of automated driving systems is currently underway, spanning from Level 3 (conditional automation) to Level 5 (full automation). Waymo s fleet of autonomous vehicles (AVs) has logged more than three million miles on public roads since Tesla is outperforming other companies by producing automated vehicles equipped with its Level 2 Autopilot. In 2016, Tesla announced that all of its cars will feature the autonomous driving hardware necessary for full Level 5 autonomy Asian Steel Watch

17 Understanding the New Mobility Paradigm Table 1. Automated Driving Level Definitions SAE level Name Narrative Definition Steering and Acceleration/ Deceleration Human driver monitors the driving environment No Automation Driver Assistance Partial Automation Full-time performance by the human driver of all aspects of the dynamic driving task, even when enhanced by warning or intervention systems Driving mode-specific execution by a driver assistance system of either steering or acceleration/deceleration using information about the driving environment and with the expectation that the human driver perform all remaining aspects of the dynamic driving task Driving mode-specific execution by one or more driver assistance systems of both steering and acceleration/deceleration using information about the driving environment and with the expectation that the human driver perform all remaining aspects of the dynamic driving task Automated driving system ( system ) monitors the driving environment Conditional Automation High Automation Full Automation Driving mode-specific performance by an automated driving system of all aspects of the dynamic driving task with the expectation that the human driver will respond appropriately to a request to intervene Driving mode-specific performance by an automated driving system of all aspects of the dynamic driving task, even if a human driver does not respond appropriately to a request to intervene Full-time performance by an automated driving system of all aspects of the dynamic driving task under all roadway and environmental conditions that can be managed by a human driver Monitoring of Driving Environment Fallback Performance of Dynamic Driving Task Human driver Human driver Human driver Human driver and system Human driver Human driver System Human driver Human driver System System Human driver System System System System System System System Capability (Driving Modes) n/a Some driving modes Some driving modes Some driving modes Some driving modes All driving modes Source: SAE International The automobile industry is expected to reach Level 5 autonomy by around To this end, the cost of expensive components must first be reduced. High-speed computers for processing autonomous driving are priced at minimum over USD 10,000. Key sensors, such as Light Detection and Ranging (LiDAR) are also expensive, coming in at somewhere from thousands to tens of thousands of dollars. There are additional obstacles as well. Outside of advanced countries, it is difficult to set up basic infrastructure such as precision 3D mapping and 5G wireless communications among cars and with road infrastructure. In addition, lanes should be designated for exclusive use of AVs during the transition period. Regional road conditions and driver characteristics should also be considered. Companies have been pursuing various efforts to overcome these obstacles. Relatively affordable radar and camera sensors are being used to reduce AV costs. Companies are developing autonomous driving technologies that mimic human driving using deep learning to allow autonomous driving without 3D mapping or 5G wireless communications. Self-driving cars will bring about several positive effects. First of all, automobile accidents will be reduced. Nearly 1.3 million people die annually in car crashes around the globe, 95% of which are caused by human error. Tesla has even pointed that driving by humans could be considered reckless behavior in the 5 The US National Highway Traffic Safety Administration (NHTSA) has defined five different levels of autonomous driving. SAE International identifies six levels of driving automation from 0 (no automation) to 5 (full automation). Vol.03 June

18 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 5. Autonomous Vehicle Equipment GPS positioning $80 $6,000 Ultrasonic sensors Measure position of nearby objects $15 $20 Odometry sensors Complement GPS info. $80 $120 LiDAR Monitors surroundings $90 $8,000 Video camera Visual monitoring $125 $200 LiDAR (Key component) Decline in AV Costs 200 (USD 1,000) Central ECU Information processing & control % of sensor costs Source: The Boston Consulting Group (BCG) Radar sensors Monitor surroundings (pedestrians, roads) $ near future. For this reason, companies including Waymo and Ford are even removing the steering wheel, brake, and accelerator pedals to ensure fully autonomous driving without human intervention. Self-driving cars are energy-effective and reduce collisions. They will also benefit those who are unable to drive a car, including young people, people with disabilities, and the elderly. Imagining future mobility Despite the 130-year history of cars, there is much room for improvement, particularly in terms of engine efficiency and utility. In response to climate change, highly-efficient EVs are becoming increasingly widespread and resources are being used more effectively via car sharing. The combination of autonomous driving technology and car sharing will in turn bring about profound changes. In 2015, the International Transport Forum (ITF) at the OECD selected Lisbon, Portugal as a case study for a simulation on the effects of the sharing economy. In a rather aggressive scenario in which all motorized trips were carried out by high-capacity autonomous public transportation, 90% of vehicles could be removed from the streets while delivering nearly the same level of mobility as before. Although this scenario is based on the premise that all residents use car sharing and are not reluctant to share a ride Figure 6. Types of Autonomous Vehicles Private Self-driving cars Family Autonomous Vehicle Source: Shutterstock.com Robotaxi Shared Autonomous Vehicle Source: nutonomy.com Self-driving Mini-bus Pooled Shared AV Source: Shutterstock.com 16 Asian Steel Watch

19 Understanding the New Mobility Paradigm Figure 7. EV Platform with strangers, the effect of even partial sharing mobility will reduce the need for parking spaces, which account for about 30% of large cities, and road networks, thus allowing a more pleasant and convenient environment for people. 6 The Boston Consulting Group (BCG) has projected that autonomous driving technology will result in the replacement of conventional taxis with robo-taxis, and that the cost of a ride in such a robo-taxi would be lower than that in a conventional cab. 7 Traveling short distances as part of daily routines for commuting to work or school, or for shopping would be accomplished by robo-taxi rather than in privately-owned vehicles. As most trips are currently taken by one or two people and autonomous cars require no driver s seat, cars in the future can be made smaller. This explains why Google s pod and NuTonomy s robo-taxi in Singapore are compact cars. Ten-seat mini-buses would be practical for short-distance commutes by those who share destinations or travel routes. If IT technology advances enough to offer commuters door-to-door service without causing inconvenience to other commuters, traditional public transportation can be replaced by autonomous public transportation. Attitudes toward car ownership are gradually shifting as well. Under rapid urbanization, road networks are becoming increasingly complicated. With the development of public transportation and the more widespread use of cars, car ownership is less considered a status symbol. At this juncture, the sharing economy is gaining momentum, giving rise to Uber, a ride-sharing platform with a nearly USD 66 billion valuation. Disappearing Parts Components Electrification New Parts Engine Intake/ Exhaust Transmission Axle Fuel Tank Source: POSCO Research Institute ICE Electric Pump(HVAC) Electric Steering System Electric Brake Regenerative Brake Uber plans to provide cheaper rides to more customers by taking advantage of self-driving cars. If autonomous driving technology reduces labor costs and door-to-door autonomous public transportation is available for the cost of conventional public transportation, car ownership is certain to become less meaningful. Changes in needs, changes in materials The sophistication of EVs and autonomous driving technology and the spread of the sharing economy will transform automobile demand, and subsequently the related materials. EVs do not require as many auto parts as do conventional ICEs. In particular, metal parts such as powertrain components the engine, vehicle intake and exhaust system, and transmission will be replaced by batteries, motors, and electronic parts. As cars are made lighter to improve driving range, alternative materials such as aluminum and CFRP are being used in some luxury lineups. EV Battery Pack 6 Urban Mobility System Drive Motor High Voltage Components Upgrade, OECD-ITF, April, Revolution in the Driver s Car Seat, Boston Consulting Group, April 3, 2015 Vol.03 June

20 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 8. Automobile Market Forecast Impact of New Mobility on Automobile Demand (million units) Motorization of emerging countries CAGR 1.6% Share of autonomous vehicles 2 Car sharing impact 3 Family-, ride-, car sharing combined with autonomous vehicle effect 2015 Production 2035 Ongoing trend-based Scenario 2035 New Mobility Scenario Increasing mobility 4 Low cost travel, teenagers, elderly (+15% VMT assumed, work on progress) Source: Modified by POSCO Research Institute (based on IHS Markit data) 8 Disruptive Mobility, Barclays Capital, July 20, 2015 Self-driving cars will significantly influence automobile demand. While some controversy exists, many research outcomes suggest that automobile demand will decline with the rise of self-driving cars. If this becomes a reality, the steel industry will have to withstand a double impact of falling automobile demand and the threat of alternative materials. Global sales of passenger cars will increase from 89 million units in 2016 to over 100 million units by This expansion is mainly the result of growth in emerging markets, including China and India. A number of institutions forecast that if this trend continues, global passenger car sales will increase to 130 million units by However, such forecasts are bound to change with the significant development of self-driving technology and the visible effects of sharing mobility. According to results from car sharing enterprises such as ZipCar and Uber, as well as from the University of Michigan Transportation Research Institute (UMTRI) and Barclays, each shared vehicle is expected to replace between nine and twenty new cars. 8 Assuming that shared vehicles run more than traditional vehicles and have a shorter replacement period; however, POSCO Research Institute projects that the shorter replacement period will reduce this only by two to three new car sales. If robo-taxi and mini-bus fares fall to the level of conventional public transportation, groups more vulnerable to transportation exclusion, such as the young and people with disabilities, will be highly likely to buy cars and use robo-taxis, leading to an increase in mobility demand. Therefore, the projected impact still remains to be seen. Higher fuel economy standards are being implemented in the USA and Europe to combat climate change. A timeline has been created for reducing CO₂ emissions from the current 140g/ km to about 100g/km within a decade and to 60g/km within two. The USA has prepared well for fuel economy standards, mainly by the U.S. Environmental Protection Agency (EPA) under the Obama administration, setting the Corporate Average Fuel Economy (CAFE) standards to 18 Asian Steel Watch

21 Understanding the New Mobility Paradigm Figure 9. Material Composition of a Car and Steel Content Per Vehicle Lower Emission CO ² Emission Regulation [g/km] 141 ( 15) 100 ( 25) 60 ( 35) 10% Weight reduction every 10 years Steel Content Reduction 1,546-10% 1,391-10% 1,252 Lighter Lightweight materials (AHSS, Al, CFRP) 54% ( 15) 51% ( 25) 49% ( 35) 54% -3% 51% -2% 49% Curb Weight (kg/vehicle) Steel Content (%) Stronger Higher Safety Standards Medium & High Strength Steel: 18% ( 15) 29% ( 35) of vehicle total 18% +5% 23% +6% 29% Medium&High Strength Steel (%) Source: Compiled by POSCO Research Institute improve from the current 34.1 mpg to 54.5 mpg (miles-per-gallon) by Despite the unpredictability surrounding potential attempts by the Trump administration to ease this restriction, it will be difficult to profoundly change this limit. To comply with these fuel economy standards, ICEs must be improved, electrified, and lightened. According to the technical assessment report (TAR) by the EPA, cars will have to become lighter by about 10% every decade in order to comply with the CAFE standards. However, car body strength and price should not be compromised in order to satisfy higher safty standards. For these reasons, steel materials, which account for nearly half of auto parts, cannot be significantly reduced. The steel industry is also actively developing lighter and stronger steel materials such as advanced high-strength steel (AHSS) to replace traditional general steel. The industry will be able to maintain competitiveness in the future. Some believe that plastic cars will come to occupy the roads with the advent of EVs and self-driving cars. However, the era of plastic cars still seems to remain in the distant future. 9 The rapidly increasing energy density of EV batteries (EVBs) will offset the weight of car bodies. EVBs pose a risk of fire, so they still require strong materials such as steel. Steel materials are also price competitive. Therefore, steel remains attractive for EVs. The same is true for self-driving cars. Although IHS Markit has made a rather aggressive forecast that self-driving car sales will reach 21 million units per annum by 2035 (about 20% of total sales), it is estimated that only 8% of cars on the roads will be self-driving by that year. This suggests that self-driving cars will share the roads with human drivers, making it all the more necessary to build cars strong enough to withstand accidents. This means that steel will remain an important material for cars. The future of autonomous cars is so unpredictable that no institution has released a forecast with strong conviction. Close attention must continue to be focused on the rapidly changing environment surrounding electric vehicles and self-driving cars. 9 Autonomous vehicle sales forecast to reach 21 mil. globally in 2035, IHS Markit, June 6, 2016 Vol.03 June

22 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Dr. Lee Eun-chang Principal Researcher, POSCO Research Institute Will the Shipbuilding Industry Flourish Again? 1 Rahul Kapoor, Diminishing returns?, TOC Asia Container Supply Chain Conference, April 20, Shipbuilding industry is highly influenced by environmental issues and technological advances The shipbuilding industry is greatly influenced by increases in seaborne trade, the lifecycle of ships, changes in regulations, and advancing technology. After the first-ever of its kind set sail in 1956, container ships emerged as a popular new type of vessel following the recessions of the 1970s. Undergoing a continuous process of development, they have become one of the most important kinds of vessels on today s oceans. Thanks to the development of container ships, a growing need for replacement of ships built during the 1970s boom, and new regulations such as double-hull requirements for oil tankers, the shipbuilding industry underwent an additional boom in the 2000s. Similarly, advancing technology and a rapidly shifting business environment will bring considerable changes to the shipbuilding industry in the future. Shipbuilding industry to be recovered in the long term, backed by global economic growth There has been increasing concern that the world economy is facing a prolonged period of low growth following the financial crisis, influenced by slow growth in advanced countries and a Chinese economic slowdown. In 2016, Drewry, a British maritime research firm, expressed concern over a new new normal in which seaborne trade growth will continue to slow more so than expected 1 owing to reshoring in advanced countries and stringent protectionist measures. However, globalization is certain to gradually expand over the long term. In consequence, the export-to-gdp ratio is expected to rise moderately from 30% in 2015 to 33% by The shipbuilding industry boomed in the 2000s, but the boom quickly turned to bust after the financial crisis, followed by massive counter-cyclical ordering. From 2008 to 2015, the shipbuilding industry was in oversupply, with an average annual new order volume of 77 million 20 Asian Steel Watch

23 Will the Shipbuilding Industry Flourish Again? Figure 1. Growing Global Trade Global GDP (USD trillions) Export (% of GDP) % 33% Source: IHS Market, Roland Berger Trend Compendium, WTO GT. This oversupply will linger until 2025, and the average annual volume of new orders will remain around 54 million GT over the next ten years. However, the shipbuilding market will then turn to an upswing with increasing growing global trade and rising demand for ship replacement. Shipbuilding orders will rise to the level of 95 million GT. Moreover, demand for new and renewable energy will rise along with environmental issues, and demand for coal and oil will slow. Environmental concerns have positive impacts on the shipbuilding industry, such as the rise of CO₂ carriers and increasing demand for liquefied natural gas (LNG) carriers, but demand for conventional bulk carriers, such as coal and oil carriers, will potentially slow. Under such circumstances, demand for gas tankers and container ships will grow considerably. Rising demand for eco-friendly ships In 2016, the International Maritime Organization (IMO) decided to introduce more stringent SOx emission regulations. Under a new global cap, ships will be required to use fuel oil with a sulfur content of no more than 0.5% starting in Moreover, the IMO Tier III NOx emission limits took effect in Under these Tier III requirements, NOx emission levels for engines installed on vessels built (keel laying) on or after January 1, 2016 must be reduced to 3.4g/kWh if they are to operate in a designated Emission Control Area (ECA), including the North American Sea Area and United States Caribbean Sea Area. There is a further regulation that requires improved operational energy efficiency in order to reduce CO₂ emissions. If the Energy Efficiency Design Index (EEDI) is further strengthened, a 20-30% reduction of CO₂ emissions will be mandated by A wide range of technologies are being adopted to meet emissions regulations. More expensive low-sulfur fuel oil can be used, or engine scrubbers can be installed to reduce SOx emissions. Selective catalyst reduction (SCR) or exhaust gas recirculation (EGR) technologies are options that reduce the level of NOx. To lower both SOx and NOx emissions, ships can use more eco-friendly fuels such as LNG, methanol, and biodiesel. In the distant future, ships will utilize electric batteries or hydrogen fuel cells just as electric cars do today. Moving away from a heavy fuel oil (HFO) environment, ships will enjoy more technological options in a new era, such as installing ancillary devices for fuels or replacing conventional fuels with new alternatives. Vol.03 June

24 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 2. Global Shipbuilding Demand (mil. GT, Annual Average) Bulker Declining coal demand (mil. GT, Annual Average) '08 15 '16 25 '26 35 Source: POSCO Research Institute based on Clarkson data Tanker Slowing oil demand growth Gas carrier Fast growing gas demand Containership Growing world trade Others Others(Leisure ships, etc) Source: Clarkson, POSCO Research Institute Image credit: Wikimedia commons 2 Gerd Würsig, PERFECt LNG feasibility study for a Piston Engine Room Free Efficient Containership, DNV-GL, Which options will be preferred depends on July 16, fuel costs, installation and repair costs for facilities or equipment, areas of operation, and bunkering infrastructure for fuels. Although LNG-fueled ships are currently regarded as a positive solution, a number of considerations should be kept in mind. LNG-fueled ships require larger fuel tanks than do HFO-fueled ships. Furthermore, additional bunkering is required for long-distance round-trips. Ship owners prefer round-trips to be fully fueled since LNG prices vary by region. Fuel tanks large enough for round-trips would require considerable investment due to their expense and the reduction in shipping capacity resulting from their space demands. To address these concerns, ships require a totally new type of design. In the designs of the PERFECt (Piston Engine Room Free Efficient Containership) project, 2 an LNG-fueled ship runs on an electric motor instead of a main engine. Hyundai Heavy Industries and studies/ GE Marine have developed a design for October 27, Marine Insight, a gas turbine-powered LNG carrier equipped with GE s COGES (Combined Gas turbine, Electric and Steam) system, 3 which is much lighter and more efficient than conventional engines. These examples indicate how a range of technologies will bring about differentiated and innovative types of ships. The more technologies that are available for adoption, the higher the related uncertainty becomes. In order to reduce this uncertainty, all possible technologies should be developed and examined. Green Ship of the Future, a Danish public-private partnership, is evaluating various technological alternatives for addressing environmental concerns and continuously conducts practical verification: retrofitting with an SCR or scrubber system and the economic feasibility of retrofit conversion to LNG propulsion. 4 New technologies can be more short-lived than the ships themselves with their life-cycle of more than 20 years. Therefore, ships should be equipped with more creative designs to allow easier conversion or application of various technologies. Consortiums or groups pursuing technological innovation will play a more 22 Asian Steel Watch

25 Figure 3. Sulfur Emission Control Area Will the Shipbuilding Industry Flourish Again? Existing, IMO EU Sulphur Directive Existing, regional Possible future Source: The International Council on Clean Transportation (ICCT) important role in developing leading prospective technologies and debating technology standards. Just like what currently takes place in the ICT industry, traditional industries will be required to more actively discuss pertinent standards. In addition, global warming will create an additional impact. The potential for using the North Pole route (NPR) is rising. The IMO Polar Code, which is a mandatory code for ships operating in polar waters, took effect on January 1, The NPR reduces the travel distance from Busan to Rotterdam by 32% (22,000 km 15,000 km) compared to the conventional Suez Canal route, and cuts the travel time by up to 10 days (40 days 30 days). 5 As a result, more ships will travel via the North Pole route, but the total capacity of the global fleet will fall. Changes brought about by new technologies Competition is consistently intensifying in the shipping market. Shipping companies will continue to seek economies of scale as a response to this increasing competition, and ships will subsequently become larger. There are limitations on the improvement of efficiency simply by scaling up the size of ships, so efficiency will have to be improved through the integration or optimization of value chains. Moreover, the world s leading ports, including Rotterdam in the Netherlands, Copenhagen in Denmark, and Hamburg in Germany, are attempting optimizations that would allow the entrance of ultra-large container ships and improve the efficiency of loading and discharging. Such efforts do not end here. The Port of Rotterdam Authority has joined forces with Delft University of Technology to launch a Port Innovation Lab intended to discover new technologies and value for the maritime industry. Key enablers of the Fourth Industrial Revolution are being adopted in the shipbuilding and shipping industries. Preventive maintenance is already available, such as collecting operational data via sensors embedded in ships and monitoring the data via satellite communications at onshore control centers. This 5 Press release of the Ministry of Oceans and Fisheries, MOF implements Polar Code this year, January 2, 2017 Vol.03 June

26 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 4. North Pole Route (NPR) Source: visualcapitalist.com 6 Rolls-Royce, Autonomous ships The next step, 2016 ( Files/R/Rolls-Royce/documents/ customers/marine/ship-intel/rrship-intel-aawa-8pg.pdf) 7 technology-innovation/revolt/ 8 Press release of the Ministry of Science, ICT and Future Planning, ICT Convergence to Increase Competitiveness and Take a Leap Second for the Shipbuilding and Maritime Industries, December 6, 2016 enables ship owners to improve ships operation rates and conduct real-time asset and shipment management. Just like self-driving cars, remotely controlled or fully autonomous ships will become available in the future. Such autonomous ships can improve operational efficiency by ensuring optimal operation routes based on real-time weather and maritime conditions. Above all, the issue of crew shortages will be offset, leading to a decline in the labor costs that currently account for the lion s share of total operation costs. Crews today must face difficulties living on board for long periods, but working conditions will be significantly improved in the future when fleets are managed from onshore control centers. These changes are not limited to the crews on board. The designs of ships will fully evolve. With no crew to accommodate, the deckhouse and safety design can be eliminated, allowing future ships to be designed with a larger cargo capacity. In 2016, Rolls-Royce released a plan to develop an autonomous unmanned ocean-going ship by DNV-GL is developing an autonomous and fully battery-powered vessel, named ReVolt. 7 Shipbuilding companies in former shipbuilding powerhouses such as certain European countries and the USA can increase their prominence by improving their competitiveness using advanced technology. They will be able to raise value added through the development of key technologies for remotely controlled and unmanned ships, autonomous ships, and remote management. Korea is working to escalate the competitiveness of its shipbuilding and maritime industries through ICT convergence. 8 As existing shipbuilding giants prepare for a new era of change, competition will grow even more intense in the future. Emerging technology will not only change ships. Shipyards will transform themselves into smart yards in order to improve productivity and safety. It will become more difficult to increase productivity through new technologies such as 24 Asian Steel Watch

27 Will the Shipbuilding Industry Flourish Again? a mega-block construction method. However, virtual reality and augmented reality (VR/AR) will improve efficiency at work, and virtual 3D engineering technology will reduce design errors. Workers will be able to operate in a safer work environment using smart helmets. Difficult manual jobs that require high levels of concentration, such as welding, painting, and grinding, will be gradually taken over by robots, leading to an improvement in productivity and quality at work. Qualitative changes in steel products and falling steel intensity With the development of ultra-large container ships, LNG-fueled ships, electric ships, CO₂ carriers, polar ships, and environmentally friendly equipment, the shipbuilding industry needs immediate qualitative changes. High-strength steel is a must for ultra-large and lighter ships, and high-strength low-alloy steel, such as POS- CO s high-manganese steel, is required for safe and affordable LNG and CO₂ storage tanks. High-efficiency electrical steel sheets for electric propulsion motors will be required rather than forged and cast steel for massive main engines. Demand for low-temperature toughness steel will rise for polar operations. There will also be a demand for steel materials for various environmentally-friendly equipment and devices. Such qualitative changes will influence steel intensity. As vessels become larger and lighter, the steel intensity of ship s tonnage will fall continuously, and then decline even further following the rise of electric propulsion, unmanned, Figure 5. Steel Intensity of Ship s Tonnage [2015 = 100] Larger & lighter (Ongoing trend) Source: POSCO Research Institute Note: Steel intensity = Steel demand for shipbuilding/gross tonnage (GT) Change of propulsion system & deckhouse design, etc. (New trend) and autonomous ships. Larger and lighter vessels will reduce steel intensity by 6% by If large diesel engines are replaced by electric motors after 2025, the weight of engines will be significantly reduced. No deckhouse is necessary for unmanned ships. With these, steel intensity will decline further by around 4%. With the advent of the world s largest ship, the Mearsk Triple-E 9 container ship, 20,000 TEUclass container ships have been booming. Since then, related shipbuilders and steel companies have been leading the ultra-large container ship market. As more technologies are available to choose from, investment decisions are inevitably delayed. However, once the validity of a certain technology is established, it will soon come to lead the market. Shipbuilders and steel companies able to support various types of ships and technologies will enjoy considerable benefits in the future. Therefore, the steel industry should devise various solutions in partnership with the shipbuilding, shipping, and marine equipment industries hardware/triple-e Vol.03 June

28 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Park Hyung-keun Principal Researcher, POSCO Research Institute Eyes on Energy Transition 1 World Energy Outlook 2016, IEA Global climate action The year 2016 was the hottest ever recorded in the history of meteorological measurement, but 2017 is already poised to break its record. It seems that it will be difficult to combat climate change without a concerted global response. At the COP21, held in Paris in 2015, 196 Parties agreed to work together to hold the increase in global average temperature to below two degrees Celsius above pre-industrial levels or even to limit the rise to 1.5 degrees Celsius. Well aware of the potential severity of the impact of climate change, many countries across the globe are already reducing their coal use and sparing no efforts in providing policy support to new and renewable energy and to electric vehicles (EVs). These multi-year efforts have already started to pay off: global CO₂ emissions have fallen since However, it is still far short of what will be required in order to reach the two-degree target. The International Energy Agency (IEA) forecasts an average global temperate increase of around 2.7 degrees Celsius by 2100, even with the implementation of existing global energy policies. Despite these concerns, global population growth and economic development are expected to drive energy consumption up. Even still, about 1.2 billion people will have no access to electricity in Today, humanity is caught in the dilemma of attempting to pursue both economic development and environmental protection. 1 Figure 1. Global Land-Ocean Temperature Index Temperatue anomaly(c) Source: NASA's Goddard Institute for Space Studies (GISS). Credit: NASA/GISS 26 Asian Steel Watch

29 Eyes on Energy Transition Figure 2. Primary Energy Demand by Fuel Type 81% 78% 75% 13,634 14% 5% 21% 15,341 16% 6% 22% 17,057 18% 6% 24% [Mtoe] Fossil Fuel Renewables Nuclear Gas 31% 30% 28% Oil Coal 29% 26% 24% Source: World Energy Outlook 2016, IEA Peak oil demand still under debate In October 2016, Fitch Ratings released a rather shocking report warning that EVs could send big oil companies into an investor death spiral. Soon thereafter global oil giants including ExxonMobil, Royal Dutch Shell, and Total also published sobering projections that oil demand would peak by around Coal, the classic fossil fuel energy source, provides a related example of what could happen. The bankruptcy of the largest coal mining enterprise, Peabody Energy, has convinced many investors that the coal industry is in a death spiral and is expected to reach peak demand by around In contrast, the natural gas market seems to be growing thanks to the development of shale gas and its replacement of coal. Opinions are mixed regarding peak oil demand. Some institutions are expressing a strong sense of urgency, as described earlier, while other long-term energy forecasters including BP and the International Energy Agency (IEA) expect that fossil fuels will still dominate through In 2016, the IEA, in its New Policies Scenario (the central scenario), predicted that energy consumption will rise by 30% by 2040 compared to 2014, while the share of fossil fuels within primary energy consumption will fall from 81% to 74% over this span. Despite this decline, fossil fuels will expand in terms of quantity of consumption, and will continue to play a dominant role in the energy sector. However, these forecasts could be quickly turned on their head if a sudden transition were to occur, impacted by such variables as the rapid distribution of renewable energy, widespread use of EVs, and a fall in energy demand driven by increased efficiency. Not alternative, but mainstream energy The atmospheric concentration of carbon dioxide should be maintained at 450 ppm to meet the two-degree Celsius target. This would allow the permissible carbon budget 3 to increase to 2 Oil Groups Threatened by Electric Cars, Financial Times, October 19, The sum of all exchanges (inflows and outflows) of carbon compounds between the earth s carbon reservoirs (such as land mass and the atmosphere) in the carbon cycle. (Source: Business Dictionary) Vol.03 June

30 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 3. Atmospheric CO ² Balance and Historic Concentration Level Fossil fuels& Industry 34.1 ± 1.7 Geological reservoirs Atmospheric growth 16.4 ± 0.4 Land-use change 3.5 ± 1.8 Land sink 11.5 ± 3.1 ( ) Ocean sink 9.7 ± 1.8 CO2 flux(gt CO2/yr) Fossil fuels and industry Land-use change Land sink Atmosphere Ocean sink Source: Global Carbon Project 4 The levelized cost of energy (LCOE) refers to a measure for calculating the lifetime total cost of an energy source. It includes initial capital and the discount rate, as well as the costs of continuous operation, fuel, maintenance and scrap (Source: Wikipedia) about 800 gigatonnes of CO₂ (GtCO₂). According to the trend in the global carbon dioxide budget over the last decade, CO₂ fluxes from fossil fuel and industry emissions stand at 34.1 GtCO₂/yr, and those from land-use change emissions at 3.5 GtCO₂/yr, while CO₂ absorption from land sink is 11.5 GtCO₂/yr and that from ocean sink is 9.7 GtCO₂/yr. This means a 16.4 GtCO₂ annual increase in CO₂ emissions. Although it is assumed that this trend will continue, the two-degree target for 2100 cannot be achieved within 50 years. The earth will evade a disaster only if it reaches carbon-neutral (or 100% carbon reduction) by As a response to global warming, renewable energy is increasingly being preferred. Wind power generated 140% of Denmark s electricity demand in 2015, and Germany broke a daily record for renewable energy by generating 85% of its power from renewable sources in April In the same month, the United Kingdom, the birthplace of the Industrial Revolution, generated a full day s electricity without coal. Global renewable energy capacity, mainly wind and solar power, increased from 20 GW in 2004 to 88 GW in 2010 and reached as far as 160 GW in Investment in renewable energy capacity, excluding large hydropower, has stood at twice that of fossil fuel generation over the last five years. The IEA has predicted that the share of renewables within global power generation is expected to rise from 23% in 2014 to 37% by It is fair to say that renewable energy is no longer alternative energy but in fact has entered the energy mainstream. This trend can be attributed to the rapid decline in renewable energy technology costs. The levelized cost of energy (LCOE) 4 of solar photovoltaic (PV) exceeded USD 100/kWh in 1980, but plunged to less than 3 cents/kwh in 2016 (Fotowatio Renewable Ventures, Mexico). In addition, the LCOE of onshore wind also reached three US cents per kilowatt hour in 2016 (Enel Green Power, Morocco) and that of offshore wind recorded 5.3 cents/kwh in 2015 (Vattenfall, 28 Asian Steel Watch

31 Eyes on Energy Transition Figure 5. Non-conventional Energy Resources and Oil Price Balance Energy Source Diversification Figure 4. Electricity Generation by Fuel Type 3% 3% 23% 23,226 1% 17% 11% 68% 30% 28,537 4% 7% 3% 17% 12% 35% 34,353 5% 10% 5% 17% 12% 60% 56% Source: World Energy Outlook 2016, IEA [TWh] Total electricity Renewables Nuclear Gas Oil Coal Fossil Fuel Oil Price Balance Deep Water Deep-water 30 USD/bbl Source: Rystad Energy Cost Curve, April 2016 Shale Oil Non-conventional Shale Oil Oil Sands Oil Sands Producing Fields (Geopolitical Uncertainty) Denmark). This means that renewable energy has achieved grid parity, the point at which the cost of alternative energy becomes equal to or less than electricity from conventional energy without subsidies. 5 Oil market reaching a new balance Influenced by the shale oil revolution, oil prices have spiraled down due to energy hegemony competition, unstable political conditions in the Middle East, and economic slowdowns, but they seemed to pick up recently thanks to last year s OPEC agreement to cut oil production. However, the boom soon returned to bust as U.S. shale-oil enterprises rapidly increased production following the rise of oil to above USD 50/barrel. Currently, OPEC members, including Iran, are poised to extend production cuts in order to support a market recovery. The IEA has predicted that global oil supply could lag demand after 2020 due to stalled investment in oil production over the last few years. On the Steel companies must target new markets by developing innovative steel products for the micro-grids and energy storage systems which will grow alongside renewable energy. other hand, some view this era of low oil prices as the new balance in the midst of a slow global economic recovery and slack demand stemming from increased energy efficiency, enhanced fuel economy, and the widespread use of EVs. In the past, oil prices were determined by shifting political circumstances in oil-producing countries, but today shale oil production buffers prices as U.S. companies are able to rapidly increase production in response to any oil price increase. Although many uncertainties have disappeared, the oil market can still swing at any time given its com- 5 Bloomberg New Energy Finance Summit, M. Liebreich, BNEF, April 25, 2017 Vol.03 June

32 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Drilling Rig Figure 6. Cumulative Energy Investment [USD trillions] Expected New Power Capacity 2,808 GW Platform Pipes Wind Towers Tower Blades Rotor Other renewables Wind Transportation Storage Tubing Casing Plates Vessels Cables 23.9 Fossil fuels (primary) Fossil fuels (power) Nuclear Renewable T&D Solar Panels Frames Stainless Backsheet T&D Tower Structure Cables 68% Solar PV Hydro Nuclear Fossil Fuel Refining Fossil Fuel Market Power Generation Market Source: World Energy Outlook World Energy Outlook 2016, plex nature. Furthermore, oil prices are a key factor for determining the scale of investment in fossil fuels and have a profound impact on the automotive market, such as the distribution of renewable energy and the popularity of SUVs. Therefore, a careful watch must be kept on fluctuations in oil prices. Energy investment and steel products As seen in Figure 6, energy investment is mainly made in two sectors: the fossil fuel sector, including exploration and production (E&P), transportation, storage, refining, and petrochemical production; and the power sector that generates electricity based on coal, gas, nuclear, and renewable sources. IEA According to the IEA, cumulative global energy investment is expected to reach USD 43.6 trillion during the period, USD 23.9 trillion of which will be dedicated to the fossil fuel sector, and the remaining USD 19.7 trillion to the power sector. In detail, electricity transmission and distribution (T&D) takes up the lion s share (USD 8.1 trillion) of energy investment in the power sector, half of which is occurring in China due to its vast land area and continuous demand for development. As T&D includes renewable energy grids and energy storage systems, investment in this category is expected to make up an even more meaningful share in the future. Renewables investment in the power sector is projected to reach USD 7.5 trillion, twice the USD 2.7 trillion investment in fossil fuel Asian Steel Watch

33 Eyes on Energy Transition Table 1. Application of Steel Products for the Development and Production System of Sub-sea Wells for Oil and Gas Figure 7. Schematic Drawing of Jack-up Rig and Steel Products Process Equipment/Plant Steel product used Development Drilling rig Drill pipe Casing, Riser pipe High tensile strength steel plates(marine structures) Extraction/ Production Transportation Storage Refining Plant Power generation Platform Marine transportation Oil tanker Liquefied natural gas (LNG) carrier Pipeline Oil tank Gas holder Plant piping Heating furnace piping Pressure vessel Superheater piping Tubing, Casing, Linepipe(Flow lines, Gathering lines) High tensile strength steel plates(marine structures) Steel products for shipbuilding, Corrosion resistant materials for shipbuilding Linepipe Plates for linepipe High tensile strength steel plates Special tubes(cr-mo Steel) High tensile strength steel plates Clad steel plates Special tubes(cr-mo Steel) Marine structual materials Riser pipe Drill pipe Casing Drilling Rig Sea surface Sea bottom Source: Steel Products for Energy Industries, JFE Technical Report, Mar Source: Steel Products for Energy Industries, JFE Technical Report, Mar In the fossil fuel sector, a wide range of steel products such as pipes, tubes, plates and cables are used for transportation, including for drilling rigs, offshore platforms, and LNG ships, as well as for storage and refining facilities. An offshore platform has a topside weight of over 20,000 tons and deep-sea platforms reach a depth greater than 2,000 meters. To meet the harsh conditions they must withstand, steel materials for offshore platforms have developed in terms of both quality and quantity. The renewable energy sector is also adopting various types of steel products. The tube tower, which accounts for 65% of the weight of a wind turbine, is made mainly of steel, while thin stainless steel sheets and frames are required for solar panels. This wide application of steel products offers additional business opportunities to steel companies. The T&D sector, including high-voltage transmission towers, is also traditionally steel intensive. Steel companies must target new markets by developing innovative steel products for the micro-grids and energy storage systems which will grow alongside renewable energy. Vol.03 June

34 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Kim Hoon-sang Senior Principal Researcher, POSCO Research Institute Future Cities and Changes in Steel Materials Urbanization, the key driver for the construction industry The megatrend of urbanization is a key driver in the development of the global construction industry. The global proportion of the urban population increased from a mere 29% in 1950 to surpass that of the rural population in By 2050, about 9.5 billion people, or 66% of the global population, is expected to reside in urban areas. This means that the number of urban dwellers will increase by an annual average of 100 Figure 1. Global Urban and Rural Population (million people) Urban Rural 7,000 6,000 5,000 4,000 3,000 2,000 1, Source: World Urbanization Prospects, United Nations, million people. Urbanization will further accelerate in the future with rapid industrialization in developing countries and the shift to a knowledge economy in advanced countries. Urbanization aggravates existing urban concerns such as housing, transportation, water supply and sewage, and electricity provision, which in turn stimulates investment in construction. Global construction investment stood at roughly USD 9 trillion in 2015, but is expected to increase by a CAGR of 2% to USD 13.4 trillion by Notably, growth in global construc- Figure 2. Global Construction Investment % 2.6% 2.0% 2.5% 1.6% % 1.0% 2.2% 2.4% 1.8% Source: POSCO Research Institute based on IHS Markit (USD trillions) Plant Commercial Infra Residential 32 Asian Steel Watch

35 Future Cities and Changes in Steel Materials Figure 3. The Rise of New Urban Trends Urbanization Growing Cities Commercial, Infrastructure etc. Mega Cities Large Structures Buildings & Bridges Smart & Green Cities IoT connected infrastructure, Recycle, Reuse Four billion people among the world s population of 7.3 bil. live in cities ( 15) tion investment will vary by sector: investment in residential, commercial, and infrastructure construction will soar, while plant construction investment will lag historical performance, following a shift of focus to new and renewable energy in response to global warming and environmental pollution. Emerging urban trends megacities, green cities, and smart cities Within the overall shift toward urbanization, megacities, green cities, and smart cities are emerging as new trends. In the future, there will be an increasing number of megacities with 10 million or more inhabitants, smart cities drawing on the Fourth Industrial Revolution, and green cities that consume fewer resources and recycle more. 1 Megacities Rising higher and further The number of megacities with populations of more than 10 million is expected to increase by 32.3% from 31 in 2016 to 41 by Likewise, the number of cities with more than 500,000 poeple will increase by 31% from 1,063 in 2016 to 1,393 by 2030, according to the World's Cities in 2016, United Nations. As the competition paradigm shifts from competition among countries to competition among cities, many countries are actively crafting policies to develop their cities as globally competitive megacities. In April 2016, Saudi Arabia formulated its Long-term Strategy 2030 (Vision 2030) and released related five-year action plans. Under this Vision 2030, Saudi Arabia plans to have three of its cities recognized among the top-ranked 100 cities in the world.1 The rise of megacities through competition among cities is well reflected in the construction of landmark skyscrapers. The number 1 of supertall buildings over 300 meters tall 2 doubled between 2012 and According to the Council on Tall Currently, 100 supertall buildings are Buildings and Urban Habitat, under construction around the world. supertall buildings are defined as This figure is expected to double to 200 buildings of 300 meters or higher. Vol.03 June

36 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 4. The Sky Mile Tower in Tokyo Source: en.wikipedia.org by plug.hani.co.kr/futures As of 2017, the world s tallest building is the Burj Khalifa in the UAE at 828 meters height and 163 stories. This structure was designed to be the centerpiece of a large-scale, mixed-used development that includes apartments, hotels, offices, department stores, and shopping centers. In addition to land use efficiency, global warming is accelerating the demand for skyscraper construction. Experts warn that if sea levels rise by just one meter, many major low-lying coastal cities including Shanghai and Tokyo could be submerged, suggesting supertalls as a potential response. The Sky Mile Tower, which has been proposed for the Tokyo of the future, could reach as high as 1,700 meters, or twice the height of the Burj Khalifa. This mega-tall building scheduled to be constructed by 2045 is viewed as a response to rising sea levels. It could hold roughly 500,000 people, including 55,000 residential units, shopping malls, restaurants, hotels, gyms, and medical centers. Japan has even gone as far as envisioning a self-contained high-rise city that could house over one million people the X-Seed Currently there are technical obstacles to constructing such a mega-tall building reaching a whopping 4,000 meters and 800 stories. If construction technologies and advanced construction materials are developed, this structure could become a reality. This mountain-like building towering thousands of meters high is imagined as a space isolated from the ground. Future forecasts predict that cities in the air, secluded from the land, will loom large in a mega-tall building boom. Population increases, urban expansion, rising land prices, and resource shortages will last until the end of 21st century, eventually driving up the height of buildings. 3 2 Green cities Go greener Ozone depletion, climate change, and energy and resource exhaustion can undermine the sustainable development of humanity and degrade the quality of life of urban dwellers. With a growing sense of obligation to improve the environment, the paradigm is shifting to eco-friendly cities. Construction materials will be recycled or used in smaller quantities, and buildings will be restored or rebuilt rather than being constructed from scratch. Leadership in Energy and Environmental Design (LEED), a rating system that is recognized as an international mark of excellence for green buildings by the U.S. Green Building Council, is now being applied to only some new buildings, but it will soon become more wide- 34 Asian Steel Watch

37 Future Cities and Changes in Steel Materials spread and provide mandatory standards for all building designs. A transition to green cities will provide a wealth of business opportunities to private enterprises. Companies will be able to diversify their businesses to the development of eco-friendly technologies and construction materials for reducing environmental impact, new and renewable energy development, and zero-energy houses, contributing to the development of greener and safer cities. Public investment in traditional construction efforts such as roads and bridges will be reduced, but will increase for green sectors such as railways, green energy, and green public construction. The green city concept is reflected in solar- City in Linz, Austria. This is an eco-friendly and energy-efficient residential district designed for sustainable development under Linz City s Lokale Agenda 21. Linz City provides subsidies for solar installations for heating and power generation and rainwater harvesting systems. Already, onethird of heating within solarcity is provided using solar energy, and the rest comes from renewable energy generated by waste incineration.4 In addition to eco-friendly residential districts like solarcity, vertical urban farms are another interesting example of green city techniques. Vertical farming is the practice of producing food in vertically stacked layers. As nature has been devastated by the ever-expanding agricultural production required by increasing populations and food shortages, vertical farming is emerging as an alternative response. Using eco-friendly energy, vertical farming can achieve high productivity throughout the year without suffering damage Figure 5. An Example of Vertical Urban Farm Source: shutterstock.com from climate abnormalities or blights and harmful insects. 3 Smart cities Cities becoming smarter The construction industry is a product of integration and convergence. This field requires the involvement of a great number of backward-linked industries such as design, engineering, technology, and equipment to build structures on demand, and also has high forward-backward linkage effects. Information Technology (IT) represents the type of industry from which the construction industry can seek convergence to create added value and stake an early claim to new markets. One case in point is smart cities. A smart city is defined as a city that integrates IT technology within the operations of the city to maximize efficiency in urban functions such as energy use, transportation, and risk reduction. In the past, 4 Urban Renewal Projects in Linz, Australia, Kim Sang-won, August 2015; Linz Life ( english/life/3199.asp) Vol.03 June

38 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 6. Smart City Construction and ICT Buildings Human Beings Cars Machines Devices Other assets City system: Transportation Water, energy... Heating, cooling Material cycles Surveillance and security Material cycles Communication Remote monitoring Diagnostics and fault detection Automation solution Energy grid and power meters Database Data Infrastructure Information and Communication Technology (ICT) Source: Smart City Concept, Applications and Services, Telecommunications Systems & Management, March 2014 the problems of cities were solved by hardware techniques such as new construction, but smart cities provide software solutions for urban problems by collecting big data via sensors on smart platforms, analyzing big data using AI, and realizing an optimal distribution of resources. This integration and convergence taking place between construction and IT will continue to progress from the adaptation of new technology to the transformation of production structures and systems in construction. For example, 5D Building Information Modeling (BIM) and 3D printing will be applied on a commercial scale to construction. Steel materials will become stronger and lighter, and even intelligent steel materials equipped with RFID tag technology will be broadly adopted in the construction industry. A smart city has two main characteristics: digital transformation and energy revolution. From the digital transformation perspective, conventional cities can evolve into IoT-based, hyper-connected localities, bringing massive transformations to people s lifestyles. Intelligent infrastructure and automation design and engineering will be significantly advanced using AI. In terms of energy revolution, environmentally-friendly carbon-free ecological cities will emerge. Carbon-free, zero marginal cost cities with a high utilization of new and renewable energy will be further expanded. In addition, cities will be able to maximize energy efficiency by using energy storage systems (ESS) and energy circulation systems. The concept of a smart city has been evolving out of the notion of a digital city in the 1990s and ubiquitous city in the 2000s. With the rising awareness of IT innovation, energy, and the environment, the smart city has become a subject of tremendous attention. It is clear that smart cities will be rapidly expanding in the future, fueled by technological development in platform and data analysis and rising demand for urban development in emerging countries. China has recently declared the official launch of smart city projects and is advancing the sophistication of its smart cities using cutting-edge AI technology based in Google s deep learning. India has also announced 36 Asian Steel Watch

39 Future Cities and Changes in Steel Materials Figure 7. Steel Intensity of Construction Investment The emerging trends of megacities, green cities, and smart cities closely interwoven with the ongoing trend of urbanization will spark innovation in construction products and technologies Source: POSCO Research Institute, Note: Steel intensity = Steel demand for construction Construction investment a plan to construct smart cities to get its Smart Cities Mission on track. Qualitative and quantitative changes in construction steel materials In the future, the emerging trends of megacities, green cities, and smart cities closely interwoven with the ongoing trend of urbanization will spark innovation in construction products and technologies. This will require new steel products for construction as well as new materials. As societies increasingly require advanced construction products to suit emerging trends, construction steel demand will change as follows. First, conventional steel materials for construction, such as steel bar and section, will have their functionality improved to include increased strength, higher thermal conductivity, and better sound isolation. To enhance performance, they will also be developed as composite materials (i.e. composite materials made of steel bars and concrete). Second, new materials such as carbon nanotubes and shape memory alloys will be widely deployed in construction processes. The utilization of high-functional new materials in construction will allow and accelerate megatall, eco-friendly, and smart construction products. Under ongoing and emerging trends, construction investment has resulted in a qualitative diversification of steel construction materials. However, quantitative demand, or so-called steel intensity, which refers to steel demand divided by construction investment, is expected to decline. Despite urbanization, construction costs excluding steel, such as labor costs, are rising compared to the past. High-strength steel materials will be increasingly used for supertall buildings and super-long-span bridges in megacities; therefore, steel content per the unit of construction investment is expected to decline. Moreover, construction costs will be redirected to intelligent devices such as IoT and sensors in smart cities and away from steel. As a result, steel intensity (Base 2015 = 100) will gradually decline to 91 by 2025 and 84 by Vol.03 June

40 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Dr. Hang Cho Senior Principal Researcher POSCO Research Institute Dr. Moon-Kee Kong Senior Principal Researcher POSCO Research Institute The Steel Industry over the Next Two Decades 1 Steel intensity is defined as the amount of steel used per unit of production or investment. This article comprehensively reviews how megatrends in the major steel-consuming industries as explained in the preceding articles will impact the global steel industry. Fundamentally, the global steel industry will face the following four challenges over the next twenty years, driven by a continuous rise in global steel demand; slowing steel demand growth due to decreasing steel intensity; a need for more advanced steel products; upgrading to eco-friendly and smart steelmaking processes; and changes in manufacturing based on the Fourth Industrial Revolution. Slowing steel demand growth with decreasing steel intensity An industry-wise approach is used to forecast global steel demand: steel demand in each steel-consuming industry is projected and then combined in order to estimate total steel demand. To this end, production and steel intensity 1 in each of the four major steel-consuming industries are projected through 2035 as shown in Table 1. By multiplying production amount (or investment amount) by steel intensity, the steel demand for each industry can be calculated. In the automobile industry, global production is expected to grow at a compound annual growth rate (CAGR) of 1.6% through 2035, but steel intensity per vehicle is projected to fall by about 20% by 2035 compared to This means that it will be difficult for steel demand in the automobile industry to increase. The same is true for the shipbuilding industry, but steel demand in this sector is indeed expected to grow slowly since shipbuilding demand is estimated to recover starting around 2025 and the decline in steel intensity will remain around only 10%. In the case of the construction industry, a steady increase in global construction investment will offset the decline of its steel intensity, leading to a stable overall increase in steel demand. In the energy sector, there will be only slight changes in steel intensity and energy investment, so steel demand will follow suit. 38 Asian Steel Watch

41 The Steel Industry over the Next Two Decades Combining all accounts, the global steel demand forecast is shown in Figure 1. With the emerging trends of global climate action and the Fourth Industrial Revolution as already described in other articles, global steel demand will continue on a path of expansion, although the growth rate will moderate. From 2016 to 2025, steel demand will grow at a CAGR of 1.2%, while for the succeeding decade it is expected to remain at 0.9%. By industry, the construction industry will be a main driver for lifting steel demand. Steel demand in the construction industry will increase rapidly to reach 920 million tonnes (Mt) in 2035, accounting for almost 50% of total steel demand. However, steel demand in the automotive and energy industries will just be maintained, while steel demand in shipbuilding will expand moderately after Steel demand in other sectors such as machinary and domestic appliances is not analyzed in detail. However, as a result of regression analysis using industrial production index forecast, it should rise by around 1%. All in all, global steel demand will reach 1.69 billion tonnes by 2025 and 1.86 billion tonnes by Therefore, it can be concluded that global steel demand has not yet peaked and will not do so within the next two decades. The steel industry will inevitably progress from the quantitative growth of the past twenty years to a future of qualitative growth. The global steel industry must astutely overcome the challenges. A need for more advanced steel products The second challenge facing the global steel industry is how it will properly respond to steel-consuming industries stricter and more diverse requirements for steel products under the influence of evolving megatrends. Their needs will become more sophisticated mainly in three areas: high strength and high toughness, high corrosion resistance, and high performance. These were of course requirements in the past, but today steel-consuming industries need even higher-strength and more corrosion resistant steel with better performance than ever before. Table 1. Forecast of Production and Steel Intensity of Steel-Consuming Industries Production (mil. unit) Note: Steel intensities are normalized (2015 = 100) Automobile Shipbuilding Construction Energy Steel Intensity New Orders (mil. GT) Steel Intensity Investment (USD Tril.) Steel Intensity Investment (USD Tril.) Steel Intensity Vol.03 June

42 FUTURE MEGATRENDS AND THE STEEL INDUSTRY In the automobile industry, weight reduction has become a central issue due to demanding environmental and fuel economy regulations. Highstrength steels are increasingly being adopted in response to stricter collision regulations. To meet such requirements, steel companies have developed and expanded the application of highstrength steels through joint research on minimizing the weight of a vehicle s body, including the Ultra Light Steel Auto Body (ULSAB) Program in 1994, the Ultra Light Steel Auto Body-Advanced Vehicle Concepts (ULSAB-AVC) Program in 1999, and the Future Steel Vehicle (FSV) in Auto steel has continuously improved in strength, reaching 450MPa in ULSAB, 1GPa in ULSAB-AVC, and 1.5 GPa in FSV. GigaPascal steels have already been adopted in Dual Phase (DP), 2 Complex Phase (CP), 3 and Hot Press Forming (HPF) 4 steels for 2 DP steels consist of a ferritic matrix containing a hard martensitic second phase in the form of islands. Increasing the volume fraction of hard second phases generally increases strength. 3 CP steels contains small amounts of martensite, retained austenite and pearlite within the ferrite/bainite matrix. In comparison to DP steels, CP steels show significantly higher yield strengths at tensile strengths of 800MPa and greater. 4 HPF is the combination of press-hardening applications and hardenable steels. In this process, conventional boron steel is heated to about 880 to 950 C, formed hot and then cooled, i.e. hardened, in the die. Figure 1. Global Steel Demand Forecast Other Energy Shipbuilding Automobile Construction (Mt) 1, CAGR 1.2% 1, CAGR 0.9% [ 16-35] 1, % Source: POSCO Research Institute Note: 1) Shipbuilding sector includes other transportation, 2) Demand for other sectors is forecast using industrial production index % -0.2% 2.3% 0.3% 1.2% the FSV projects currently underway. Moreover, most flat products used for automobiles are highstrength flat products. However, the stronger the steel becomes, the more its formability is reduced. POSCO has recently mass produced twinning-induced plasticity steel TWIP 5 to provide both strength and ductility. Ensuring corrosion resistance is one of the ultimate goals of the steel industry. High-resistance stainless steel 409L is used for automotive exhaust systems, including mufflers, in order to withstand thermal oxidation. Its application has recently expanded to exhaust manifolds since the manifold is close to the engine and thus exposed to high temperatures. Heat-resistant products such as 429EM, High Cr, and 310S are being used for manifolds. In addition, demand is rising for steel products with more diverse functions, such as hyper non-oriented (NO) electrical steel for the motors of electric vehicles and bio-shield and vibration damping steel for sensors. In the energy and shipbuilding industries, the development, production, and transmission of oil and gas are increasingly being conducted under extreme conditions such as deep underwater and in the Arctic. High-strength and high-toughness steels are required for standing up to such harsh environments. As offshore structures become larger, they require ultra-thick steels and highstrength steels with yield strengths of over 500 MPa. High fracture toughness steel must withstand extreme cold weather with temperatures below -60 C to be used in the polar regions. In particular, brittle crack-arrest steel is being developed and used to provide facture toughness in 40 Asian Steel Watch

43 The Steel Industry over the Next Two Decades Table 2. Requirements for Steel Products by Steel-consuming Industry Automobile Energy/ Shipbuilding Construction High strength & high toughness Expanded application of giga-pascal AHSS for lighter cars DP, CP, HPF, TWIP, etc. High strength & low-temperature toughness steel for deep-sea & polar exploration BCA, TMCP, etc. High strength steel for skyscrapers/ super-long span bridges High strength reinforced bar, section, cable High corrosion resistance Heat resistant Stainless steels for exhaust systems 429EM, high Cr, 310S Sour(H2S) resistant steel for extream conditions API steel for linepipe High corrosion resistant steel for high temperature, high humidity environ. PosMAC, ZAM, Super Dyma, etc High performance Highly efficient hyper NO for EV motors, bio-shield steel for sensors, vibration damping steels Thick plate for offshore wind towers, radiation shield plate for nuclear power plants High performance steel for interior/ exterior building applications Thermal insulation, self-cleaning, anti-bacterial, sound-proof the welded joints of shipbuilding steel. Line pipe steel also needs to become stronger to withstand increasing pressures and reduce the use of steel; API (American Petroleum Institute) X80 grade steel is consequently being increasingly adopted for line pipes. Furthermore, demand is also rising for ultra-thick and high-deformability steel to improve low-temperature toughness (to -20 C) for the deep-water environment or for resistance to seismic ground movement. For the shipbuilding industry, vessels are increasing in scale and ships such as container ships, tankers, and bulk carriers require high-strength and ultra-thick steel to hone shipping efficiency and high-toughness steel to enhance the safety of structures. In the meantime, line pipe steel is exposed to different forms of corrosion as oil or natural gas is transmitted from production bases to customers. Particularly in a sour environment in which hydrogen sulfide (H2S) is present as an impurity in oil or gas with water, steel materials become prone to cracking and must be resistant to Hydrogen-induced Cracking (HIC) and Sulfide Stress Corrosion Cracking (SSCC). Radiation shield plates are used in nuclear power plants, and ultra-thick plates are applied in the wind turbine towers that account for more 5 TWIP (Twinning-Induced Plasticity) steel is a class of austenitic steels which can be deformed by both glide of individual dislocations and mechanical twinning. Figure 2. Lightweight Autobody Projects ULSAB ( 94~ 98) ULSAB-AVC ( 99~ 02) FSV ( 08~ 20) UltraLight Steel Autobody Developed by 35 steel companies around the world 25% weight reduction using the TWB technique, HSS, and UHSS UltraLight Steel Autobody- Advanced Vehicle Concepts Developed by 33 steel companies around the world CO ² 140g/km, 20-30% weight reduction through concept design of entire vehicle Future Steel Vehicle Developed by 16 steel companies around the world Aims for 35% weight reduction with an optimal structure for application to future vehicles (PHEV, EV, and FCEV) Vol.03 June

44 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 3. Adoption of High Strength Steel in ULSAB, ULSAB-AVC, and FSV Table 3. Steel Use Proportion in FSV Steel type Share Body Structure MAss(kg) Source: World Auto Steel ULSAB ULSAB-AVC FSV Tensile Strength (MPa) Mild Steel 2.6% HSLA 450/BH % Mart % DP 500& % DP % DP % TRIP % TWIP % CP % HF % than 80% of the components for erecting a wind turbine. As wind power becomes widespread, more high-strength and high-toughness steel will be adopted. In the construction sector, steel materials must become stronger and more corrosion-resistant to meet safety concerns and for the reduction of life-cycle costs. As buildings become higher and larger and bridge spans grow longer under the trend toward megacities, high-strength steel materials are gaining ground. In the case of South Korea, 800 MPa high-strength steel was used for trusses and columns in the 120-story (555-meter) Lotte World Tower, and 2.1 GPa steel cables were applied in the Yi Sun-sin Bridge with its main span length of 1,545 meters. Cost-saving efforts are being expanded across the construction industry by developing engineering technologies that simplify construction design and execution and by selecting optimized materials able to extend the lifespan of buildings and structures. A representative steel material is weathering steel developed by US Steel, often referred to by the generalized trademark COR-TEN. This material is allowed to rust in order to form a protective coating and improve corrosion resistance. With no need for painting, it is cost-effective and provides a pleasing rustic antique appearance. Recently, titanium is also being used for a coating. With the rise in the cost of zinc, highly corrosion-resistant but affordable steel materials are gaining prominence. One case in point is hot-dip Zn-Mg-Al alloy-coated steels, such as Nisshin ZAM, NSSMC Superdyma, JFE Ecogal, and POSCO PosMAC. By adding aluminum and magnesium to the coating, hot-dip Zn-Mg-Al alloy-coated steel achieves the same performance while using 50-70% less zinc than conventional hot-dip galvanized steel. It can be widely utilized in housing components, podiums, cattle sheds, shutters, and electronics and automobile components. In addition, steel products with various functions, such as thermal insulating, self-cleaning, anti-bacterial, and sound-proofing qualities, 42 Asian Steel Watch

45 The Steel Industry over the Next Two Decades Figure 4. The Lotte World Tower and the Yi Sun-sin Bridge in Korea Source: shutterstock Source: tour.yeosu.go.kr are being developed as internal and external construction materials. Upgrading to eco-friendly and smart steelmaking processes The rising megatrend of global climate action will compel steelmaking processes to become more eco-friendly. In the face of environmental concerns, the steel industry has been attempting to advance energy-saving and recycling technologies and develop new steelmaking processes to replace the conventional blast furnace (BF) operations. Such efforts will continue in the future. Various types of energy-saving technologies are being developed for BF, which consume the largest share of energy in the steel-making process. Hot oxygen injection is a technology in which oxygen is directly injected into the BF to improve productivity by 15% compared to a conventional BF. Developed by the U.S. Department of Energy (DOE), the technology is currently in the pilot stages. Blast furnace heat recuperation recycles the BF exit gas at a temperature of 250 C into a burner to preheat stove combustion air. This technology reduces fuel costs and heightens fuel efficiency, although the effects differ with the scale of the BF. Research into this technology began in the 1980s and a demonstration plant has been developed. In addition, plasma blast furnaces apply plasma, which is widely used in the chemical and metal industries, to the BF process to minimize metal losses. The technology was primarily developed by the European Steel Association and has already completed validity testing. One of the major themes of research into the steelmaking process is recycling slag, dust, and other surplus oxides generated as waste materials during steelmaking. The U.S. Department of Energy (DOE) and the Massachusetts Institute of Technology (MIT) have conducted joint research on methods for increasing the iron recovery rate from slag. Japan s JFE Steel has performed research on technologies for recycling steelmaking slag into marine blocks. These two Vol.03 June

46 FUTURE MEGATRENDS AND THE STEEL INDUSTRY Figure 5. Development of the Future Steelmaking Process Energy Saving Recycling Hot Oxygen Injection BF Heat Recuperation Plasma BF BF Slag Heat Recovery Basic Oxygen Furnace Slag RHF Dust Recycling Recycling of Waste Oxides in Steelmaking Furnace Carbon Capture Carbon Free Advanced Direct Reduction with Carbon Capture and Storage (ULCORED) Carbon Capture & Storage Technology Hydrogen Reduction Process New Iron-making Processes FINEX COREX Tecnored ITmk3 Source: POSCO Research Institute research on technologies to separate iron and zinc from the dust generated in a rotary heat furnace. The DOE and Advanced Industrial Science and Technology (AIST) are developing technologies to reduce waste oxides in the steelmaking process and improve the iron recovery rate. Furthermore, new iron-making technologies are being developed to replace the conventional BF, including POSCO s FINEX, Siemens VAI s COREX, the Tecnored process, and Kobelco,s ITmk3. These processes use fine iron ore or pulverized coal to reduce energy use and minimize hazardous substances such as SOx and NOx. To address environmental concerns, the steelmaking process must not only adopt energy-saving and recycling technologies and new alternative technologies, but also focus on reducing carbon dioxide emissions. In the short term, carbon dioxide capture technologies can be applied to each process to reduce CO₂ emissions, but for the long term the steel industry is gearing up to develop carbon-free technologies such as the hydrogen reduction process. Creating value through a smart transformation using IoT, Big Data and AI Another emerging megatrend is Industry 4.0. This refers to the Fourth Industrial Revolution, which succeeds the First Industrial Revolution triggered by the advent of steam engines in the 18th century, the Second Industrial Revolution characterized by mass production in the early 1900s, and the Third Industrial Revolution brought about by plant automation in the 1970s. The key characteristic of the Fourth Industrial Revolution is the digitalization of manufacturing using advanced ICT technologies, including big data and AI. It involves a more gradual evolution compared to the past industrial revolutions that brought about more sudden and radical shifts. The advancement of ICT technologies will in the future convert steel plants into smart factories. Smart steel plants collect data on-site using IoT (smart sensing), analyze and predict the status of production processes based on big data (smart analytics), and optimize production while using AI 44 Asian Steel Watch

47 The Steel Industry over the Next Two Decades Figure 6. Smart Transformation in the Steel Industry SmartSensing SmartAnalytics SmartControl Connected On-site data collection using IoT Data-driven Analysis & forecast based on big data Intelligent AI-based optimization and autonomous control of entire processe Automation Enhanced efficiency in process using computer technology Smartization Improved competitiveness through smartization of all work processes by employing big data & AI Smart Solutions Integrated smart processes to bring transformation and create profits "New Values" Improving competitiveness Creating new business value Source: POSCO Research Institute to automatically control the overall process. The smartening of the steel industry will be most effective in three areas: advanced factory automation, smart manufacturing system, and internalization of know-how. Advanced Factory Automation: Wireless measurement and monitoring, including temperature measurement using sensors, robot scarfing, and autonomous cranes using location recognition sensors and software Smart Manufacturing Systems: Prediction of potential production defects and facility malfunctions using big data, effective production scheduling using AI, and integration of facilities and systems at steel plants via IoT (current manufacturing execution systems are separately operated by plants) Internalization of Know-How: Converting implicit knowledge into explicit knowledge in the form of manuals, and improving work styles through the realization of smart workplaces. Smart Factories are anticipated to bring about a great number of benefits: reduction of product error rates and decision-making time, inventory minimization, enhancing facility maintenance, reduced number of accidents, and quicker response to errors. Such positive effects will immediately result in cost reductions. The concept of smart factories in the steel industry will develop from automation to smartening. Smart factories will have to integrate each smart process at the enterprise level in order to maximize efficiency and develop new profit-making models using smart solutions to create value for customers. The steel industry will inevitably progress from the quantitative growth of the past twenty years to a future of qualitative growth. To this end, the steel industry needs to boost capabilities for smart transformations and continuous product and process innovation; and build a sound steel ecosystem by strengthening partnerships with steel-consuming industries and seeking open innovation in the development of steel products and solutions. The global steel industry must astutely overcome the challenges of the future in order to remain a key industry. Vol.03 June

48 INTERVIEW with worldsteel Chairman Beyond Survival to Success John J. Ferriola Chairman, Chief Executive Officer and President of Nucor Corporation, Chairman of worldsteel Mr. Ferriola joined Nucor Corporation in He became President and Chief Operating Officer and a member of the Board of Directors in January On November 16, 2012, Nucor announced that its Board of Directors had elected John to the position of Chief Executive Officer and President, effective January 1, Mr. Ferriola currently serves as Chairman of worldsteel and Chairman of the Board of Directors of the American Iron & Steel Institute (AISI). John also serves on the Board of Directors of the National Association of Manufacturers (NAM). He has been active in the Association for Iron and Steel Technology (AIST) for over 20 years and previously served on its board of directors. John Ferriola (center) with teammates from Nucor Steel Decatur, LLC 46 Asian Steel Watch

49 Beyond Survival to Success Q: Please describe the business, core value, and vision of Nucor in brief. A: Nucor Corporation is North America s largest steel producer and recycler, with approximately 200 facilities in the United States and Canada. We operate 25 scrapbased steel production mills in 17 U.S. states. Nucor s steel mills are among the most modern and efficient mills in North America, and have an annual production capacity of 26 million tons. We lead the industry in tons of steel produced per employee. Nucor and its divisions produce a comprehensive range of products including carbon and alloy steel in bars, beams, sheet, and plate; steel joists and joist girders; steel deck; cold finished steel; steel fasteners; hollow structural steel tube; steel electrical conduit; and metal building systems. Nucor also owns the David J. Joseph Company, which processes scrap metal, and owns and operates two direct reduced iron (DRI) plants one in Louisiana and the other in Trinidad. Additional companies in the Nucor family include Skyline Steel, a premier manufacturer and supplier of steel foundations, and Harris Steel, which is North America s largest rebar fabricator. Our 24,000 teammates are the company s greatest asset. We are all dedicated to taking care of our customers by being the safest, highest quality, lowest cost, most productive and most profitable steel and steel products company in the world. At Nucor, we value innovation. We believe the teams at each mill know their cus- Nucor s history is one of those that changed the U.S. steel industry through innovation. In 1969, we began operating our first electric arc furnace steel mill in Darlington, South Carolina. We were the first company in the U.S. to exclusively use EAFs to make steel. tomers and their operations best, and we give them a great deal of freedom to make decisions about how they should run their mills. This decision making authority, along with our pay-for-performance incentive pay system, helps drive innovation. We have also never laid off a teammate at one of our steel mills because of a lack of work. This practice allows us to keep the experience and knowledge our teammates have acquired while working for us. Q: Nucor is an icon of innovation in the steel industry. Please share the technological prowess that Nucor has achieved so far. What was the secret of success? A: Nucor s history is one of those that changed the U.S. steel industry through innovation. In 1969, we began operating our first electric arc furnace (EAF) steel mill in Darlington, South Carolina. We were the first company in the U.S. to exclusively use EAFs to make steel. Many people thought Vol.03 June

50 INTERVIEW For the last few years, we have focused on moving up the value chain to produce steel products that meet the most demanding quality specifications. Some of these valueadded products have required us to substitute scrap metal for other iron units. One of those substitutes is DRI. we would only be able to make the most basic types of steel by using scrap metal, but throughout our history we have proved the skeptics wrong. Today, we are North America s most vertically-integrated and diversified steel company. We continue to push innovation. For the last few years, we have focused on moving up the value chain to produce steel products that meet the most demanding quality specifications. Some of these value-added products have required us to substitute scrap metal for other iron units. One of those substitutes is DRI. It is this need for DRI, and our desire to control more of our raw materials supply and cost, that led us to build our two DRI plants. A primary market for these value-added products is the automotive industry, which needs stronger, lighter steels to achieve higher fuel economy. In recent years, we have completed several projects at our mills geared toward these automotive products, including making wider sheet steel at one of our mills in South Carolina and capital investments at several mills to expand our production of special bar quality (SBQ) products. In 2016, we announced plans to build a specialty cold mill complex at our sheet mill in Arkansas that will enable us to make higher-strength steel products that we currently cannot make. We also announced plans last year to form a joint venture with JFE Steel Corporation, a premier supplier of high-quality steel products to the automotive market, to build a galvanized sheet steel mill in Mexico to serve their growing automotive market. All of these investments serve as examples of the ways Nucor continually pushes innovation in order to make higher quality products and move into new markets. The secret of our success in continually innovating is our teammates and our culture. We empower our teammates to make decisions and they drive many of the ideas for improving our operations. Our production incentive bonuses mean that teams are always looking for ways to be more efficient, improve productivity, and develop new products. Q: Please tell us about the recent status of the U.S. steel industry? How do you see the mid-to-long term forecast of the U.S. steel industry and global steel industry? A: The U.S. steel market has been under tremendous pressure from imports the last few years. In 2016, imports were down by 15% compared to the prior year. Imports captured 26% market share, which was down 48 Asian Steel Watch

51 Beyond Survival to Success Nucor produces various grades of tubing and pipe. Here, standard pipe awaits shipment. from a record high of 29% in However, the average capacity utilization rate in 2016 was 71%, still well below the 87% utilization rate the industry enjoyed in U.S. steel shipments were 86.5 million net tons, essentially the same level of shipments as The economic recovery since 2009 has been uneven. Growth in the U.S. has been sluggish, but compared to the rest of the world our economy has been a bright spot. Our relative economic strength compared to other countries is the reason the U.S. market has been such a magnet for steel imports. We expect the U.S. economy and steel demand will improve in Non-residential construction, a major market for Nucor products, looks poised to regain momentum. While we expect automotive steel demand to level off, auto sales have reached record levels for the past two years, so even in a stable environment, demand will remain strong. With oil prices rising, we could see energy-related steel demand begin to turn around. The World Steel Association is predicting demand growth of nearly 3% in the U.S. market, but less than 1% growth globally in Q: It is generally accepted that the global steel industry has entered the Ice Age and it will take a long time for spring to come. How does Nucor make efforts to overcome Vol.03 June

52 INTERVIEW Galvanizing line at Nucor Steel Berkeley in South Carolina 50 Asian Steel Watch

53 Beyond Survival to Success challenges in the steel industry? A: We are navigating the challenging conditions that have existed in the steel market since 2009 by executing what we call our long-term strategy for profitable growth. This strategy is built around five drivers: strengthening our position as the low cost producer; achieving the market leadership position in each product area where we compete; expanding our capability to produce higher-margin, value-added products; leveraging our downstream channels to market; and achieving commercial excellence. Since 2009, we have invested USD 7.3 billion in our existing steel mills and to make acquisitions in order to expand our product portfolio, especially our value-added product offerings. To give one example, last year we spent nearly USD 900 million to acquire two producers of hollow structural section (HSS) steel tubing and a producer of steel electrical conduit. Prior to these acquisitions, we did not have a presence in the pipe and tube market. Today, we are market leaders in both HSS steel tubing and steel electrical conduit. We are already a North America s most comprehensive supplier of steel solutions to the construction and infrastructure markets. Now, we are able to offer an even wider selection of products to our fabricator and service center customers, further differentiating ourselves from our competitors. As I have mentioned, we are also focused on increasing our presence in the automotive market. In addition to investing in our mills so we can produce more products for The need for advanced high-strength steel extends beyond automotive to other markets like construction. We recently completed a project at our Nucor-Yamato mill in Arkansas that makes it the first mill in North America capable of rolling ASTM A913 steel sections. the automotive market, we ve also opened an office in Detroit, Michigan dedicated to working with automotive customers. Our automotive shipments have grown by 50% over the past three years with strong gains in both our sheet and our engineered bar businesses. Automotive and pipe & tube are only two examples. We are doing this across our product portfolio. Our strategy is paying off. We enjoy industry leading returns on capital and are generating strong cash flow. Q: Recently the fourth wave of manufacturing is blowing strongly to the steel industry. Do you think that advanced technologies, such as IoT, big data, and 3D printing, have a big impact on the steel industry? How are you implementing Industry 4.0 in Nucor? A: The history of Nucor, and the North American steel industry, is one of constant innovation and exploration of new, more competitive and cleaner ways to make steel. Vol.03 June

54 INTERVIEW We have been working with our international partners to address overcapacity. These efforts are now focused on the Global Forum on Steel Excess Capacity, which has been organized by the G20 nations. The Forum is working to find solutions to the overcapacity problem. Innovation and technology have transformed America s steel industry into one of the world s most competitive, sustainable, and environmentally progressive industries. Labor productivity has seen a five-fold increase since the early 1980s. It used to take an average of 10.1 man-hours to produce every ton of finished steel. By 2015, that had dropped to an average of 1.9 man-hours per finished ton. Steel is the most recycled material in the world more than aluminum, copper, paper, glass and plastic combined. In North America alone, more than 60 million tons of steel are recycled or exported for recycling each year. Like Nucor, much of the industry is focused on making advanced high-strength steels to meet the needs of automakers. Advanced high-strength steel is the only material that reduces greenhouse gas emissions in all phases of an automobile s life: manufacturing, driving, and end-of-life. Since 1990, the U.S. steel industry has reduced energy intensity by 31 percent and CO₂ emissions by 36 percent per ton of steel shipped. The need for advanced high-strength steel extends beyond automotive to other markets like construction. We recently completed a project at our Nucor-Yamato mill in Arkansas that makes it the first mill in North America capable of rolling ASTM A913 steel sections. The higher strength achieved from A913 allows lighter foot weights to be specified, reducing the overall weight and material cost for the owner, making steel even more competitive versus concrete and wood. Nucor is also using data to better inform our operations and customer service. We have grown our product offerings and can supply customers with most of their steel needs. To help facilitate that and share information across Nucor facilities, we are in the process of implementing a new information software system. This new system will help us support our order management, procurement, and core financial and controlling process, which will enable us to make better business decisions, provide customers with real-time information and make it easier for our customers to do business with Nucor across our steelmaking divisions. Q: What do you think are the current major issues facing the global steel industry? And how will you resolve the issues? A: Steel production overcapacity, and unfair foreign trade that results from it, is the number one issue facing the global steel industry. Foreign government subsidies and other market-distorting policies in the steel 52 Asian Steel Watch

55 Beyond Survival to Success sector have resulted in massive production overcapacity. Estimates put overcapacity at 700 million tons per year globally, with more than 400 million tons of that excess capacity located in China. Too much production capacity has resulted in a flood of steel imports entering into the U.S. market, capturing a historically-high percentage of market share. This has led to thousands of job losses and numerous plant closures throughout the steelmaking supply chain. In addition, China s steel industry remains government-owned and controlled and heavily subsidized. China exported a record million metric tons of steel in 2015, more steel than is produced by the U.S., Canada and Mexico combined. Last year, China s steel exports remained at historically high levels million metric tons. There is not a two-way street in steel trade with China. The U.S. steel industry has been aggressive in pursuing trade cases and we have scored a number of important victories. These trade cases have reduced the amount of unfairly traded imports entering our market, but this battle will continue until excess capacity is removed. Trade enforcement must be combined with trade diplomacy that benefits U.S. steelmakers and workers. We have been working with our international partners to address overcapacity. These efforts are now focused on the Global Forum on Steel Excess Capacity, which has been organized by the G20 nations. The Forum is working to find solutions to the overcapacity problem. One of the outcomes the Global Forum needs to produce is a timeline for capacity reductions by China and a mechanism to verify that the reductions have actually occurred. China claims that it cut excess capacity by 85 million metric tons last year, exceeding its goal of 45 million metric tons. A new report suggests, however, that production capacity in China actually increased last year. Which one is it? This illustrates why an independent mechanism to verify capacity reductions is so important. HSS A-500 tubing, a product produced by the recently formed Nucor Tubular Products Group (left); Large diameter engineered bars produced at Nucor s facility in Memphis, TN (right) Vol.03 June

56 Special Report Autosteel and the New Materials Competition Dr. Peter Warrian Dr. Peter Warrian is a Distinguished Research Fellow with the Munk School of Global Affairs at the University of Toronto. In 2016 he published A Profile of the Global Steel Industry (Second Edition) and in 2017, with Mike Smitka, he published A Profile of the Global Auto Industry. Both books are published by Business Expert Press. 54 Asian Steel Watch

57 Autosteel and the New Materials Competition There is much speculation about disruptive change in the automotive industry. What will be disruptive will be the following two factors: first, the changes to the business model i.e. mobility as a service and second, radical changes in how we manufacture vehicles in the future. This is where materials competition comes in. The materials composition of the automobile will change relatively little between now and The dominant material will still be steel, with aluminum, plastic, and composites making marginal gains. The biggest materials shift will be the displacement of mild steels with high strength steel grades. The United States government s Corporate Average Fuel Economy (CAFE) standards have become a global reference point for steelmakers. They also constitute a tipping point for a new kind of materials competition for the industry. The focal point will not be the metallurgical properties themselves, but how they facilitate new geometries. Leading-edge developments in autosteels will then migrate to other industry verticals such as construction applications. The first challenge for steelmakers is the internal challenge of keeping up with the accelerated pace of technical innovation. It will present issues about the traditional boundaries of a steel company. The critical function of the new high strength steels (HSS), along with other advanced materials, is not only that they are stronger and lighter, but that they allow new dimensions of design. This blurs the customary boundaries of design and manufacturing within which steel companies have traditionally worked. The second major challenge will be to the autosteel customer base, the auto supply chain. Only a limited number of current customers are able to effectively deploy and apply new high end steels. Most of the auto supply chain is comprised of small and medium-sized enterprises (SMEs) with limited capital, human resources, and technical capacities. The industry will only be able to successfully manage the transition and raise the games of these firms with the aid of new external partners. Current state of the CAFE standards The CAFE standards constitute a tipping point for a qualitatively new materials competition, both because of the scale of autosteel purchases and for being a classic case of technology forcing regulatory change. Vol.03 June

58 Special Report There are two redesign cycles left before Given the accelerating pace of software development and improved materials, it is reasonable that each of these redesign cycles should achieve at least a 5% weight reduction. Overall, about a 15% weight reduction should be feasible by Isenstadt, A. et al, (2016) Lightweighting technology development and trends in US passenger vehicles, International Council of Clean Transportation (ICCT), Working paper As most people are aware, the standards apply to new passenger cars and light-duty trucks for model years 2012 through A mid-term review of the standards is in process and will be finished by 2018 at the latest. The initial determination, supporting the policy, was released in late November Assuming the fleet mix remains unchanged, the standards require vehicles to meet a combined average fuel economy of 34.1 miles per gallon (mpg) in model year 2016, and 49.1 mpg in model year 2025, which equates to 54.5 mpg as measured in terms of carbon dioxide emissions with various credits for additional climate benefits. The new fuel efficiency targets have turned lightweighting into the overwhelming goal for autosteel. Costs are also an issue. A critical criterion for the mid-term review is whether lightweighting can be achieved within acceptable manufacturing costs. It now appears that on this issue the program is over-achieving. The manufacturing costs for advanced materials are coming in at only about 30% of the original manufacturing cost estimates. A recent technical paper presents a systematic review of materials competition and lightweighting technologies under the regulations. 1 The key metric was expressed in terms of total cost as a function of percent vehicle weight reduction (composites include plastics, but not carbon fiber). From a manufacturing cost perspective, the policy objectives appear to be quite attainable. For steelmakers, the important conclusion is that increased use of lightweight materials and improved vehicle designs will be limited only by the speed at which computer design tools improve and new materials can be brought to the market. The materials composition of the vehicle Steel has been the primary material used in vehicles for decades. The proportions of plastics and aluminum have gradually increased over time, but until recently they were used primarily for independent components, such as bumpers (plastics) and engines (aluminum) that had little 56 Asian Steel Watch

59 Autosteel and the New Materials Competition Source: POSCO impact on safety or noise, vibration, and harshness (NVH). The latter has also become factors in evaluating materials decisions. The most significant mass reduction occurs during vehicle redesigns, when competitors vehicles are benchmarked and all components and subsystems are considered for weight reduction. Across a range of vehicles, impressive weight reductions have been achieved using a multi-material approach and updated manufacturing processes/computer simulations. No single material or method dominates the others. However, for the steel industry, the important point is that legacy vehicle architectures continue to be mainly replaced with more mass-efficient advanced highstrength steel (AHSS) intensive architectures. This bodes well for the future. The practical question is how fast tools and materials improve and the improved designs can be incorporated into vehicles. The current generation of vehicle redesigns is routinely achieving about a 5% weight reduction. There are two redesign cycles left before Given the accelerating pace of software development and improved materials, it is reasonable that each of these redesign cycles should achieve at least a 5% weight reduction. Overall, about a 15% weight reduction should be feasible by The merging of steel manufacturing and design In autosteel, materials manufacturing has always been linked to design, ever since the allsteel autobody emerged in the 1920s. This remains the dominant design across the industry. Until and unless that changes, steel will remain the dominant material. Autosteel customers, while focusing on lightweighting, are also faced with meeting improved safety performance. For instance, the award-wining 2014 Honda MDX had to meet both emissions and safety standards and has a body using 59% high-strength steel, 36% mild steel, 2% Mg, and 3% Al. This may be a representative picture of the trend for near-future vehicles. The changed role of materials suppliers is Vol.03 June

60 Special Report Traditionally, autosteel design parameters were based on 2G: gauge and grade. The future is 3G: geometry, gauge and grade. Academics talk about a shift from traditional Design for Manufacturing to Manufacturing for Design in the new stage of advanced materials competition. demonstrated in the Honda MDX Door Ring case. The existing Honda design, like all other SUV models, could not simultaneously comply with both emissions and safety standards. It was the steel company ArcelorMittal using new Usibor and Ductibor grades along with a holistic Body in White (BIW) design that solved the dilemma. Traditionally, autosteel design parameters were based on 2G: gauge and grade. The future is 3G: geometry, gauge and grade. Academics talk about a shift from traditional Design for Manufacturing to Manufacturing for Design in the new stage of advanced materials competition. The above case of the design of the door ring was only possible because Arcelor was able to produce the new steels. Traditionally, Tier 1 suppliers are invited early into the design process. The auto OEM finalizes the platform design in year 1 of the traditional five-year cycle. Tier 1 parts suppliers and lead stampers are invited into the process in years 2 and 3. Steel companies have not been admitted until years 4-5, when the product design is already frozen. Steel companies are now lobbying for entry in years 2 and 3 so they can have an impact on materials decisions affecting final product design. They are seeking to play the role of materials consultants to design teams that include OEMs and Tier 1 design engineers. There is a larger process at work here. The impact of lean production models on the auto supply chain has been accompanied by the rise of shared engineering responsibilities, as suppliers move away from merely producing parts to blueprints supplied by their customers. Software and digital manufacturing capabilities are the bridge that allows new materials to be brought into a vehicle, but they also pull in other actors across the supply chain. This will require steel companies to expand sales engineering staff and locate it much closer to their customers. Innovation in the automotive industry At the highest level, Sergio Marchionne, CEO of Fiat Chrysler Automobiles (FCA), has recently argued provocatively that the R&D model of automotive innovation is bankrupting car com- 58 Asian Steel Watch

61 Autosteel and the New Materials Competition panies and undermining their enterprise value. 2 A new approach is needed. The core argument he makes is that the automotive industry, with its product life cycle of four years to recoup R&D costs, is dramatically out of line with the 17-year product life cycle of other major manufacturing industries. His suggestion is that car companies have to move beyond their current proprietary product platform strategy. The nature of innovation in the auto supply chain itself is changing. The Premier Automotive Suppliers Contribution to Excellence (PACE) Awards by the Automotive News have become a global reference point. The analysis by Smitka and Warrian of the past 15 years of awards identifies three critical attributes of successful innovative firms: they are good at materials science, they use the latest software engineering tools, and they use technology roadmaps. Suppliers face three core challenges: The first is the choice of where to direct their R&D efforts. The second is how to coordinate those efforts with their suppliers and customers, as any single component is ultimately but one part of a complex assembled product. Third, they need to manage these efforts internally. Regarding internal coordination, in the past, firms have relied on roadmapping to help direct efforts and coordinate with other firms. The traditional internal coordination mechanism of firms has been the gate system widely used in the industry for the internal management of research projects, from ideation through to the start of production. Companies use these to track project progress against a standard timeframe, and to budget additional resources or halt programs that are not progressing. In addition to structural components and body panels, powertrains are another tipping point in materials competition for steel producers. An example of successful roadmapping would be to translate regulatory mandates into expected engine pressures. In practice, the roadmap would incorporate additional detail, with R&D projects coded by the type of solution they are using and located by the date at which prototypes might be ready for testing. By combining those from suppliers of the panoply of engine components, an original equipment manufacturer could use this to help gauge whether it might be feasible to begin the detailed development of their next engine generation and to spot places where they might face hurdles and need to work more aggressively with potential suppliers. There is a huge variation among leading firms in how they deploy roadmapping and IP resources. A scan of the top three PACE winning companies gives a sense of the breadth and range of technology management approaches. Delphi has no roadmap in the public domain, but it is perhaps the most active in managing its intellectual asset portfolio with sales or licensing of its IP, co-ventures and being a partner in new startups. Federal-Mogul seeks to leverage its previous innovations, demonstrates a proactive path dependency in developing its IP, and publishes its pathways. BorgWarner actively develops successive generations of its innovative products but makes no comprehensive public roadmap available. 2 S. Marchionne, Confessions of a Capital Junky, November Vol.03 June

62 Special Report Lower down the chain, SMEs with significant technical capacities are the prime future partnership candidates for autosteel producers. Unfortunately there are at present only a limited and insufficient number of qualified firms. The technical progress at commercializing the latest steel metallurgy is not matched by the capacities of the customer base. Interviews with company, government and academic experts suggest that at present only about 8-10% of auto supply chain SMEs have the human and technical capacities to effectively apply the latest advanced steels. Open-sourcing proprietary auto product architectures Why are cars different from computers? Why has automotive innovation lagged in the slope of the innovation curve? The answer is that computing developed a common industry product architecture around Wintel (Windows + Intel). As described in the Honda Door Ring case, Arcelor is a clear leader in the adoption of new steels through the design process. Their S-in Motion program is an open-source platform of technology applications that OEMs now have available to adopt and adapt. Valin ArcelorMittal Automotive Steel (VAMA), Arcelor s new co-venture in China for production of Usibor, will extend this new materials/new design capacity into the Asian autosteel market. This major step forward, however, faces a challenge from aluminum. The design choices of existing autosteel customers are seriously constrained by carry-over parts from existing steel designs where costs and critical pieces are important. The new-entrant aluminum producers, Figure 1. Arcelor S-in-Motion Source: automotive.arcelormittal.com 60 Asian Steel Watch

63 Autosteel and the New Materials Competition because they have all-new designs, do not have these constraints. The changing economic geography of autosteel Location has always been critical for steel companies. In the future of autosteel, the critical locational variable will not be where the assembly plants are, but where the engineering is being done. Asian steel producers face a particular dilemma. The auto supply chains of the North American Free Trade Agreement (NAFTA) and the EU have become highly concentrated, particularly after the financial crisis. The Asian auto supply chain remains highly fragmented. There are economies of scale and network effects that arise from this. The market for autosteel has become increasingly concentrated geographically. The Auto Alley within NAFTA and Auto Corridor in the EU in Figure 2 show the global industry trend. This is where autosteel producers and processers are focused. China, by comparison, is an outlier. Despite its huge market size, there are still 60 domestic car producers distributed across many provinces. There is as yet no comparable consolidation, although there are perhaps some beginnings around Shanghai. This is where the bulk of auto engineering is taking place and where the partners and codevelopers of steel producers are located. A further consequence is that regional innovation policies of governments will also have a critical attribute of place. Figure 2. The Auto Alley within and Auto Corridor in the EU North America, 2013 Europe, 2013 Assembly Plants Supplier Plants Kilometers Assembly Plants Kilometers 73% of region s assembly 78% of region s assembly Vol.03 June

64 Special Report 3 Helper, Susan & Kuan, Jennifer. (2016) What Goes Under the Hood? How Engineers Innovate in the Automotive Supply Chain. In Freeman, Richard & Salzman, Hal, eds. Engineering in a Global Economy. Chicago: University of Chicago Press. 4 Goracinova, E., Warrian, P. and Wolfe, D. Challenges of Coordination: Automotive Innovation in the Ontario Supply Chain in Comparative Context, Canadian Public Policy, (2017) Spring New partnerships and new policies Most of the auto supply chain is comprised of SMEs. Overcoming the challenges of change for such companies will require new perspectives, new partners, and new public policies. For both steel companies and automotive OEMs, future success will critically depend on raising the game of the SME supplier base. As mentioned above, the locus of engineering work has changed significantly. 3 The financial crisis was a seismic event. For example, in 2011, 70% of US auto suppliers were engaged in engineering design efforts, compared with 48% in In terms of new engineering software, finite element analysis (FEA) has become a pervasive new tool and is a good indicator of where supply chain firms are along the innovation curve. FEA is the assessment of a component s suitability for its operating environment, incorporating scientific knowledge to evaluate an auto part s strength and durability in a given situation, including withstanding pressure, heat, impact, and other known environmental stresses. By this measure, about 25% of firms are in the game. The engineering intensiveness of the sector is also reflected in employment data. In the Helper study, over 20% of auto supply chain firms had no engineers at all, and nearly onethird had just one to three engineers on staff. The picture that emerges is of a spectrum of firms ranging from low engineering-intensity and low customer engagement to high engineering-intensity and customer collaboration. The context is important. Intensified international competition and cost pressures have combined with stricter CAFE environmental regulations and consumer safety standards to drive innovation further down the automotive supply chain. The range of technologies that are important to success in the industry has expanded from electronics, to digital platforms, new fuel and power technologies, and lightweighting materials. The need for more systemic innovations has led to a process of shifting the locus of innovation from within a single firm, the OEM, to a wider range of firms along the supply chain, and also research institutes and end-users. The new industrial policy and supply chain network failure Most traditional autosteel producers and their customers are located in mature industrial regions. Regions in which automotive clusters have been revitalized, such as the West Midlands, Detroit, and Baden-Wurttemberg, are characterized by a strong SME base and coordination initiatives that have contributed to the utilization of a wide range of innovation resources. The role of community colleges and public research infrastructure has been critical. 4 Network failures have been identified as a reason for the lock-in of old industrial regions into obsolete technological trajectories. Given that most of the auto supply chain is comprised of SMEs with limited capital, technical and human resources, there is an important role for public policy in managing the transition, particularly for SMEs. The traditional argument is that gov- 62 Asian Steel Watch

65 Autosteel and the New Materials Competition Intensified international competition and cost pressures have combined with stricter CAFE environmental regulations and consumer safety standards to drive innovation further down the automotive supply chain. The need for more systemic innovations has led to a process of shifting the locus of innovation from within a single firm, the OEM, to a wider range of firms along the supply chain, and also research institutes and end-users. ernment should only intervene where there is a clear market failure. The autosteel issue, however, is more in the nature of a network failure. New and different policies are needed. 5 For most liberal democracies in the postwar period, market failures constitute the only really indisputable economic rationale for public participation in private affairs. The policymaker is expected to try first to get the prices right, to institute an incentive that will allow the market to correct itself, such as a tax expenditure, before weighing in with more aggressive interventions. Network failures are different. The argument is that more explicitly collaborative network forms are functionally superior, especially where some combination of unstable demand, rapidly changing knowledge, and/or complex interdependencies between component technologies is present. For the author, this is the case and the essential challenge in autosteel and the new materials competition. It is often observed that the most effective economic, technology, and industrial policymaking today depends upon settings in which private and public actors come together to solve problems in the productive sphere, with each side learning about the opportunities and constraints faced by the other. To focus just on standard worries about picking winners is to forget that such settings are less discovered than constructed. Public research infrastructure Technology Readiness Levels (TRLs) have become pervasive for research and funding agencies as criteria for successful funding applications, project management and evaluation. The author s current research is on the role of materials technology labs in the lightweighting efforts for automotive steels. It seeks to document and describe the specific mechanisms of knowledge creation and technology transfer at the different stages of the innovation process in the interaction between the lab and its industry partners. A mature automotive region like Ontario faces unique challenges. Its 5 Brandt, P. and Whitford, J. (2016) Fixing Network Failures? The contested case of the American Manufacturing Extension Partnership, Socio-Economic Review, 2016, Vol. 0. No. 0, 1-27 Vol.03 June

66 Special Report New business models arise as firms move forward, backwards, and sideways. The steel company of the future will be different. The industrial economics lesson is that realization of value will be less and less correlated to the original site of production. supply chain firms, particularly SMEs, tend of be at the lower end of the value chain and weakly represented in leading-edge technologies like electronics and materials science. The engineering culture of even the leading firms like Magna and Linamar, were built by their founders with an exclusive focus on identifying micro-efficiencies in parts production. This remains in the DNA of the technical culture of the firms that steel companies supply. It is inherently resistant to the disruptive technological changes and macro-efficiency opportunities of the materials science revolution. By contrast, tightly integrated innovation systems like Baden Wurttemberg or the Midlands are much more successful, but they face lockin issues that entrench incrementalism. More de-centralized systems like the North American Automotive Alley, may be more open to radical technological changes, but are heavily dependent on the disparate capacities of SMEs. The conclusion is that changes in technologies allow places to open up for enhanced resiliency or reinvention for supply chain firms, if they take advantage of them and lead others to stagnate/ fail. As materials suppliers like advanced steel companies undertake a wider range of innovation and the role of car companies moves more toward that of coordinator or integrator, supply chain firms need to be able to address the interdependencies of a vehicle as a system. In addition, innovations themselves frequently involve an array of mechanical and electronic features, and are contingent on developing new methods of manufacturing. Suppliers routinely form teams crossing firm boundaries to meet these challenges. To understand the role that public research labs can play, consider the example of HSS steels and the spring-back problem. The client company does advanced hydroforming. The new materials are so strong that conventional stamping and forming technology results in sub-optimal products because the material springs back from the original forming design due to resistance in the material. The problem will only worsen as materials progress in getting stronger and lighter. In this case, linkage to another government 64 Asian Steel Watch

67 Autosteel and the New Materials Competition lab at a nuclear reactor facility became critical. The nuclear site was used for its specialized testing capacity employing the reactor s neutron beam to test for residual tension in the input materials. The lab discovered that there was also embedded tension in the input material that came from the suppling steel company. With data from the reactor, they built a model of the actual rolling process of the tubes at the steel mill, assisted by production data from the company. It was discovered that the steel tubes and the welding process were the source of the problem. The lab built a model of the whole steel mill to model the stresses in the rolling process. This in turn fed into the manufacturer s design process. Disruptive change in the automotive industry There is much speculation about disruptive change in the automotive industry with the emergence of autonomous vehicles (AV) and electric vehicles (EV). In the author s view, the latter will cause incremental, not revolutionary changes. If all new vehicles were AV by 2020, then it would be about 2035 before half of the total NAFTA vehicle fleet would be autonomous vehicles. The energy density of the batteries still lags internal combustion engines. What will be disruptive will be two other factors: first, the changes to the business model i.e. mobility as a service and second, radical changes in how we manufacture vehicles in the future. This is where materials competition comes in and where steel has the opportunities described above. In fact, EV s use proportionally more high-strength steel than do conventional vehicles. Steel companies of the future Innovation studies academics see lessons in the new global economy where digital technologies contribute to a mobility of production functions along global value chains. New business models arise as firms move forward, backwards, and sideways. The steel company of the future will be different. The industrial economics lesson is that realization of value will be less and less correlated to the original site of production. Vol.03 June

68 66 Asian Steel Watch

69 68 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry Dr. Imm Jeong-seong 78 Chinese Steel Moves along the One Belt, One Road Dr. Chang-do Kim Vol.03 June

70 Featured Articles The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry Dr. Imm Jeong-seong Senior Principal Researcher POSCO Research Institute China, which has long Long-time neighbors perceived itself as lying at the center of the seeking cultural and economic exchanges world (Zhonggou, or Middle Country), and India, which is known to be the land of gods, have been mutually engaged for millennia. These inheritors of legacies of the Yellow River and Indus Valley civilizations have long pursued cultural and economic exchanges across the deep gorges of the Eastern and Western Himalayas. Chinese tea and silk were exported to India over these passes, while Indian thought such as Buddhism and academic learning diffused into China. Such bilateral exchanges took place not only via the Silk Road, but also along maritime trade routes that connected China, Southeast Asia, India, and the Middle East. After a period in which the two countries suffered extended hardships and disorder during the age of imperialism, India became the first non-socialist country to establish diplomatic ties with the People s Republic of China in 1950 and their long-standing relationship as neighbors was formalized. However, diplomatic relations were severed following the Chinese invasion of India in 1962 triggered by Tibetan border issues and the Dalai Lama being granted asylum by India. Although diplomatic interchanges were resumed in 1979, economic cooperation did not follow suit. It was only in the mid-2000s that bilateral trade and investment began to expand. India s imports from China increased significantly over the ten years from 2005 to 2015, with a compound average growth rate (CAGR) of 19%. India mainly imports electrical and electronics products, machinery, and organic compounds from China and returns cotton, copper, and ore as exports. Under this import/export structure, India s exports to China could not increase significantly, and its trade deficit with China surged to USD 52.7 billion in Meanwhile, India s foreign direct investment outflows to China were greater than China s FDI outflows to India until 2010, but this reversed in 68 Asian Steel Watch

71 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry Table 1. Trade and FDI between India and China ( ) (USD millions) Export 6,759 14,169 13,535 11,934 9,010 CAGR 2.9% Import 10,868 43,480 52,248 60,413 61,707 CAGR 19.0% Trade deficit - 4,109-29,311-38,713-48,479-52, times FDI Outflow times FDI Inflow times Source: Ministry of Commerce and Industry of India, National Bureau of Statistics of China In particular, China s annual FDI in India surpassed USD 400 million in both 2014 and However, China ranked only 18th in terms of accumulated investment in India from 2000 to 2015 (USD billion), accounting for a mere 0.47% of total FDI in India. Pointing to this structural trade imbalance, the Indian government has been calling on China to increase its FDI in India. The two countries set a Why has Line of Actual Control bilateral economic (LAC) in 1996, but have cooperation expanded still not fully resolved despite territorial their territorial issues. disputes? Despite this, why has bilateral cooperation been expanding? Since China and India are home to the world s largest and second-largest populations countries, each surpassing one billion, and are the traditional regional powers for Northeast and South Asia, respectively, their bilateral economic cooperation has a considerable ripple effect. There are three primary reasons why Sino-Indian economic cooperation will continue to expand. First, bilateral cooperation has expanded due to their differences in economic development level and economic structures. After the introduction of reform and opening-up policies in 1978 and a transition to a market economy that began in 1994, China entered the World Trade Organization (WTO) in 2002 and underwent rapid economic growth. In 2010, China became one of the so-called G2 nations. Although China and India had similar GDP levels in the 1980s, China had become an upper middle-income country according to the World Bank standard with per capita GDP of about USD 8,000 in` India, which remains a lower middle-income country, is presently attempting to benchmark China s development policies and know-how. China has been pursuing high-speed growth despite some related sacrifices, focusing on investment and exports. India, on the other hand, has been upon its tradition of grass-roots democracy to seek inclusive growth with a growth model focused on consumption and domestic de- Vol.03 June

72 Featured Articles Figure 1. India and China s Economic Cooperation Needs Boosting a stagnant domestic market and raising global status Expanding export markets to ease oversupply Using China s massive accumulated capital (Foreign exchange reserves: USD 3 tril.) Transfering economic development knowhow and growth model One Belt, One Road (+AIIB) Export Increase EPC+F 1) Investment Manufacturing Investment Soft Power Consumption goods Capital goods Orders for infrastructure (Facility export & experts) Massive financial support Connected with locallyproduced parts Knowhow of infrastructure construction & nuturing of industries and urbanization Spread of Confucius ideology Increasing needs to enter India s fastest growing market Taking advantage of China s success in economic development Improving Infrastructure Make in India Promoting restructuring Benchmarking China s growth model Shift to sustainable economic and industrial structures Note: 1) EPC + F = EPC (Engineering, Procurement and Construction) + Financing Source: Compiled by the author mand. China, dubbed the factory of the world, holds a strong position in manufacturing while India, the back office of the world, is prominent in IT. China has extensive experience with the construction of infrastructure, including roads, railways, and power plants. In contrast, India has an advanced service industry, including finance, distribution, and culture. After a number of economic development trials and errors, the two countries are trying to learn from each other s strengths and hope to spark synergy by linking their hardware and software capabilities. Second, their policy needs are mutually congruent. In 2015, China unveiled the One Belt 70 Asian Steel Watch

73 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry One Road (OBOR) initiative to boost a stagnant domestic market and raise its global status as a great power. This strategy aims to take advantage of China s massive accumulated capital in order to enter developing markets with high growth potential but in need of investment. China hopes to penetrate such markets and expand exports by seeking joint entry with major industries currently in oversupply, such as power generation, construction, steel, and automotive, through massive industrial projects. China views India as an ideal destination in which to implement its OBOR project since it has a massive market and lofty growth potential. India urgently needs to nurture manufacturing in order to create jobs and refurbish urban and transportation infrastructure in order to ensure that its massive 1.3 billion population proves a blessing rather than a curse. However, the improvement of power generation and transportation infrastructure has been delayed by chronic fiscal deficits and political and social issues. Moreover, India s manufacturing sector, including steel, shows low global competitiveness due to insufficient technology and poor economies of scale under the lingering influence of the socialist economic system of the past. For these reasons, India hopes to resolve certain chronic internal problems by taking advantage of external shocks created by China, which has already succeeded in its economic development. The third reason for the expansion of bilateral relations is that the current leaders of the two countries often apply a utilitarian route of thinking. Since their respective inaugurations in 2013 and 2014, Chinese President Xi Jinping and Indian Prime Minister Narendera Modi have set aside sensitive issues, including border conflicts, and focused instead on economic cooperation. In particular, Prime Minister Modi, who has been attempting to introduce and implement the most drastic economic reform policies since the coun- Table 2. The Chinese Government Strategy to Address Oversupply Through Foreign Expansion Objective Industry Country Entry strategy Ease overcapacity until 2020 and create new growth engines Power generation, construction, steel, machinery, automotive, chemical engineering, shipbuilding, and more Emerging countries with high growth potential but in need of investment India is considered one of the ideal destinations Largest market in terms of both size and growth potential A bridgehead to South Asia, the Middle East, and Africa under the One Belt One Road initiative Joint entry with related industries through grand-scale projects ex) Providing Chinese technology, facilities, standards, service, and materials through the development of an industrial complex Combination of China s advantages in engineering, procurement and construction (EPC) and capital power ex) Construction works order + Financial support or Construction works order + Financial Support + Management Development of exclusive Chinese industrial complexes and attraction of Chinese manufacturing companies as tenants Source: State Council of China (2015) Vol.03 June

74 Featured Articles India and China are now moving beyond bilateral economic cooperation and into multilateral economic cooperation across Asia. The two countries are implementing the Bangladesh-China-India-Myanmar economic corridor, which aims to connect India s northeast region with China. try s independence, is extending stringent efforts to attract Chinese companies to India. India and China are now Will bilateral moving beyond bilateral economic cooperation economic cooperation further expand? and into multilateral economic cooperation across Asia. The two countries are implementing the Bangladesh-China-India-Myanmar (BCIM) economic corridor, which aims to connect India s northeast region with China. Furthermore, with a stake of 8.52%, India is the second largest shareholder after China (30.43%) in the Chinese-led Asian Infrastructure Investment Bank (AIIB). Moreover, India has expressed its willingness to join the Regional Comprehensive Economic Partnership (RCEP) led by Chinese President Xi Jinping rather than the Trans-Pacific Partnership (TPP) supported by former US President Barack Obama. Meanwhile, the Modi government is using soft power rather than military force to counter China s so-called String of Pearls strategy, which aims to strengthen military alliances with countries in the Indian Ocean region, including Pakistan, Bangladesh, Myanmar, Sri Lanka, and Nepal through massive economic assistance. In this regard, India has launched Project Mausam (mausam being a Hindi word for seasonal winds) which seeks to revive the glory of pre-modern times when Indian culture and trade spread and expanded across Southeast Asia, the Middle East, and East Africa along the seasonal winds of the Indian Ocean. Will this economic cooperation between India and China continue? Clues as to the answer can be found in India s Strategic Culture by US analyst Rodney W. Jones. He points out that Indians continue to think and act based on philosophical and mythological factors. They are accustomed to hierarchical order and consider knowledge of trust to be the key to power. Historically, India strengthened ties with world powers such as the British Empire, the Soviet Union, and the USA. Today it seeks to expand cooperation with China, 72 Asian Steel Watch

75 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry Figure 2. India s Finished Steel Imports from China (1,000 tonnes) 5,000 Chinese steel imports Share 4,786 (%) 70 4,000 3, , ,000 40% 38% , '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: International Steel Statistics Bureau (ISSB) one of the world s two largest economies, and gain technology and know-how. Another characteristic of Indian strategic culture is the concept that goals are timeless. This explains why India has not been actively working to resolve the Kashmir conflict with Pakistan and territorial disputes with China. Indians may prefer to bide their time until a situation turns favorable to them. India may try to solve its territorial disputes with China only after its national power becomes equal or even superior to that of China through economic cooperation. However, in the short term, their bilateral relationship could be impacted by hegemonic competition in Asia between China and the USA under the Trump administration. During the Cold War, Prime Minister Jawaharlal Nehru created the Non-Aligned Movement to maximize the country s interests between the superpowers, the USA and the Soviet Union. India is expected to continue its strategic position between the USA and China, but this can be perilous. India may align with the USA on diplomatic and military fronts but seek to strike a balance through cooperation with China on the economic front. In the face of abrupt changes in Sino-US relations, India and China s economic cooperation could deteriorate abruptly. Over the last twenty Heavy inflows of years, the Chinese steel Chinese steel industry has contributed to the construction of materials pose a threat to the Indian domestic infrastructure steel industry and the development of in the short run manufacturing industries, including automotive and shipbuilding, and it will play an important role in supplying steel materials to the OBOR project. However, due to the stagnation and decline of domestic steel demand, the steel industry has been labeled a representative industry in oversupply and forced to actively seek foreign expansion. Therefore, China s steel industry is attempting to seek joint entry with steel-consuming industries into the Indian market in order to Vol.03 June

76 Featured Articles This increase in low-cost Chinese finished steel imports allowed India to reduce its investment in infrastructure construction and improve price competitiveness in steel-consuming industries, but it hit Indian steel companies hard. increase its exports. First, for bilateral trade, India s finished steel imports from China began to surge in 2005 and then see-sawed before eventually marking an increase of 130% in 2014 compared to the year earlier. In 2015, the inflow of finished steel imports reached 5 million tonnes (Mt), including 1.1 Mt of hot-rolled coil. Chinese products accounted for nearly 40% of total imports in India. As a result, iron and steel became China s fifth-largest export item to India, and India s steel trade deficit with China reached USD billion. This increase in low-cost Chinese finished steel imports allowed India to reduce its investment in infrastructure construction and improve price competitiveness in steel-consuming industries, but it hit Indian steel companies hard. Not only small-scale steelmakers, but also larger companies including SAIL, JSW, and JSPL recorded net losses in FY Large steelmakers and the Indian Steel Association (ISA) have called for urgent government support, and the government has responded with various protectionist measures: raising tariffs on imported steel three times after 2015; introducing a Minimum Import Price (MIP); imposing safeguard and AD duties; and strengthening rules and application of the Bureau of Indian Standards (BIS). Thanks to such efforts, large steelmakers have partially improved their business performances, but the issue of insolvency still lingers across the entire Indian steel industry. The steel sector, one of the country s key industries, has become its largest money-losing industry and even been subject to a warning from the Reserve Bank of India. However, the Indian steel industry did not become insolvent not only due to the increase in Chinese imports, but also because protectionist government measures led to a weakening of its global competitiveness in terms of market size, technology, and costs. As of March 2016, secondary Indian steel mills per unit capacity was far lower than the global standard: 34,000 tonnes for induction furnace manufacturers, 31,000 tonnes for long product re-rollers, 161,000 tonnes for CR re-rollers, 101,000 tonnes for sponge iron 74 Asian Steel Watch

77 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry manufacturers, and 380,000 tonnes for electric arc furnace (EAF) manufacturers. Even before the wave of Chinese steel imports, Indian steel makers had been forced to undergo restructuring as their profit structures were aggravated by disrupted supply and rising costs of fuels and raw materials such as iron ore, coal, and gas. In addition to small companies, major private steel mills including JSPL, Essar, and Bhushan were already in decline due to the aftereffects of aggressive new investment and M&As at home and abroad after the mid-2000s. Although the Indian steel industry may suffer in the wake of a surge in cheap Chinese steel imports, it will place itself in a position to help further boost economic development if it takes this as an opportunity for industrial restructuring. Second, examining China s investment trend in the Indian steel industry, China seems to be in the second stage of its investment in India. In the first stage, China turned its eyes to India as a source of supply for the steel raw materials needed for the country s high growth. In 2005, Sinosteel, a state-owned company for the development, processing, and trade of steel raw materials, became the first Chinese company to establish an office in India. Other state-owned steelmakers such as Baosteel, WISCO (Wuhan Iron and Steel), and Shougang Group, soon followed suit. They first established trade offices or subsidiaries and then participated in joint ventures for processing raw materials with Indian companies. In 2008, Baosteel acquired a 35% share of a joint venture with India s Visa Steel to make ferrochrome. This second stage of investment began in when the Chinese government recommended that each industry look overseas to address the burgeoning issue of oversupply. When Chinese construction companies entered India to build power plants, heavy electric equipment companies followed, as did steelmakers to provide steel products. In 2013, WISCO set up a new silicon steel processing and distribution center with an annual capacity of 20,000 tonnes in order to supply grain-oriented electrical sheet to Vol.03 June

78 Featured Articles India needs to ensure a more investment-friendly environment in order to prevent any steel supply shortages that may occur over the medium-to-long run. an Indian subsidiary of Tebian Electric Apparatus Stock (TBEA). Baosteel built a processing center in India with an annual capacity of 150,000 tonnes to provide auto sheet not only to Fiat India, but also to Chinese automakers that plan to enter the market, including Shanghai Automotive Industry Corporation (SAIC). As the Modi government is actively working to attract FDI from China, Chinese steelmakers eventual penetration into India will depend on the degree to which Chinese steel-consuming industries invest in India. In the future, Chinese steelmakers entry into India will reach a third stage encompassing both downstream, including galvanized and cold-rolling mills, and upstream production. If Chinese capital and Heavy investment technology spur infrastructure construction in manufacturing may drive steel demand in India within the next in India, leading five years and Chinese to possible supply companies increase their shortages in the investment in India s medium to long-term manufacturing sector Table 3. Crude Steel Capacity Target under the Draft NSP 2017 (Mt) FY2015 (actual) FY2020 (F) FY2025 (F) FY2030 (Target) Crude steel capacity (+25) 236 (+89) 300 (+64) Draft NSP 1) (2017) Crude steel production Apparent finished steel use WSD (Sept. 2016) Crude steel production worldsteel (Sept. 2015) Apparent finished steel use worldsteel (Sept. 2016) 2) Apparent finished steel use * Note: 1) Draft NSP 2017 assumes GDP growth rate to be 7.5%/y, 2) A figure noted by asterisk (*) is an estimate from worldsteel s forecast of 241 Mt by 2035 Source: Ministry of Steel of India, World Steel Association, World Steel Dynamics 76 Asian Steel Watch

79 The Impact of Sino-Indian Economic Cooperation on the Indian Steel Industry in response to the OBOR initiative and the Modi administration s Make in India policy, Japanese and Korean companies are expected to similarly expand their investment in the country in an effort to stake an early claim in the market. If Indian companies, which have dragged their feet in terms of investment due to a lack of capital and business viability, join the manufacturing investment bandwagon, steel demand is likely to surge. Within the next five to ten years, India may experience as similar surge in steel demand as did China in the early 2000s. According to the draft National Steel Policy of 2017 (NSP) released by the Indian government, apparent finished steel use is expected to increase to 111 Mt by 2020 and 206 Mt by India needs to dramatically increase its crude steel capacity in order to keep steel self-sufficiency in line with such elevated demand. The Indian government expects that the country s crude steel capacity will increase by 25 Mt by 2020, 89 Mt by 2025 and 64 Mt by 2030 to satisfy the continuously rising domestic steel demand and to export some steel products. Considering that the sponge iron/mini blast furnace/induction furnace/eaf unit shows inferior global competitiveness with an annual capacity of Mt, it could be driven out of the market; therefore India needs to invest more upstream. The Indian Ministry of Steel estimates that the NSP 2017 calls for USD 150 billion in capital in order to realize its goals. However, India s major private steelmakers, troubled by managing assets from foreign M&As, lack the financial capacity to invest in upstream. Without foreign investment and technology, it seems challenging to build any advanced integrated steel mills. Therefore, India needs to ensure a more investment-friendly environment in order to prevent any steel supply shortages that may occur over the medium-to-long run. While monitoring the status of supply and demand and import restriction trends in India, Chinese steelmakers are reportedly also studying cases of foreign entry into India by global steelmakers, including Japanese steelmakers, POSCO, and ArcelorMittal. They are well-aware of the failures of global steelmakers long-term projects to develop their own mines and build integrated steel mills in India, despite their global-level technology and capital, stemming from internal Indian social and political issues, red tape, and substandard administration. World Steel Dynamics (WSD) estimates India s crude steel production will reach 127 Mt by 2025, far lower than the 200 Mt projected in the NSP In the fall of 2016, the World Steel Association (worldsteel) lowered India s mid-to-long-term growth forecast for apparent finished steel use from 8% to 6% per annum. It therefore appears that the Indian government should substantially improve the foreign investment environment in order to realize the NSP 2017 goals and actively attract Chinese and other foreign steelmakers. Vol.03 June

80 Featured Articles Chinese Steel Moves along the One Belt, One Road Dr. Chang-do Kim Senior Principal Researcher POSCO Research Institute Soon after Xi Jinping was sworn in as General Secretary of the Communist Party of China in November 2012, he unveiled the vision known as the Chinese Dream. Xi s Chinese Dream is characterized by achieving the so-called Two 100s : China becoming a moderately well-off society with per capita GDP of over USD 10,000 by 2021, the 100 th anniversary of the founding of the Chinese Communist Party, and China becoming a fully developed country by about 2049, the 100 th anniversary of the founding of the People s Republic of China. In order to realize this dream, various policies are being implemented, including the One Belt, One Road (OBOR) initiative, a three-stage plan to sophisticate China s industrial structure (Made in China 2025 Manufacturing giant 2035 Innovation power 2049), and the Internet Plus action plan. OBOR is designed to provide a catalyst for the reform and opening-up 2.0 being driven by President Xi. The reform and opening-up 1.0 period took place over the last 30 years. Beginning with four small special economic zones (SEZ) in southern China in the late 1970s, then-president Deng Xiaoping eventually opened 14 coastal cities and the entire Pearl River Delta to foreign investment in the 1980s. Deng formulated a three-stage development plan which aimed to open a part of China to all of China (dot line plane). The next President, Jiang Zemin, followed in the footsteps of his predecessor by developing the Yangtze River Delta in the 1990s. In the 2000s, President Hu Jintao implemented the Grand Western Development Program, the Northeast Revitalization Plan, and the Rise of Central China Plan. As these examples show, China s reform and opening has expanded from south to north, and from the Eastern China to the Western Central China region. Unlike his predecessors, who focused on domestic development, President Xi is attempting to connect the developed eastern coastal regions and the less-developed central western regions to the outside world by both land and sea. In doing so, he is seeking to address regional imbalances, 78 Asian Steel Watch

81 Chinese Steel Moves along the One Belt, One Road Figure 1. National Development Policies in China and Vision of OBOR Economic Zone Reform and Opening 2.0 Rise of Central China Plan (2006) Grand Western Development Program (2001) Northeast Revitalization Plan (2003) Development of Beijing, Tianjin and Bohai Bay (2000s) Development of Yangtze River Delta (1990s) Development of the Pearl River Delta (1980s) Source: Compiled from the Chinese government and media reports Netherlands Greece Kenya Russia Turkey Iran One Belt: New Silk Road Economic Belt Kazakhstan Uzbekistan Sri Lank India Indonesia One Road: 21st Century Maritime Silk Road The concept of New Silk Road unveiled by President Xi (September-October 2013) Contributing to the Silk Road Fund (USD 40 billion, December 2014) The vision of OBOR released by the Chinese government (March 2015) ease overcapacity, and encourage local companies to expand overseas. While Deng s reform and opening-up policies fueled domestic development introducing advanced foreign technology and experience, Xi s OBOR seeks to apply China s accumulated know-how in rapid growth to pioneer overseas markets and expand its clout within the global community. During this process, China s reform and opening policies have been upgraded in terms of quality. When President Xi unveiled the concept of a OBOR, the key of Reform and New Silk Road during Opening-up 2.0 a visit to Central and for realizing Southeast Asia in September and October the Chinese Dream 2013, it was generally accepted as more of a dream than a vision. There seemed to be a low likelihood of connecting Asia, Africa, and Europe along the former Silk Road through an economic belt. However, Chinese leaders have since pursued internal measures to create new policies to realize OBOR, and externally they took advantage of summit meetings to persuade leaders in other countries to participate in the initiative. Thank to such efforts, the Chinese government began to actualize this New Silk Road and announced OBOR in March One Belt refers to the land-based Silk Road Economic Belt and One Road describes an oceangoing 21st century Maritime Silk Road. The initiative aims to reinvigorate the overland Silk Road first established during the Han Dynasty (BC ) and the maritime Silk Road that emerged during the Ming Dynasty ( ) with a view to consolidating the development demand in Eurasian countries and establishing collaborative networks. The OBOR initiative as envisioned by the Chinese government directly or indirectly connects 65 countries with a combined population of 4.4 billion people. This accounts for 63% of the world s population, and their total economic output of about USD 21 trillion represents roughly Vol.03 June

82 Featured Articles Table 1. OBOR s Five Major Goals Goals Policy coordination Facility connectivity Unimpeded trade Financial integration Details Communication Inter-governmental communication regarding respective economic development strategies Macro-policy exchanges Inter-governmental policy connection; joint formulation of collaboration methods Support for cooperation Providing policy support for the implementation of practical cooperation and large-scale projects Transport Linking disconnected roadways; alleviating transport bottlenecks; and improving road network linkages Energy Constructing cross-border power supply networks; cooperating on regional power grid upgrade and transformation Communications Installing cross-border optical communications cables and undersea optical cables to connect continents Convenience Removing investment and trade barriers; reducing clearance costs; improving customs procedures Balance Finding new growth engines for trade; promoting balanced trade; expanding the scope of mutual investment Encouragement Encouraging OBOR nations to invest in China and Chinese companies to invest in infrastructure construction in OBOR nations Currency settlement Expanding the scope and scale of currency swaps and settlement Financial cooperation Seeking cooperation between related nations through a special financial institution under the Shanghai Cooperation Organization (SCO) Financial funding Jointly establishing the AIIB and the New Development Bank; expediting the creation and operation of the Silk Road Fund Bonds Issuing yuan-denominated bonds by related countries and by companies with high credit ratings inside China; issuing bonds of Chinese financial institutions and companies in yuan and foreign currencies outside China People-to-people bonds Cultural training Annually providing 10,000 government scholarships in countries along OBOR; jointly applying for inscription as UNESCO World Cultural Heritage sites; simplifying visa processes in related OBOR countries; conducting a project for maritime Silk Road cruise liners Medical care Enhancing joint responses to public medical accidents; providing medical relief and aid; expanding cooperation in traditional medicine Science and technology Constructing a joint research center, international technology transfer center, and maritime collaboration center Source: Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road, National Development and Reform Commission (NDRC) of China, Chinese Ministry of Foreign Affairs, and Chinese Ministry of Commerce, March 28, % of the total global economy. To allow the economic linkage of this vast area, China has set five major goals for OBOR: policy coordination, facility connectivity, unimpeded trade, financial integration, and people-to-people bonds. These goals aim to reduce trade and investment barriers through the development and connection of infrastructure in neighboring OBOR countries. China has contributed USD 40 billion to a Silk Road Fund to finance OBOR and established the Asian Infrastructure Investment Bank (AIIB) with an initial USD 100 billion in capital. The AIIB welcomed 57 founding members in March 2015, and at the first annual meeting in June 2016 approved USD 509 million in investment in its first four projects, including highway construction in Pakistan and Tajikistan. Using this as its financing method, the OBOR project has become a more realistic plan. The land-based Silk Linking transnational Road branches into economic corridors three routes: the North and constructing Line which starts in Beijing and crosses Russia industrial complexes and new cities and Germany to reach Northern Europe; the Middle Line which ranges from Beijing to XiAn, Afghanistan, and eventually Paris; and the South Line which links from Beijing to Pakistan, Iran, 80 Asian Steel Watch

83 Chinese Steel Moves along the One Belt, One Road Figure 2. OBOR s Six Transnational Economic Corridors China-Central Asia-West Asia Corridor An oil and natural gas pipeline connecting Xinjiang to the Persian Gulf, the Mediterranean coast and the Arabian Peninsula Lines A, B and C between China and Central Asia (in operation) and line D between Turkmenistan and Xinjiang Uyghur Bangladesh-China-India-Myanmar Corridor A 2,800-km network of roads and railways Implementation accelerated following President Xi s visit to India (September 2014) and Prime Minister Modi s visit to China (May 2015) Moscow China-Pakistan Corridor More than 30 MoUs signed during President Xi s visit to Pakistan (April 20, 2013) A USD 46 billion project to build a 3000-km network of roads, railways, pipelines to transport oil and gas, fiber cables, and industrial complexes from Pakistan s Gwadar Port to Kashgar City in Xinjiang to be scheduled by 2020 Gwadar Port New Delhi Kolkatai Irkutsk Ulaanbaatar Dhaka Hanoi Bangkok Kuala Lumpur Kunming Nanning Singapore Beijing Shenzhen Russia China-Mongolia-Russia Corridor Connected with Russia s Trans-Eurasian Belt Development (TEPR) and Mongolia s Steppe Road projects Agreed during the trilateral summit among China, Mongolia, and Russia (September 2014) Lifted to the international strategic project (January 2015) NDRC released the China-Mongolia-Russia Economic Corridor Plan and designated seven cooperation areas, including infrastructure consotruction (September 2016) Construction of New Eurasian Land Bridge A 10,900-km railway network to link from Lianyungang in China to Rotterdam in the Netherlands Related to about 30 countries China-Indochina Peninsula Corridor Aims to expand logistics, financial and information exchanges with countries in the region and boost local cooperation by linking roads and railways Source: Compiled from the Chinese government and media reports Turkey, and finally Spain. By examining its OBOR policies, China can be seen to have been focusing on connecting infrastructure facilities along the land-based Silk Road. China is currently constructing six transnational economic corridors in border areas: a China-Mongolia-Russia corridor; a new Eurasian land bridge of freight trains; a China-Central Asia-West Asia corridor; a China-Pakistan corridor; a Bangladesh-China-India-Myanmar corridor; and a China-Indochina Peninsula corridor. The Pakistan corridor is particularly meaningful since it not only connects infrastructure between the two countries, but also creates industrial complexes along the route. This example clearly illustrates how the OBOR infrastructure project will be followed by the construction of industrial complexes and new population centers in the OBOR nations and their vicinities. On May 14-15, 2017, The accelerating the Chinese government OBOR project held a major OBOR summit in Beijing, participated by 29 foreign heads of states and governments, to spur the implementation of the initiative. The AIIB expects an additional 25 members to join this year. There are several reasons why OBOR is rapidly developing both internally and externally. On the external front, first the US strategy of Vol.03 June

84 Featured Articles The Chinese steel industry has begun to search for a way forward through OBOR for the following reasons. Projections for expanded steel consumption based on OBOR are impressive; and steel demand should further expand if OBOR countries expedite related development. a pivot to Asia has been suspended. Last January, President Donald Trump signed an executive order formally halting US participation in the Trans-Pacific Partnership (TPP) and demonstrated his intention to focus on domestic issues. The OBOR project will accelerate in the absence of US restraints on China. Next, the countries linked through OBOR feature high growth potential. More than half of the 65 countries under the OBOR initiative are developing countries with a per capita GDP below USD 10,000 and have been driving rapid growth in their respective regions. Since the 2000s, the OBOR countries GDP growth rates have surpassed the global average. According to the World Bank, the average GDP growth rate of OBOR countries from 2000 to 2010 was 6.7%, surpassing the global average by 3.9%p. During this period, their annual average growth rates in trade and FDI were 18.9% and 14.8%, respectively, far higher than the global means of 1.5% and 9.0%. Even since 2011, economic development along the OBOR routes have shown a similar trajectory. China is clearly attempting to accelerate the implementation of OBOR in order to reap the benefits of the high growth potential in these regions. On the internal front, first the Chinese government hopes to strike a balance in its regional development by connecting developed eastern China with less-developed central and western China, and eventually to areas overseas. In some eastern provinces, GDP per capita is three times higher than that recorded in central and western provinces. The OBOR project needs to be expedited in order to swiftly address such regional imbalances. Second, China is helping domestic companies pursue foreign expansion into neighboring OBOR countries by linking infrastructure with them. In doing so, it hopes to address domestic overcapacity. The operation rate of Chinese industries experiencing overcapacity stands at only around 60-70%. It is desperate for them to seek overseas expansion. Third, China is attempting to diversify the routes for the transport of resources through 82 Asian Steel Watch

85 Chinese Steel Moves along the One Belt, One Road OBOR. As the Chinese economy expands, its dependence on oil imports has been growing. About 80% of China s oil imports pass through the Strait of Malacca and the South China Sea, which creates geographic concerns due to its vulnerability to a US blockade. Therefore, in order to reduce its dependence on these routes, China is seeking to develop alternatives along the OBOR routes, such as the Myanmar-China pipelines. As Chinese economic growth slows, the government is working hard to identify new growth engines. Given the high expectations for OBOR, the country is expediting investment and development in the OBOR region. According to the Chinese Ministry of Commerce, Chinese companies had established 56 economic zones among OBOR countries by the end of 2016, with an accumulated investment of USD 18.5 billion. China s trade with OBOR countries totaled USD 3.1 trillion for the last three years, accounting for 26% of total trade. If infrastructure connectivity in this region increases, trade will rise as well. During the initial period of reform and open- Chinese steel moves along ing-up ( ), the the OBOR routes Chinese steel industry grew quickly, borne along by the country s rapid economic growth and local governments competing investments. China s crude steel production was a mere Mt in 1980, but had surged to Mt by 1996, Mt by 2003 and Mt by 2008, finally peaking at Mt in Its Table 2. China and OBOR Nations Steel Use, Imports, and Exports (2015) Country Apparent Steel Use 1 compounded annual growth rate was 9.5% from 1980 to However, the Chinese steel industry has been suffering severe aftereffects of this accelerated growth: falling steel consumption following the economic slowdown that has taken place since 2014; prolonged oversupply with declining steel prices; and suspension of facility operations and a rising number of bankruptcies stemming from the spike in financial, environmental, and labor costs. Under such circumstances, the Chinese steel industry has begun to search for a way forward through OBOR for the following reasons. First, projections for expanded steel consumption based on OBOR are impressive. Steel consumption is ex- (1,000 tonnes, kg) Apparent Steel Use per Capita 2 Exports3 Imports 4 Net Imports Kazakhstan 2, , ,200 Russia 44, ,702 4,364-25,338 Ukraine 3, , ,917 Uzbekistan 1, ,160 1,143 Bangladesh 4, ,967 3,962 India 89, ,563 13,284 5,721 Indonesia 13, ,003 11,413 9,410 Malaysia 11, ,823 7,816 5,993 Myanmar 2, ,420 2,418 Pakistan 7, ,411 3,358 Philippines 10, ,282 7,175 Singapore 5, ,729 5,180 3,451 Sri Lanka 1, Thailand 19, ,254 14,628 13,374 Viet Nam 21, ,512 16,343 14,831 Japan 67, ,804 5,918-34,886 South Korea 58,125 1,156 31,173 21,674-9,499 China 700, ,556 13,178-98,378 Note: 1) Crude steel equivalent, 2) kg crude steel, 3) & 4) Semi-finished and finished steel products Source: worldsteel Vol.03 June

86 Featured Articles Table 3. China s Steel Exports to Neighboring Countries (1,000 tonnes) Country/Region Group Country/Region Export Share (%) Export Share (%) CAGR (%) Major Area Asia 81, ,652 64,471 42, Europe 7, ,555 7,550 5, North America 1, ,334 4,512 2, Latin America 7, ,574 9,552 6, Africa 8, ,437 6,912 4, Oceania World 108, ,405 93,790 62, Asia Taiwan 2, ,502 2,823 1, India 3, ,762 3,798 1, Japan 1, ,328 1, Pakistan 2, ,556 1, Korea 14, ,496 12,969 9, Indonesia 5, ,105 3,402 2, Malaysia 3, ,312 2,484 1, Thailand 6, ,730 3,692 2, Vietnam 11, ,148 6,628 3, Singapore 2, ,226 3,215 2, Philippines 6, ,609 4,779 2, Cambodia Laos Myanmar 2, ,173 1,908 1, Brunei CIS Russia Uzbekistan Ukraine Kazakhstan Kyrgyzstan Eastern Turkey 2, ,060 1, Europe/ME/ Poland Africa Saudi Arabia 3, ,658 2,318 1, UAE 2, ,354 1,996 1, Iran 1, ,109 1, Qatar Egypt 1, ,537 1, Source: Compiled by the author based on CEIC data pected to increase by 30 Mt annually simply for the transportation and infrastructure projects drawing on central and local government investment. Moreover, steel demand should further expand if OBOR countries expedite related development. Therefore, the Chinese steel industry has been actively working on rationalizing distribution, improving competitiveness, and accelerating foreign investment under the OBOR initiative. Steelmakers in Western Central China, including JISCO and Panzhihua Iron and Steel, are finding themselves playing a greater role and growing in 84 Asian Steel Watch

87 Chinese Steel Moves along the One Belt, One Road importance since this western central area is the starting point for the overland Silk Road. It is crucial to increase the competitiveness of steelmakers in this area in order to satisfy surging steel demand in the region and penetrate into neighboring foreign markets. To this end, the Chinese government is sparing no effort in providing related policies and funding. Steelmakers in the Eastern and Northeastern regions, such as Baowu Steel, Hebei Steel, and Ansteel, are currently emphasizing strengthening the competitiveness of steel mills in coastal areas. By doing so, they are hoping to penetrate into countries with high growth potential along the maritime Silk Road. China is especially interested in nations along this water route with high potential for steel consumption or imports India, Thailand, Indonesia, Vietnam, Pakistan, and Bangladesh, among others. Second, over the recent few years Chinese steel exports have been focused on the OBOR nations. Since becoming a net steel exporter with 43 Mt in 2006 (import, Mt), China s steel exports have continued to grow. Gross exports hit a record high of Mt and net exports reached Mt in Last year, steel exports surpassed 100 Mt. The type of steel products exported has been increasingly shifting from low-grade steel products, such as long products, to high-grade types, including flat products. China s major steel export destinations include South Korea and Southeast Asia. If the OBOR project is accelerated and Chinese steel competitiveness improves, steel exports to other countries/areas, including India, Pakistan, and the Middle East, will increase. Lastly, if infrastructure connectivity with OBOR nations improves, China is positively considering investing in nations with high growth potential for steel. Since 1990, the accumulated number of Chinese FDI cases in the steel industry has surpassed 70, including 20 in the last three years alone. This illustrates how the Chinese steel industry is ramping up its foreign expansion. The major current investment destination is Southeast Asia as part of efforts to create export hubs and build service centers in key markets. The nation s foreign expansion still focuses on long products. Additionally, it aims to address domestic overcapacity and avoid environmental and financial restrictions. However, the focus of China s OBOR expansion will increasingly shift to flat products and investment in foreign markets. After securing a bridgehead in foreign markets, China is expected to expand the value chain. This is line with the overall OBOR process of constructing infrastructure in neighboring countries establishing basic industries creating industrial complexes building new cities. Deng Xiaoping initiated How much will OBOR Reform and Opening up change the future 1.0 in 1978, whereas Xi of the Chinese steel Jinping has envisioned industry? his Reform and Opening up 2.0 in the form of the OBOR project. While this second phase will be implemented over the next 30 years, the success of the project is directly Vol.03 June

88 Featured Articles Table 4. Chinese Steel Investment in OBOR Nations (Including Plans) Company Announcement Country of Investment Details of Investment NISCO Mar Indonesia Construction of JV producing wire rod and bar (with Gunung Gahapi) WISCO Mar Indonesia Construction of JV integrated steel mill (US$ 5 bil.) DeLong Group May 2014 Thailand Investment in HR strip mill (annual capacity of 0.6 Mt) June 2014 Malaysia Signing of MoU with local company Perak on ISM producing flat products (3 Mt) Panhua Group June 2014 Philippines Plan to build a pre-painted steel mill SIPG July 2014 Malaysia Groundbreaking for steel PJT (3.5 Mt) Kunming Steel Sep Vietnam Operation of JV with VN Steel (annual capacity of 0.5 Mt) WISCO Nov India Establishment of electrical sheet service center Tsingshan Steel Nov Indonesia Building of nickel smelter plant JV June 2015 Indonesia Signing on flat stainless steel project (3 Mt) Shougang Jan Malaysia Completion of first BF (0.7 Mt) of integrated steel mill (ISM) project (Total 3 Mt) Magang Mar Kazakhstan Signing of MoU on steel PJT (1 Mt) China Venture May 2015 Malaysia Plan to acquire stainless production line (RMB 400 mil.) Ansteel July 2015 Indonesia Consideration of building new ISM (5 Mt) Hebei Steel Apr Serbia Acquisition of iron ore mine with 270 Mt reserves ( 14); the Hebei Provincial Government approved ISM PJT (5 Mt) using this mine; acquisition of Smederevo mill in Serbia JISCO July 2016 Jamaica Acquisition of Jamaican aluminum processing plant from Russia s lus RUSAL WenAn Steel Aug Malaysia Signing of MoU on building 5 Mt ISM Source: Compiled from Mysteel and media reports linked to the future of the Chinese steel industry. For OBOR to thrive, China needs to address the following issues. First, the OBOR nations in which China has the greatest interest are for the most part developing countries with high-risk business environments, including rampant corruption, inadequate legal systems, and unclear policies. Second, advanced countries such as the USA and European nations will increasingly seek to rein in China during the implementation of OBOR. China must work to minimize conflicts with these countries. Third, China needs to reduce OBOR nations local antipathy to its massive exports and investments. If China simply pursues its own interests without any apparent benefits in the local communities, OBOR cannot succeed. Fourth, Chinese companies need to accumulate experience in foreign entry. It has only been two to three years since China s foreign expansion began to take off; therefore, the country needs to continue to amass knowhow in foreign expansion and strengthen localized management. If China properly addresses the above issues and successfully pursues the OBOR project, its steel industry will face a markedly different future. 86 Asian Steel Watch

89 Chinese Steel Moves along the One Belt, One Road The Asian steel community needs to establish collaboration channels among OBOR-related countries, companies, and international organizations in accordance with changing trends in Chinese policies. First, China can realign its steel industry on the domestic and foreign levels through the OBOR project, leading to maximized efficiency in raw material procurement, steel production, and sales. This will allow Chinese steelmakers to increase their global competitiveness. Second, the Chinese steel industry will be able to enhance its overall technology and product quality while exploring neighboring OBOR markets. China is well aware that the project cannot survive if based on obsolete facilities and technologies. Experts also advise that the Chinese steel industry requires advanced facilities and technologies to reduce local antipathy in the OBOR nations and advance into these markets. The Made in China 2025 and Internet Plus initiatives aim to sophisticate and smarten the steel industry. These initiatives will become an important foundation for exploring OBOR markets. Finally, the Chinese steel industry should boost its eco-friendliness and further reduce environmental emissions over the process of developing OBOR. Since China has already experienced environmental and energy issues during the rapid growth of its steel industry, it can be expected to address environmental and energy issues from the early stages of the OBOR project. This is what neighboring countries anticipate from China. In conclusion, China s OBOR project can provide additional opportunities for global steelmakers if it succeeds in increasing China s domestic steel demand and nurturing steel industries along OBOR. However, if the Chinese steel industry monopolizes neighboring markets and competition intensifies among global steelmakers in these regions, disputes could certainly arise. Since China holds the lion s share of the global steel market and its implementation of OBOR is accelerating, the country s impact on neighboring countries, such as those in Southeast and Central Asia, is becoming increasingly prominent. Therefore, the Asian steel community needs to establish collaboration channels among OBOR-related countries, companies, and international organizations in accordance with changing trends in Chinese policies. In addition, necessary settlement measures among the Asian countries should be emplaced before any conflict or dispute becomes serious. If so, the Asian steel industry will be able to pursue balanced and sound development. Vol.03 June

90 Market Trend and Analysis MARKET TREND & ANALYSIS MEASURING AND FORECASTING STEEL MARKET CONDITIONS WITH THE POSRI STEEL INDEX Center for Economic Research and Information Analysis POSCO Research Institute 88 Asian Steel Watch

91 MEASURING AND FORECASTING STEEL MARKET CONDITIONS WITH THE POSRI STEEL INDEX Vol.03 June