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New Roland Berger study: Severe global overcapacity in the steel market is causing prices to plunge and competition to intensify

Munich, March 9, 2016

  • Demand for steel in China fell 3.3% in 2014
  • Share prices of three major players down 50% in 2015 despite reasonable increase in volumes
  • 4th Industrial Revolution is also hitting steel companies
  • Roland Berger experts propose new levers to increase profitability

After a brief period of optimism in 2013 and 2014, growth in the world steel market has come to a halt: In 2014 demand for steel in China fell 3.3% with further decline confirmed for 2015 and expected to continue until 2020. In other regions the demand is stagnant or growing slowly at best.

As a result, the world steel industry is once again facing a serious overproduction crisis, which has led to a spectacular fall in prices and brought stiffer competition. These are the main findings of the new Roland Berger study, "Weathering the steel crisis", which examined the steel market and looked at steel producers' and distributors' responses to this crisis.

Now that steel prices have fallen sharply, most analysts expect competitive pressure to remain high in the near to medium term. Growth will in fact not be robust enough to absorb current production, and the scope and duration of this new crisis will lead to more restructurings, an increase in M&A transactions and a reduction in current production levels.

Given the extent of worldwide overproduction and the globalization of the market, slow growth and falling prices have eroded productivity and made countermeasures by a number of players in the sector less effective. This includes those generally recognized as the most global and among the most efficient in the market (in particular in terms of managing production capacity). Last year the share prices of three major players decreased by at least 50%. This loss in share value is proof that, in today's economic environment, the current business model may not be the best suited to confront this crisis, which is far more structural than initially thought. What is more, Industry 4.0 is already shortening market cycles and making the demand for steels more variable, granular and diversified.

New profitability drivers are emerging
Consolidation may not be the main future driver. In their study the Roland Berger experts present a roadmap that could allow the steel industry to exit this crisis stronger than it was before. The early adoption of these steps is key to success:

Client intimacy, value adding services and specialization:The current period is an opportunity for steelmakers to interact more closely with customers and ultimately to provide more specialized products and services.

Production matters: In order to adapt to the new commercial positioning, steelmakers need to adjust their supply chain and commercial approach by improving reactivity and their ability to manage complexity.

Organizational structures: With the exception of some sectors such as automotive, where clients may prefer being supplied globally, the organization of the future may concentrate on selected hotspots, rather than having a comprehensive global presence. Steel giants may also have to consider whether maintaining presence in all segments is creating or actually destroying value.

Finding the right balance between product portfolio, segments and geographical scope, as well as supply chain responsiveness, may well be the strategic sweet spot all steel producers should aim for in the near future. After decades of striving to "grow bigger", the formula for success may have switched to "be focused".

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