E & Y Report on Steel Sector

Topics: Steel, Iron ore, Steelmaking Pages: 57 (15334 words) Published: June 30, 2013
Global steel 2013

A new world, a new strategy

Contents
Executive summary

4 6 10 14 18 22 30 36

1 2 3 4 5 6 7

Maintaining value in volatile economic conditions — a look at the year ahead

Is there value in vertical integration?

Striving for strategic cost reduction Optimizing capital — maximizing returns for shareholders

Chinese steel sector Is India on track to become the next steel powerhouse? Other key producer countries outlook 2013

Contents
Executive summary

4 6 10 14 18 22 30 36

1 2 3 4 5 6 7

Maintaining value in volatile economic conditions — a look at the year ahead

Is there value in vertical integration?

Striving for strategic cost reduction Optimizing capital — maximizing returns for shareholders

Chinese steel sector Is India on track to become the next steel powerhouse? Other key producer countries outlook 2013

Executive
“Controlling raw material costs is a benefit of vertical integration; however, steelmakers should critically assess the value of vertical integration and consider possible alternatives to help mitigate the cost of raw materials.” Mike Elliott Global Mining & Metals Leader, Ernst & Young Global steel — will 2013 be the bottom of the trough? Despite a slight increase in demand for steel and the removal of some older steelmaking capacity in 2012, the global percentage level of excess capacity is greater now than it was 12 months ago due to the continued growth in new steelmaking facilities particularly in developing economies. Capacity utilization rates in the sector remain below 80%, and in 2013 excess capacity will remain the most significant issue in the steel sector. Growth in global steel demand is unlikely to improve significantly in 2013. Sluggish demand combined with excess steelmaking capacity and ongoing volatility in raw materials costs will challenge the sustainability of high-cost producers. The continued closure of older, higher-cost steelmaking capacity and increased demand growth should lead to improved profitability for the sector in 2014 and 2015, driven by better utilization rates. The closure of inefficient capacity will require the sector to avoid political interference with commercially rational decisions. producers need to assess and address whether they are best set up for the new operating environment: • Is there value in vertical integration? • Strategic cost reduction for survival and future growth • The optimal capital structure for the future business model

Is there value in vertical integration?
In recent years, many steelmakers have integrated raw material (coal, iron ore) mines into their supply chains. However, new analysis by Ernst & Young suggests that despite the benefits in controlling raw material costs, it may not always have a positive benefit on enterprise value. Steelmakers should critically assess the value of vertical integration to their business and consider alternatives to managing raw material costs and supply, such as long-term contracts with suppliers and relocating production sites closer to upstream suppliers.

Strategic cost reduction
With continuing weak market conditions, cost reduction activities are essential for steelmakers’ sustainability and future growth. While these activities are necessary, it is crucial that steelmakers do not move away from their overall company strategy, thus potentially causing further value erosion. In this report we discuss the different approaches that are currently being used to reduce cash operating costs, including: • Reducing production volumes from loss making plants to stabilize steel prices and address oversupply in the market

Restoring sustainable value
Ernst & Young’s 2012 steel report detailed the importance of customer reach, operational agility, cost competitiveness and stakeholder confidence for producers to remain profitable. These remain priorities for 2013. The big challenge for steelmakers in 2013 is how to be cost competitive while...
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