Where do we go from here? Reflections on the future of the global stainless steel industry

Transcription

1 Where do we go from here? Reflections on the future of the global stainless steel industry John Lichtenstein Managing Director, Global Metals Lead AMM/SMR 29 th Annual Stainless & Its Alloys Conference Chicago, October 27, 2015

2 Overview The global stainless steel industry remains mired in crisis with limited visibility as to how to escape from it While the proximate causes are the recent surge in Chinese exports combined with low nickel prices, fundamental causes have been building for some time The prevailing belief is that things will be better once we get back to normal conditions: i.e., Chinese exports contained by trade actions and excess inventory burned through There are two problems with this perspective Normal was never really that good, certainly not from the perspective of stainless company shareholders; and There is little reason to believe that future conditions will be similar to the past; in fact, we can already identify trends which will fundamentally disrupt the landscape Future conditions will create new threats to the industry, but also new opportunities China will remain a potent threat, though in a different shape Digital Disruption and the Circular Economy will both drive and enable the future transformation of the industry Copyright 2015 Accenture All rights reserved. 2

3 Where have we been? The global stainless industry went into decline before the great recession, and has yet to fully recover Steel Industry EBIDTA Margins (%) Stainless (N=9) Carbon (n=44) SSC )n=4) Source: Company Reports, Accenture Analysis Copyright 2015 Accenture All rights reserved. 3

4 Where have we been? Since 2009, the stainless steel industry s return on capital employed (ROCE) has been close to zero Steel Industry ROCE (%) Stainless (N=9) Carbon (n=44) SSC (n=4) Source: Company Reports, Accenture Analysis Copyright 2015 Accenture All rights reserved. 4

5 Industry response The industry has pursued numerous strategies to improve performance Strategy Examples Consolidation with capacity rationalization Outokumpu + Sheffield + Avesta + Krupp Nirosta + Mexinox + ThyssenKrupp Outokumpu Ugine + J&L + Alz + Acesita Aperam Greenfield investment Acerinox ThyssenKrupp Jindal Global Expansion ThyssenKrupp Acerinox Posco Increase scale to lower costs Outokumpu Product Innovation Duplex Process Innovation Strip Casting (TK, Nucor) Co-production with carbon (TK, AK Steel) Supply Chain Management Acesita (Aperam) Business Models Standalone, portfolio, integrated (with carbon) Cost Reduction Everyone Trade Cases Industry core competence Copyright 2015 Accenture All rights reserved. 5

6 What went wrong? Everyone chasing growth Unrealistic growth expectations Investment cycles out of sync with market cycles Cross-subsidization (in multi-product businesses) Non-market based decisions (to build, continue to operate) Minimum scale vs. natural market size Scale increase to reduce costs Speed of technology transmission Volatility (impact of raw material financial players) Copyright 2015 Accenture All rights reserved. 6

7 Industry consolidation Global industry consolidation increased until around 2005 and then started to decline, in line with the rapid proliferation and growth of Asian producers 80% 70% 60% 50% 40% 30% 20% 10% 0% Top Producers Share of Global Production 76% 71% 66% 62% 22% 23% 21% 53% 23% 17% 54% 48% 45% 39% 36% Top 5 Next 5 Extensive consolidation in EU and NA from 1990 through 2005 Today, 15 of top 20 producers are from Asia, 11 from China Source: SMR, ISSF, Company Reports, Accenture Analysis Copyright 2015 Accenture All rights reserved. 7

8 Commoditization Despite its high value and unique properties, stainless steel has to a great extent become commodified due to several discernible factors Quest for production efficiencies drives high degree of product standardization Small end-user order quantities drives high percentage of sales to service centers Reinforces standardization to limit inventories Low value addition opportunities drives sensitivity to small changes in pricing which drives arbitrage-seeking behavior..and increased volatility Natural conduit for imports, particularly in periods of global excess capacity Global congruence in standards (due to high % of trade and technology transfer) Low freight-to-product value(relative to carbon) High percentage of costs in raw materials whose price is heavily influenced by financial speculation (amplifying volatility) Copyright 2015 Accenture All rights reserved. 8

9 Where do we go from here? A return to previous normal conditions is neither desirable nor feasible: new trends and disruptive forces are changing the landscape and potential future pathways for the industry China s influence continues to grow despite an inevitable reduction in direct exports Digital technologies will disrupt all facets of the industry, particularly the supply chain The transition to a circular economy presents significant opportunities for stainless, though it will also lead to fundamental changes in the supply chain Copyright 2015 Accenture All rights reserved. 9

10 Trade Direct trade in stainless steel has been declining as a % of total production; this trend is expected to continue as more production is concentrated in Asia 45,000 Global Stainless Steel Production & Trade (000 tons and %) 41, % 40,000 35,000 31, % 30,000 80% 25,000 20,000 15,000 12,434 50% 13,853 64% 18,044 24,570 24,904 68% 47% 46% 42% 60% 40% 10,000 5,000 24% 19% 17% 15% 15% 11% 20% % Global Production Inter-Regional Trade as % of Production Total Exports as % of Production Source: ISSF, Accenture Analysis Copyright 2015 Accenture All rights reserved. 10

11 China Early optimism that government will play stronger hand in eliminating excess capacity has faded in the face of lower growth rates and concern over social unrest While the rest of the world focusses on China s direct steel exports, indirect exports continue to grow, sapping other countries growth potential Low steel prices combined with the recent devaluation will help propel indirect export growth Coming to an industry theatre near you: Chinese investment The Government s recent decision to open the domestic steel industry to foreign majority ownership is designed to take the issue of reciprocity off the table The Government has also announced a plan to export steel over capacity by encouraging foreign acquisitions and investment in new plants around the world Copyright 2015 Accenture All rights reserved. 11

12 China Exports to the US While direct exports have accelerated in the past two years, indirect stainless steel exports continue to erode the domestic market at a rapid pace 600 China Stainless Steel Exports to the US (000 tons) Indirect Imports Direct Imports Source: SMR, Accenture Analysis Copyright 2015 Accenture All rights reserved. 12

13 China Exports Fridges & Cookers China is the leader in the export of white goods (fridges and cookers), accounting for 21% of the global total Export Value Growth CAGR Share of Exports 2000 Share of Exports 2013 China 1475% 4% 21% Mexico 449% 5% 10% Italy 50% 17% 9% USA 40% 14% 7% S. Korea 226% 5% 6% Germany 140% 7% 6% Turkey 820% 1% 5% Thailand 440% 2% 4% France 70% 6% 3% Poland 1204% 1% 3% Austria 477% 1% 2% Czech Rep. 642% 1% 2% Hungary 208% 1% 2% Source: Global Trade Atlas, Accenture Analysis Copyright 2015 Accenture All Right Reserved. 13

14 San Francisco Bay Bridge Headlines Not stainless but. Copyright 2015 Accenture All Right Reserved. 14

15 The future? The entire stainless steel value chain (raw materials distribution) will be radically different with increased vertical integration, collaboration and disintermediation Digital technologies applied in the planning, selling and manufacturing of stainless steels will support significantly better translation of market signals in production planning, with more highly differentiated service delivery models The Circular Economy will require products with longer use life already an advantage of stainless - but also increased recycling and reusability: Greater collaboration (or integration) of production, distribution, and recycling/remanufacturing will be required Pressure on raw material suppliers will intensity as demand for primary materials declines In line with both of these developments will be further horizontal consolidation at each stage of the value chain, with inefficient producers and distributers squeezed out Copyright 2015 Accenture All rights reserved. 15