Monday, January 30, 2012

Production of steel

As economic growth slow down globally has also impacted  steel industry heavily.

Managing excess capacity in the face of a persistent gap between demand and supply is fast becoming an existential threat for many of the biggest players in the steel industry worldwide.

According to the Global Steel Report released by Ernst and Young, the world  production overcapacity of steelmakers at the beginning of 2012 stood at 493 million tons/annum.

The report of the Ernst and Young adds that since 2001, the global production of steel has grown at an average rate of 6% and over the same period the consumption grew by an average of 5.5 only.

The steel industry is also threatened by the rise in raw material prices, retardation of economic activity in the West and lack of operational agility.

Over the past few decades steel makers enjoyed purchasing power over raw material suppliers.They also had been setting prices for distributors but now the tides have turned on steel manufacturers and purchasing power has shifted to raw material suppliers of iron ore.

As a result, prices of key inputs such as iron ore and coking coal have spiked; corroding the erstwhile high margins pocketed by steel manufacturers.

Being capital intensive business, the industry cannot quickly adjust to the changes in change in demand patterns.
Steel makers inability to make timely operational changes in certain segments means they are stuck with substantial costs that are likely to persist for some time.

Steel makers should broaden product offerings and focus on profitable segments by going for niche markets and focusing on higher margin products.

The focus of POSCO and U.S steel on Advanced High Strength Steel (AHSS) is an example of specific niche market targeting.

In emerging economies the focus should be on steel used in building infrastructure.

The report also focuses on optimisation of capital, especially since almost about 94% of the financing faced by the steel industry is from debt.

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