Wildfire in the steel industry? Causes and outlook - SECTOR UPDATE - Andersch ...
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SECTOR UPDATE Wildfire in the steel industry? Causes and outlook © 2019 Andersch AG
SECTOR UPDATE STEEL INDUSTRY
WORRYING REPORTS nating to declining. Pressure is also being put on prices as
a result of steel being dumped on the market by the Chi- STEEL DEMAND P.A. (MN TONNES, % CAGR)
After 31 years, a longstanding fixture of the DAX,
nese and lower production costs from Eastern European
Thyssen-Krupp, makes its exit from Germany’s lea- Global Europe
suppliers. Competition is becoming increasingly fierce as 2.8% -0.8%
ding index; world market leader ArcelorMittal cuts
companies fight for an ever-dwindling number of orders.
back production simultaneously at several locations; 1,708 1,775 1,806 206 200 203
Salzgitter and Voestalpine see a slump in profits; SHRINKING DEMAND
Schmolz Bickenbach announces several profit war-
nings, and Klöckner & Co. is in the middle of a restruc- The key end-user markets for the steel industry – the 2018 2019F 2020F 2018 2019F 2020F
turing process. It is quite clear that the steel industry construction sector (34%), the automotive industry
is up against the wall. (20%) and engineering (15%) – are currently expe-
riencing different economic situations which have a LEADING STEEL PRODUCERS, GLOBAL AND
A WHOLE HOST OF direct impact on the steel industry: IN EUROPE (REVENUE DEVELOPMENT 2019
OVER PY, MARKET SHARES 2018)
NEGATIVE TRENDS • Construction sector: Economic growth is expected
to lose momentum. For 2019, the Central Associa-
Revenue development (%) Market share (%)
The sharp decline in demand from key customer sectors,
tion of the German Construction Industry (ZDB) an-
the weakening Euro, higher raw material costs and lower #1 ArcelorMittal -1.8* 5.3
ticipates an increase in revenues of 8.7% in Germa-
steel prices were already weighing down on earnings in
ny and around 5.0% for the following year, which
Global
#2 BAOWU -5.9*** 3.7
Europe in the first half of 2019. The situation was further
means that the construction sector remains one of
aggravated by American tariffs, Brexit uncertainties, #3 Nippon Steel 3.4** 2.7
the few forces driving the economy.
persistent overcapacities, an ineffective customs policy
• Automotive industry: The Worldwide Harmonised
on the part of the EU and the additional pressure being #1 Thyssenkrupp -1.9* 0.7
Light Vehicle Test Procedure (WLTP), in force sin-
thereby put on steel prices by foreign dumping. In the
Europe
ce September 2018, caused a brief slump in demand #2 voestalpine -3.8** 0.4
second quarter of 2019, EU demand for steel fell shar-
among automobile manufacturers. There have been
ply by 7.7% year-on-year (Q1/2019: -1.6%). The steel #3 Salzgitter -2.0* 0.4
increasing signs of crisis throughout the industry
industry is undergoing a period of fundamental structu-
since 2019. In Germany alone, production was down * H1 2019; ** Q1 2019; *** Q3 2018
ral change. Consumption levels are barely rising, even
9% for the year to 9/2019 compared with the previ-
during periods of good economic performance, as steel
ous year. In the USA, unit sales dropped by around
is being replaced by other materials. On top of this come
1%, while in China unit sales were down by around SHARE OF EUROPEAN CUSTOMER
rising energy and CO2 emission costs as well as what is
12%. The markets in Europe and the USA are ex- INDUSTRIES 2018 (%)
projected to be a very capital-intensive process to move
pected to stagnate in 2020, whereas a slight recove-
towards CO2 neutral production. Other
ry in China is forecast on the back of potential tax re-
17
lief measures. 34
SHARP RISE IN PRICES OF Metal 14
Construction
• Engineering: European demand in particular wa-
RAW MATERIALS ned as a result of lower investments stemming
products
15
20
The jump in iron ore prices is attributable to the devas- from the automotive sector (real production -0.9% Engineering Automotive
tating dam failure in a Brazilian iron ore mine belonging in H1/2019). For 2019, a year-on-year decline of
to Vale. The rise in commodity prices was also fuelled -2.0% overall is expected. The outlook is also gloo-
by speculation about a possible return by the Chinese my – current forecasts by the Mechanical Enginee-
„The situation is not so bad in other parts of the
to stimulus policies and the tropical cyclone Veronica, ring Industry Association (VDMA) assume that pro-
world, but I am really concerned about Europe.
which severely disrupted Australian iron ore production. duction will drop by a further 2.0% in 2020.
The steel industry is to a certain extent what
drives the economy as a whole, and Europe’s eco-
FALLING STEEL PRICES According to Eurofer, the main indicators of the steel
nomy is currently struggling with many problems.“
industry point to a continuation of the downturn
The steel industry is experiencing a significant fall in
(2019: -3.1%) lasting until at least Q2/2020. Lakshmi Mittal, CEO and principal shareholder of
prices due to a continued surplus of capacities on the
Sources: Andersch analysis, company information, Reuters, Arcelor Mittal, in an interview with FAZ translated
European market and a weak economic environment World Bank, WV Stahl, Business Standard, Oxford Econo- from German; accessible at: https://bit.ly/34aMQ8V
characterised by customer industries ranging from stag- mics, Worldsteel, Eurofer, VDA, VDMA, ZDB, Kassenzone
GLOBAL DEMAND FOR STEEL BY REGION (MN TONNES) x% CAGR 2018-2020 Market relevance for German producers, measured by revenue (0= low; 3= high)
NAFTA 0.7% EU28 -0.1% Rest of Europe -4.0% China: Strong construction sector CIS 3.4%
supports demand, whereas trade
141 142 143 Europe: Slowing growth in 169 167 169 37 33 35 conflict and economic slowdown will 55 58 59
customer industries along depress demand in subsequent years
with uncertainty surrounding
2018 2019F 2020F Brexit and trade conflicts 2018 2019F 2020F 2018 2019F 2020F China 4.3% 2018 2019F 2020F
Relevance: Relevance: Relevance: Relevance:
835 900 909
2018 2019P 2020P
Central/South America: LATAM 1.7% Africa 0.9% Relevanz: Rest of APAC 3.0%
Upturn in the Brazilian cons-
truction sector and Mexican
44 44 46 37 36 37 340 348 361
mining industry
APAC: Infrastructure programmes
in India and South-East Asia lead
2018 2019F 2020F 2018 2019F 2020F 2018 2019F 2020F
to rising demand for steel
© 2019 Andersch AG Relevance: Relevance: Relevance:STEEL PRODUCERS
MARGINS UNDER HEAVY PRESSURE SHARE PRICES IN DECLINE
Iron ore prices on the procurement side and steel prices on the sales All companies listed below have taken countermeasures such as
side have developed in a substantially negative way since January 2018 reducing capacities, introducing short-time working and cutting cost
DEVELOPMENT OF STEEL PRICES COMPARED TO IRON ORE SHARE PRICES OF LISTED STEEL PRODUCERS
PRICES (INDEXED, 1ST JAN 2018 = 100) (INDEXED, 2ND JAN 2018 = 100)
180 Iron ore spot price China hot rolled
USA hot rolled N. Europe hot rolled 100
160
140 80
120
Margin loss
60 ArcelorMittal
100 Salzgitter
Thyssenkrupp
40
80 Voestalpine
Schmolz Bickenbach
0 0
Jan 18 Nov 18 Sep 19 Jan 18 Nov 18 Sep 19
RAW STEEL – CAPACITIES AND PRODUCTION STEEL PRODUCERS UNDERGOING current value creation and distribution chain incorporates
(MN TONNES) x% Surplus capacity STRUCTURAL CHANGE dealers, sub-dealers and pre-processing companies, with
corresponding margins at each intermediate stage, there-
In addition to short-term effects such as the development
Global 28% 29% 19% by extending the delivery process. Digitalisation enables
of iron ore and steel prices or the economic situation,
producers to organise themselves in a more vertical way
2,309 2,275 2,234 steelmakers are facing lasting changes in the sector: mo-
and to deliver more directly to end users in the future.
Production
dern, lighter substitutes and potential capacity reductions
Capacity
What this requires, however, is the development of a fully-
in key customer industries mean that demand for steel
fledged distribution system including an integrated, auto-
2014 2016 2018 sees only moderate growth even when times are good.
mated ordering process.
Producers also need to prepare themselves for a surge in
EU-28 28% 26% 23% additional costs, caused by the need for them to compen- MARKET CONSOLIDATION
229 220 217 sate for CO2 emissions and, in the long term, to produce in IN EUROPE
Production
a more climate-friendly or even climate-neutral way. The
Capacity
first step here is aimed at converting process gases; in the The driving forces described above are serving to
2014 2016 2018 long term, however, there are plans to use hydrogen as a reinforce consolidation trends in the European steel
reducing agent instead of coke used up to now. A conside- industry. Existing overcapacities on the world market
Germany 17% 19% 18%
rable amount of investment is needed to enact such chan- are not the only reason that these trends will be of a
Production
52 52 52 ges, which only ensure competitiveness if the producers permanent nature – once plants have been closed at
Capacity
exporting to the EU either go along with this practice or if a high cost, they will not be quickly recommissioned.
2014 2016 2018 climate tax is levied at the EU’s external border. Digitalisa- Sources: Andersch analysis, company information, expert
tion is another trend that is reshaping the landscape: the interviews, Worldsteel, WV Stahl, Eurofer, OECD
REGULATORY FACTORS – DISADVANTAGEOUS FOR THE GERMAN STEEL INDUSTRY
EU TARIFF QUOTAS SECTION 232: TARIFFS FAIR COMPETITION PRICE OF CO2 CERTIFICATES STATE SUPPORT
The EU tariff quotas in force US tariffs, which have been Parts of Eastern Europe, primarily Salzgitter calculates that the Around 85,000 people work
since February do not work, de- in force since March 2018, Turkey, Ukraine and Russia, are price of CO2 certificates is in the German steel industry
stabilise the pricing mechanism affect around 16% of European not part of the EU ETS and are expected to rise by around 80% and their jobs are at acute risk.
and also include automatic exports and around 20% of Ger- therefore not subject to the costs by 2025, as the volume of certi- Many companies are announ-
quota increases that do not man exports. The result is that of CO2 certificates – nor are ficates available will be reduced cing massive job cuts, which is
reflect real growth rates. Even surplus global capacities are Asian steel producers. This gives by 2.2% every year from 2021 why the first applications for
the EU’s current WTO request increasingly being channelled such producers a significant cost onwards (currently 1.74%). In support are now being submit-
for adjustment is not in line to Europe. advantage, which is why steel order to maintain competition, ted to the federal government.
with real growth rates – this Experts are calling for tariffs associations are demanding so- it would be necessary to harmo- In view of the sustained level of
means that further adjustment to be converted into quotas called climate protection tariffs. nise electricity price payments, surplus capacities on the global
is urgently needed. (as in the EU), which could cap The current regulation encoura- as paid in some EU countries, market, however, experts do
imports and levy tariffs, but also ges the import of dumping steel or to introduce new climate not consider such a rescue to
lead to greater price volatility. produced in a way that is harmful protection tariffs. be sustainable at all costs.
to the environment.
PROTECTIONISM CLIMATE EMPLOYMENT
© 2019 Andersch AGSTEEL TRADERS
BREAKDOWN OF STEEL DISTRIBUTION MARKET SHARE AVERAGE MONTHLY EU IMPORTS BY COUNTRY (’000 TONNES)
IN EUROPE 2018 (%)
+11.8%
2,442
2,175 2,275
ArcelorMittal
21%
9% 25% Turkey
1,562 14% 13%
Other 8% 12% 7% 12% Russia
Thyssenkrupp
(~ 3,000) 15% 10% 7% Ukraine
12% 22% 11% China
12%
Klöckner & Co. 24% 10% 11% South Korea
8%
38% 34% Other
Salzgitter 34%
33%
Tata
2014 2016 2018 Jan-Aug 2019
STEEL TRADE – BUSINESS MODEL suppliers such as Klöckner and leading steel produ-
„Das The only way for the commodity business to
WITH LOW MARGINS cers (including Thyssen Krupp and Salzgitter), which
be attractive is if its entire supply and service chain
vertically integrate with their own trading companies
In addition to quality and production costs, the ef- is fully digitalised. […]“
along their value chain. Competitive factors that give
ficiency of distribution is a key factor in ensuring the them a decisive edge include economies of scale in Gisbert Rühl, CEO of Klöckner & Co SE, in an interview
competitiveness of steel as a material. Steel traders with Alexander Graf/Kassenzone; translated from
global purchasing, diversified product ranges, cus-
German; accessible at: https://bit.Ly/2MOQXBO
play a central role in the supply chain between manu- tomer access via extensive logistics and distribution
facturers and steel consumers: a little over half of the networks and expertise in the processing of steel pro- REGULATION ALSO PLAYS A MAJOR
steel produced and imported in the EU reaches custo- ducts (e.g. thermal cutting, 2D/3D laser technology or
ROLE FOR STEEL TRADERS ROLLE
mers via distributors, with the rest being distributed CNC turning and milling).
directly by manufacturers. In order to operate profitably, traders are accepting ever
The primary added value of steel distribution is ware- DIGITALISATION AS A THREAT TO greater risks when procuring crude steel and, at times,
housing – dealers buy as cheaply as possible and use THE CLASSIC BUSINESS MODEL taking risky bets on the Asian market. For example, if
the cyclicality of the steel price to sell their inventories traders buy steel in China, they must bring it to Europe
There is no effective exchange of information and
at a profit. The bargaining power of steel traders is not as quickly as possible in order to stay below the quota
data between market participants in the steel indus-
very high due to low added value and intense com- threshold and avoid high tariffs. To date, the so-called
try about available stock levels and throughput times.
petition. A business field that serves to supplement safeguards introduced by the European Commission
This results in long delivery times, incorrect deliver-
these activities is the pre-processing of semi-finished have not yet had the desired effect – despite the imposi-
ies and high stock levels. On top of this, the bidding
products (drilling, cutting to size, milling). The value tion of quotas, steel imports from third countries fell on
process is sometimes complicated and inefficient.
for customers lies in the availability of steel as well a monthly basis by just 6.8% in 2019 compared with the
Experts believe that, as digitalisation progresses, an
as special designs. The margins that can be achieved prior year. This means that pressure on prices remains.
ever-growing number of traditional steel traders will
here are generally low (EBIT margin of 1-2%), being In particular, large publicly listed distributors are preven-
be forced out of the market in the medium term as
mainly driven by price and demand for crude steel, ted from acting in a speculative way, opening the door
manufacturers increasingly strive to reach their cus-
which means they are extremely sensitive to surplus for smaller providers to take more risks in their activities.
tomers directly. The challenge for steel distributors is
capacities in the global market and to stagnating de-
to develop appropriate digitalisation strategies aimed
mand. M&A ACTIVITIES ALONG THE
at expanding existing networks and enabling trading
VALUE CHAIN
to take place more efficiently. One example of this is
FRAGMENTED MARKET LEADS TO Discussions are currently being held in respect of mergers
Klöckner’s XOM Materials platform, which is intended
FIERCE COMPETITION between manufacturers and traders. The merger talks
to serve as a marketplace for all materials used in the
The market is generally highly fragmented – around processing industry, bringing sellers and buyers toge- conducted between the German companies Klöckner
70% of the market volume is attributable to small and ther. Platforms also enable customers with low mar- and Thyssen-Krupp, which were unilaterally terminated
medium-sized steel traders. Despite the high level of ket transparency and who purchase small amounts to by Klöckner in September, promised synergies in purcha-
market fragmentation, a handful of core players do- have more direct access to manufacturers. sing and sales. Nevertheless, further merger efforts can
minate the wholesale sector, including independent be expected in the industry over the next few years.
ADDED VALUE AND TRENDS
Added value
Raw materials Production Trade Processing Consumer goods Recycling
Iron ore and coking Production of steel and Service centres buy, Further processing of steel The largest consumers of steel in- Scrap and surplus parts
coal are the main forming into blocks, store and process stocks to produce specialised clude companies making building are collected and recycled
components used in the ingots, slabs and sheets of semi-finished steel components for other manu- materials, automotive goods and
production of steel products facturers mechanical equipment
Greater integration of New production proces- Digitalisation of process Digital networking enables Product innovations such as Steel can be recycled
local raw material sup- ses such as the use of flows helps lower costs steel processing compa- high-strength lightweight steels without any quality loss:
Trends
pliers to reduce shipping hydrogen or natural gas when it comes to ordering, nies to directly access the are cost-effective and are increa- Growing recycling rate of
distances are intended to minimise storing and delivering inventory data of their singly being used for electric cars 79.5% for steel packaging
CO2 emissions steel inventories suppliers
© 2019 Andersch AGCONCLUSION AND OUTLOOK
STEEL PRODUCTION REMAINS UNDER PRESSURE FURTHER COST INCREASES ON THE HORIZON
No significant recovery effects expected in the short term The price of CO2 certificates has risen by more than 200% since January 2018; from
2021 the volume of certificates will decrease by 2.2% annually (currently: 1.74%)
STEEL PRODUCTION, UTILISATION IN GERMANY DEVELOPMENT AND FORECAST OF THE PRICE OF CO2
(MN TONNES) CERTIFICATES 2017-25 (€)
Utilisation
50
81% 82% 81% 81% 40
30
20
42.1 42.4 -2.6% 40.0 0.0% 40.0
10
0
2016 2018 2019F 2020F 2017 2018 2019 2020 2021 2022 2023 2024 2025
NO RECOVERY YET IN SIGHT DISTRIBUTION BUSINESS MODEL In contrast, granting privileged status to energy-intensive
UNDER THREAT industries is also being discussed at present EU Compe-
Economic developments and Brexit, the trade war
tition Commissioner Vestager plans to drastically cut the
between the US and China along with current subsidy Over the next few years, companies that operate solely number of exceptions in emissions trading, with a view to
and dumping practices in third countries mean that the as distributors without any significant additional services potentially ending them all in the medium term. A public
European steel market is unlikely to see a recovery in will gradually disappear from the value chain if producers consultation is planned to this end – with an as yet un-
the near future. Delays in investment projects and sub- and large distributors connected via platforms such as known outcome.
stantial cost-cutting drives in key target industries are XOM use digital solutions to cause disruptions.
expected to persist in 2020. High inventories (which
The political objective of producing steel in a carbon-
could make production cuts go up in smoke) and rising MARKET CONSOLIDATION IS
neutral way by 2050 can only be achieved if steel
prices for raw materials are contributing significantly to INEVITABLE
the delayed recovery. producers make use of new technologies.
Valuations of steel companies are at a low level (over
three years: ThyssenKrupp: -39.1%, Salzgitter: -46.5%)
SURPLUS CAPACITIES PERSIST Current measures being undertaken by selected
and may further decline. When compared to the US, the
steel producers
Despite the prospect of consolidation trends in Europe, European steel market is less concentrated, which is why
surplus global capacities will continue to exist in the calls are growing louder for a more liberal approach in the HYBRIT PROJECT — SSAB, VATTENFALL,
medium term, with experts expecting that investment EU to mergers. SALZGITTER AND LKAB
projects between 2019 and 2021 may add 3.9-4.9% Replacing coking coal with hydrogen or natural gas from
to gross capacities. According to the OECD, most of CURRENT CLIMATE DEBATE renewable energies by means of direct reduction plants
this capacity will be added in Asia (53-63 mn tonnes)
by China and India and in the Middle East (25-28 mn The steel industry fears that its ability to compete against
CARBON2CHEM PROJECT — THYSSENKRUPP
international suppliers will be further impeded as a re-
tonnes) by Iran.
sult of the EU tightening its climate policy. The industry The smelting gases (incl. CO2) which arise when steel
is looking hopefully to the newly constituted European is produced are converted into valuable chemicals
PRESSURE ON COSTS CONTINUES
Commission and its President, Ursula von der Leyen, who
TO RISE H2FUTURE PROJECT — VOESTALPINE,
raised the issue again in her speech to the European Par-
Rising prices for CO2 certificates, high development SIEMENS, VERBUND
liament. Their task now lies in weighing up the possibility
costs for climate-friendly technologies and necessary of a trade conflict for the benefit of climate-friendly pro- Constructing a pilot plant to produce CO2-free
investments all mean that cost and liquidity pressure duction, without putting the competitiveness of local sup- hydrogen using a state-of-the-art hydrogen
continues to increase for manufacturers. pliers at a disadvantage vis-à-vis their international rivals. electrolysis facility
OPINIONS IN THE MARKET
Local steel producers are afraid of China‘s long term subsidy policy... ... as well as a climate-driven one-sided disadvantage in the global competition:
„China could, as was the case with rare earths, destroy the European steel industry by „Producing one tonne of steel in Europe currently generates around 800 kg of CO2
means of dumping practices, creating dependencies and then hiking prices. Strategically emissions, whereas one tonne in China generates many times more CO2, not to mention
speaking, China has long-term interests and deep pockets with sufficient cash flow.“ transport-related emissions. It seems that only when a large European steel group lays
off a significant number of employees will it become clear that pursuing a unilateral
Anonymous, interview with a market expert (steel group)
climate policy in the EU will destroy the European steel industry, cause dependencies on
foreign steel and place a greater net burden on the global climate.“
Anonymous, interview with a market expert (steel group)
You are interested in market trends in the TAMMO ANDERSCH DOROTHÉE FRITSCH ANDERSCH AG
steel industry? Please get in touch and
arrange a meeting for an informal chat
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