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Competitiveness and challenges in the steel industry

Competitiveness and challenges in the steel industry OECD steel committee 74th session Paris, July 1, 2013. CONFIDENTIAL AND PROPRIETARY. Any use of this material without specific permission of McKinsey & Company is strictly prohibited Disclaimer While McKinsey & Company developed the outlooks and scenarios in accordance with its professional standards, McKinsey&Company does not warrant any results obtained or conclusions drawn from their use. The analyses and conclusions contained in this document are based on various assumptions that McKinsey&Company has developed regarding economic growth, and steel demand, production and capacities which may or may not be correct, being based upon factors and events subject to uncertainty.

Competitiveness and challenges in the steel industry OECD Steel committee 74 th session Paris, July 1, 2013 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

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Transcription of Competitiveness and challenges in the steel industry

1 Competitiveness and challenges in the steel industry OECD steel committee 74th session Paris, July 1, 2013. CONFIDENTIAL AND PROPRIETARY. Any use of this material without specific permission of McKinsey & Company is strictly prohibited Disclaimer While McKinsey & Company developed the outlooks and scenarios in accordance with its professional standards, McKinsey&Company does not warrant any results obtained or conclusions drawn from their use. The analyses and conclusions contained in this document are based on various assumptions that McKinsey&Company has developed regarding economic growth, and steel demand, production and capacities which may or may not be correct, being based upon factors and events subject to uncertainty.

2 Future results or values could be materially different from any forecast or estimates contained in the analyses. The analyses are partly based on information that has not been generated by McKinsey&Company and has not, therefore, been entirely subject to our independent verification. McKinsey believes such information to be reliable and adequately comprehensive but does not represent that such information is in all respects accurate or complete. McKinsey & Company | 1. Contents challenges in the steel industry . cyclicality and increasing competition from emerging economies Competitiveness of the steel industry beyond cost optimization Implications for enhancing competitive- ness few actions to launch and promote McKinsey & Company | 2.

3 The development of the industrial production index shows fundamental differences by region Industrial production index mature regions Points (based on 2005) China: 600 Europe China and Western Europe North America 500 are the dominant players in Europe (EU15) global consumers 400. 300 While projections on China 200 are positive, mature regions 100 suffer from no growth 0. 2008 09 10 11 12 13 14 15 16 17 18 19 2020. Years Industrial production index developing regions Points (based on 2005). 250 Emerging regions follow a Latin America Dev Asia +6% 200 growth trend line over the MENA.

4 Next few years 150 Africa In all of those regions next to 100 GDP growth, some countries have clear growth 50 stimulating drivers such as 0 energy and resources 2008 09 10 11 12 13 14 15 16 17 18 19 2020. Years SOURCE: Global Insight; McKinsey McKinsey & Company | 3. Within major steel economies macro-economic factors indicate uncertainty for demand and utilization Debt GDP ratio Economically Index (based on 2005). uncertain markets in 2,0 traditional steel - US consuming econo- 1,5 EU-15 mies 1,0 GER China's economy China stabilizes while the 0,5 debt to GDP ratio in the US and EU-15.

5 0 has been increasing 2005 06 07 08 09 10 11 12 13 14 15 2016 steadily since 2008 in combination with Infrastructure spending strongly declining Index (based on 2005) infrastructural investments 4,0. In addition to weak China 3,0 GDP growth and higher debts, infra- 2,0 GER structure investments US in EU-15 countries 1,0. have declined more EU-15 than 30% between 0. 2005 06 07 08 09 10 11 12 13 14 15 2016 2011 and 2012. SOURCE: Global insight; McKinsey McKinsey & Company | 4. Current projections based on consumption forecasts indicate a global slow-down Apparent steel demand per region Million metric tons Regional growth Percent 1,797 2010 - 16 2016 - 20.

6 1,702. 176 1 1. 1,607. 172. 1,500 167 128 4 1. 1,413 125. 153 141 1 0. 1,306 148 122. 141. 119. Europe 153 113 141. 143. North America 94 141. Developed Asia 134 794 4 2. 765. 730. 686. 646. China 589. 120 6 7. 106. 93. 72 81. India 65. 394 439 5 5. 293 318 354. Other1 270. 2010 12 14 16 18 2020. Share of China 45 46 46 45 45 44. Percent 1 Africa, other Asia, CIS, Oceania, MENA, Latin America SOURCE: World steel Association (WSA); McKinsey steel Demand Model McKinsey & Company | 5. The steel industry is very volatile and with depressed profitability since 2008 mature regions are losing in profitability China Developed Asia Average EBITDA margin Percent1 Europe NAFTA.

7 30 2003 - 08: margin 2000 - 03: price- improvement and 2008 - 12: margin deterio- 25 margin squeeze upstream integration ration and leveraging Margin develop- 20 ment follows a 15 negative trend line Current 10 situation worst for a 5 long time 0. -5. 2000 01 02 03 04 05 06 07 08 09 10 11 2012. 1 Based on a sample of 84 of the largest steel companies globally SOURCE: Bloomberg; McKinsey analysis McKinsey & Company | 6. Within the entire steel value chain, profitability is challenged and margins move to mining HRC value chain1 profit pool split evolution since 1995, USD billions 100% = 54 23 125 156 230 135.

8 Iron ore 8. In the medium 15 17 term, the value Coking 11 pool in steel will coal 7. 44 42 remain in favor of 46. 22 the raw material producers There might be shifts in between steel 22 years, but making 81 32. 78 28 demand and (HRC) supply for steel 61. combined with 35. cost for marginal 26 27 producers will stabilize EBITDA. distribution 1995 2000 05 10 2011 2017. 1 HRC assumed to represent 85% of total hot-rolled flat products. Flat production assumed to use 85% of pig iron as raw materials. Assuming t of iron ore per tonne of pig iron and tonne of coke per tonne of pig iron SOURCE: McKinsey steel Model, McKinsey Mining Value Pools Model McKinsey & Company | 7.

9 From a perspective on the EBITDA pool, emerging regions benefited most from the China-driven boom of the last decade HRC value chain EBITDA pool Mining Non-OECD steel OECD steel USD billions CAGR. 2003 - 2012. 164 17%. 136. 38. 121 33%. 56. 58. 39. 37. 10 9%. 28. 13 42. 14. 16 7 15 -1%. 2003 2007 2009 20121. 1 Based on preliminary estimates SOURCE: McKinsey (BMI Value Pools Model) McKinsey & Company | 8. Contents challenges in the steel industry . cyclicality and increasing competition from emerging economies Competitiveness of the steel industry beyond cost optimization Implications for enhancing competitive- ness few actions to launch and promote McKinsey & Company | 9.

10 Margin development in steel is a major issue, driven by external factors and plant situation 1 Development of industry attractiveness USD per ton of HRC Typical factors driving/challenging Competitiveness Brazil 2 Supply balance CO2 and technology 922 challenges 753 . industry - 462 wide 460 497 factors 256. Price Cost EBITDA Price Cost EBITDA. 2008 2012 Intrinsic Regional industry factors Western Europe player and conse- actions quences 953. 657. 698. 255 622 4 Asset quality 3 Access to raw and actions materials/resources 35.


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