New Competitive Realities in Steel: Cost Leaders in the New World

Transcription

1 New Competitive Realities in Steel: Cost Leaders in the New World by Gilles Calis, Managing Consultant SteelConsult International SBB Steel Markets Asia Conference November 25 Taj Lands End Hotel Mumbai, India

2 Introduction to SteelConsult International SERVICES Strategy Consulting Market Research Business Planning & Financial Modelling Customer Satisfaction Surveys WHY STEELCONSULT? Specialized in Iron & Steel Expertise & experience End-use sector knowledge Customer focus Commitment Industry contacts Languages: PRODUCT AREAS Steelmaking Raw Materials Semis Flat Products Long Products Tubes Processed Products SteelConsult International 25 Page 2

3 New Competitive Realities in Steel: Cost Leaders in the New World - Contents Contents Introduction Raw materials Labour Energy Conclusions SteelConsult International 25 Page 3

4 New Competitive Realities in Steel - Introduction Though raw materials costs have risen and sales prices have declined, the steel industry is still highly profitable 71.5% 25 iron ore price rise boosts earnings of mining companies in Q2 25 EBITDA (Index (US$, Q1 2=1)) But in US$ terms steel mills still enjoy much higher earnings than the independent iron ore mining industry EBITDA (mln US$) 7 6 Global Steel Earnings Barometer Automotive Earnings Barometer Iron Ore Earnings Barometer Q , 4, Global Steel Earnings Automotive Earnings Iron Ore Earnings 45, 4, 5 4 Top-1 publicly listed iron ore mining companies (45% of global iron ore output, 75% of seaborne trade) , 3, 25, 35, 3, 25, 3 3 2, 2, 2 Top-67 publicly listed mills (65% of global steel output) Q1 2 15, 1, 15, 1, 1 Top-12 Automotive OEMs (9% of global car output) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q , Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q , Source: SteelConsult International ( Note: Q3 data are partial estimates SteelConsult International 25 Page 4

5 New Competitive Realities in Steel - Introduction The competitive performance of Indian mills is excellent. Though scale is limited, margins are high EBITDA (Index (US$, Q1 2=1)) 6 5 Global Steel Earnings Barometer Regional Barometer India* Regional Barometer China Regional Barometer Central & South America 6 5 EBITDA margin (%, H1 25) 6% 5% CSN 4 4 4% Tata SAIL % 2% Essar Steel Baosteel Severstal Ispat Ind. US Steel POSCO Nippon Steel Mittal Steel*** Arcelor** 1 1 1% Corus**** Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q % 1, 2, 3, 4, 5, Turnover (mln US$, 24) Source: SteelConsult International ( Notes: *includes SAIL, Tata Steel, Essar Steel, Ispat Industries and RINL **incl. 1% CST & Acindar *** incl. ISG ****excl. aluminium activities SteelConsult International 25 Page 5

6 New Competitive Realities in Steel - Introduction The new competitive arena in 25 Indian mills are among the lowest cost producers in the world Operating cost HR coil by component, US$/tonne, Raw materials Labour Net Energy Other Western Europe North Am eric a Japan China South Afric a India Braz il Russia Source: SteelConsult analysis Notes: Costs based on average of main integrated HR producers in each country/region SteelConsult International 25 Page 6

7 New Competitive Realities in Steel: Cost Leaders in the New World - Contents Contents Introduction Raw materials Labour Energy Conclusions SteelConsult International 25 Page 7

8 New Competitive Realities in Steel - Raw Materials Access to local raw materials is the decisive cost differentiator in 25. India has large reserves of iron ore, but needs to import low ash coal/coke Costs of raw materials, US$/tonne of HR coil Western Europe Japan North Am erica China India Braz il South Afric a Russia Source: SteelConsult analysis Notes: Costs based on average of main integrated HR producers in each country/region SteelConsult International 25 Page 8

9 New Competitive Realities in Steel - Raw Materials Freight adds up to $6/tonne of steel to mills importing raw materials from overseas. Local supply of ore, and to some extent coal, is a major advantage for Indian mills Baltic Capesize & Panamax Indices 9, Baltic Capesize Index Baltic Panamax Index 9, 8, 8, 7, 7, 6, 5, 4, Since 23, freight rates are not only much higher, but also much more volatile 6, 5, 4, 3, 3, 2, 2, 1, 1, M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N Source: MaxMart SteelConsult International 25 Page 9

10 New Competitive Realities in Steel: Cost Leaders in the New World - Contents Contents Introduction Raw materials Labour Energy Conclusions SteelConsult International 25 Page 1

11 New Competitive Realities in Steel - Labour Hourly labour costs in India are lowest in the world. But how soon will wages catch up? Hourly labour costs in the steel industry (US$), India Ukraine China Russia Brazil South Africa South Korea USA Japan Western Europ e Source: Datastream, The Economist, SteelConsult analysis SteelConsult International 25 Page 11

12 New Competitive Realities in Steel - Labour While Indian labour costs (in US$ terms) are expected to almost double in the next 5 years, they will remain much lower than in Europe, North America and Japan Hourly labour costs manufacturing (US$) Hourly labour costs manufacturing (US$) India Russia China India Russia China Japan USA Germ any * 27* 29* * 2 7* 29* Source: Eurostat, International Labour Organization, US Department of Labor, EIU, SteelConsult analysis SteelConsult International 25 Page 12

13 New Competitive Realities in Steel - Labour It takes decades for labour costs in rapidly developing economies to catch up with those in mature economies Hourly labour costs manufacturing ( ) Hourly labour costs manufacturing (US$) 35 3 Germ any Spain Portugal Ireland 35 3 Japan Taiwan China South Korea USA In 24, HLC in Spain were only 48% of those in Germany whilst Korean HLC stood at just 45% of those in Japan Source: Eurostat, International Labour Organization, US Department of Labor, EIU, SteelConsult analysis SteelConsult International 25 Page 13

14 New Competitive Realities in Steel - Labour However, labour productivity in India is still low. Indian mills have an opportunity to increase their competitiveness by raising productivity faster than US$ costs of employment Manhours*/tonne of crude steel, 24 Labour costs/productivity** India, indexed (1998=1) Productivity Indian steel mills Hourly Labour Costs India (US$) Since 1998, employee productivity has doubled but so have hourly labour costs 1 5 Nippon Steel POSC O Arcelor*** CSN Corus**** US Steel Mitt al Steel Novolipetsk Bao steel Tata Steel SAIL e Source: EIU, SteelConsult analysis Notes: *Manhours based on total company staff **Productivity defined as steel output/head ***Arcelor excl. A3S ****Corus excl. Aluminium and Distribution & Building Systems SteelConsult International 25 Page 14

15 New Competitive Realities in Steel: Cost Leaders in the New World - Contents Contents Introduction Raw materials Labour Energy Conclusions SteelConsult International 25 Page 15

16 New Competitive Realities in Steel - Energy Energy has a relatively modest impact on competitiveness of integrated mills. However, the days of cheap energy are over Natural gas consumption by region (bn m³) Global natural gas reserves (bn m³) 4,5 4, North Am erica South Am erica Europe CIS Asia Middle-East Africa 25, 3,5 3, 2,5 2, 1,5 1, Global gas reserves Source: IEA, US Department of Energy, SteelConsult analysis * 28* 21* 212* 214* 2 16* * 22* 222* 224* 2, 15, 1, 5, SteelConsult International 25 Page 16

17 New Competitive Realities in Steel - Energy Russia and the Middle-East hold 65% of the world s identified natural gas reserves. Asia, Europe and North America increasingly rely on imported energy CIS Annual production (bn m³) 763 Identified reserves (bn m³) 51,56 % 34% Gas reserve life duration at production levels 24 (years) Middle East 19 Middle East 25 47,629 31% Africa 84 North America 77 15,22 1% CIS 67 Asia ,631 8% South Am erica 62 Africa ,377 7% Asia 38 Europe South America ,27 6,594 5% 4% Europe 29 World 2, ,163 1% North Am erica Source: USGS, IEA, SteelConsult analysis Note: Production refers to dry natural gas SteelConsult International 25 Page 17

18 New Competitive Realities in Steel - Energy Indian mills should seek to reduce dependency on external energy by maximizing energy efficiency and reducing exposure to the price of natural gas Coal and coke prices will decrease from the peak levels of 24/25. Prices for energy, however, will remain high in India as in most other parts of the world; The energy that is locked inside the coal and is released through coke oven and BF gas will become increasingly valuable in the future; As a result of the developments mentioned above, the BF/BOF route will become increasingly attractive vs the (gas based) DRI/EAF route in countries without cheap gas; To increase competitiveness, integrated mills should seek to reduce dependency on external energy by maximizing energy efficiency and recycling; The Indian mills using the gas based DRI/EAF route should manage their exposure to high energy costs by: Joint purchasing with other large energy consumers (eg chemicals & alu companies); Examining possibilities to switch to non-gas intensive reduction/smelting technologies; Importing HBI from gas rich countries in the Persian Gulf or the CIS by purchasing from local suppliers and/or investing in or relocating DRI production facilities to these countries. US prices* for natural gas (US$/1,m³, real prices in 2 dollars) '8 '85 '89 '93 '97 '1 '5* '9* '13* '17* '21* '25* Source: USGS, IEA, US Department of Energy, SteelConsult analysis Note: * Lower 48 average wellhead SteelConsult International 25 Page 18

19 New Competitive Realities in Steel: Cost Leaders in the New World - Contents Contents Introduction Raw materials Labour Energy Conclusions SteelConsult International 25 Page 19

20 New Competitive Realities in Steel - Conclusions Conclusions: How can Indian mills retain their competitive edge? Indian mills are among the most cost competitive mills in the world. The large capacity expansions planned in the coming years will lead to scale economies and enhance competitiveness. The global supply/demand balance for raw materials is tightening, to the relative benefit of mills with access to cheap local raw materials. Indian mills without captive supply of iron ore and coal should seek to secure at least part of their long term requirements urgently. Energy will become an increasingly important cost differentiator for integrated mills around the world. With energy relatively expensive compared to other parts of the world, Indian mills should continue to improve energy efficiency and recycling and secure lowest possible prices. Labour costs in India are lowest in the world, and will remain much lower than those in most other countries for many years. To maximize this competitive advantage, Indian mills need to ensure that productivity improvements keep up with, or even exceed, rising wages and other costs of employment. The capacity expansions planned in the next few years provide an excellent opportunity to increase productivity while minimizing social consequences. However, cost is not the only important competitive differentiator. Indian mills will also have to further increase investments in R&D, product quality, customer support and delivery performance. These criteria are particularly important in view of the increasing involvement of leading foreign mills in the Indian industry and market. SteelConsult International 25 Page 2

21 New Competitive Realities in Steel: Cost Leaders in the New World Thank you for your attention! SteelConsult International Trompenburgstraat 2 1st floor 179 TX Amsterdam The Netherlands Tel: Fax: info@steelconsult.com SteelConsult International 25 Page 21