Cover story№ 1 July 2018

 

The calm after the storm

In January the World Steel Association (WSA) reviewed the state of the global steel industry in 2017. It reported that the 66 countries that provided data had produced 1691.2 million tonnes of steel – 5.3% more than in 2016. Thus, the decline in recent years in both production and consumption was halted.

Steel production, million tonnes

In 2017, steel production levels were the decade’s highest to date, exceeding the 2014 peak of 1669.5 million tonnes. Capacity utilisation never fell below 69.5% and in some months reached 74% or more (2016: 64.9%–72.2%). However, to put things in perspective, at the start of the decade capacity utilisation was close to 80% and in 2010 global production grew 15.7% from the previous year.

China increased its steel production by 5.7% to 831.7 million tonnes, remaining the world’s largest producer. Analysts at Russia’s Metal Supply and Sales agency, however, point to discrepancies between the figures provided by the WSA and China’s National Bureau of Statistics, adding: "The Chinese government, having been criticised persistently for excess steelmaking capacity and ‘illegal’ state aid to the domestic steel industry, has every reason to understate output." In any event, large and medium-sized Chinese steel companies somehow managed to increase production as more than 700 small producers went out of business.

Chinese gambit

Small steel plants developed rapidly in China in the mid-20th century. Universal steel production was a fundamental part of the five-year plan of the Great Leap Forward. When imbalances arose, they had to be remedied by closing down inefficient plants making low-quality products. This policy of closures was extended in recent years by the government to some medium-sized plants.

Under the banner of concern for the environment, a crackdown on illegal and inefficient producers is taking place, with obsolete plants being closed down and plans for new ones blocked unless they meet modern standards. For example, in August 2017 the Chinese authorities announced plans for a 50% cut in steel production in Hebei and three other steelmaking provinces in order to improve winter air quality.

Backyard steelmaking – which, according to the WSA director for economic studies and statistics Nae Hee Han, the Celestial Empire has all but abolished – never made it into official statistics. Hence it was always difficult to estimate the size of the steel market of either China or, given its significance, the world as a whole. Now, she continues, this formerly opaque business is making itself felt in another way: closing plants in the grey economy causes previously invisible domestic steel consumption to become visible as former customers of the defunct producers take their business to legally operating steel plants. This affects the statistics and causes discrepancies in the figures. How long this effect will persist remains to be seen.

Yet despite such inconsistencies, the overall trend in the world’s leading steel producing country is clear. China is in many respects repeating what happened in Europe, which faced similar problems in the 1970s – inefficient, excess capacity lay idle and companies’ losses mounted. The Davignon Plan cut capacity by 20%, improving the utilisation of the remaining companies by 10%. China promises to reduce its annual steelmaking capacity by 150 million tonnes or 14% by 2020.

It would be premature, to put it mildly, to write off China as the main driver of the steel industry. It remains the largest producer and also the largest consumer of steel. Chinese steelmakers have the major advantage of playing on home ground, catering mainly to domestic demand. The sweeping away of competitors will bolster the position of major Chinese producers.

 

Metals of all varieties have been a mass global commodity for centuries. The history books record several periods of rapid growth in their production. The latest is only just behind us, with the third millennium beginning as a new iron age. However, the emphasis is changing: product quality and customer service are now the priorities.


The ability of Chinese steelmakers to rely on domestic demand is a major advantage

The domestic market will remain very valuable to them as China continues to pursue steel-hungry projects ranging from skyscrapers to high-speed railways. However, the growth of domestic consumption is bound to slow down, forcing Chinese steelmakers to turn increasingly to foreign markets. Whereas previously China set the pace with volume, now, as inefficient capacity is withdrawn, it is starting to look more closely at quality and terms of supply, corresponding to the global trend in the industry.

Domestic affairs

Russian companies are increasing output in defiance of some serious challenges. The vice-president of the Russian Steel Association Marina Ivanova notes that foreign trade protectionism is at unprecedentedly high levels: "Worldwide, Russian steelmakers are the subject of more than 50 restrictive measures. Ten of these were imposed or reconfirmed in just the past year," she said.


According to the WSA, all regions except the CIS saw growth of steel production in 2017. The CIS was held back by Ukraine, which experienced a distinct (6.4%) fall in output. Even though Russian production rose (up 1.3% to 71.3 million tonnes), the aggregate production for the region was unchanged from the previous year (102.1 million tonnes).

New prospects might arise, however, as the domestic market recovers from crisis and demand increases. The Analytical Credit Rating Agency (ACRA) believes the housebuilding boom expected as a result of lower mortgage rates could provide work for the steel industry. Gazprombank experts say that pipe manufacturers could also drive growth by an upturn in oil and gas drilling and major infrastructure projects. A third promising source of domestic demand for steel is engineering. The localisation of production, already familiar seen within the automobile industry, has considerable potential, according to Maxim Khudalov, corporate ratings director at ACRA.

HBI is an effective addition to scrap in the production of high-quality steel grades

Steel companies themselves, meanwhile, are realistic about their prospects in view of the emerging challenges of the relatively slow growth of the global market and the protectionism of a number of countries. The Deloitte CIS ‘Overview of Manufacturing Industry in Russia – 2017’ report, which saw contributions from both steel and pipe companies, noted that 58% of respondents thought the situation in the industry would not change for the better. Nonetheless, the companies had a good idea how to withstand adversity.

The survey respondents planned to strengthen their market position by improving logistics and reducing currency risks. A priority was launching new products onto the market. All of these initiatives involve greater customer focus, which corresponds to the current global trend.

Listening to the customer

That is certainly the policy of Russian steelmakers. Many started large-scale development programmes even before the crisis. The Russian Steel Association estimates that more than RUB 2 trillion has been invested in ferrous metallurgy since the early 2000s.

The most eye-catching event of recent years was the commissioning of a new hot briquetted iron production facility, HBI-3 Plant, at Lebedinsky GOK (part of Metalloinvest). HBI is an effective addition to scrap in the production of high-quality steel. It has the advantage of minimal environmental impact, since the direct reduction process has none of the atmospheric emissions associated with the production of coke, sintering ore or pig iron, and leaves no solid waste in the form of slag. HBI has energy costs 35% lower and greenhouse gas emissions 60% lower than pig iron. Metalloinvest upgraded its beneficiation and pellet plants, which ensured the production of additional volumes of concentrate and higher-quality pellets.


Working more closely with customers to develop the sales process for existing products is also highly important. This may involve a degree of customisation, working to address the needs of specific customers. In one such case, Magnitogorsk Steel recently launched production of a special steel under the name Arc for the shipbuilding industry. With a cold resistance of up to -70 °C, it is now used in the construction of icebreakers. Another, rather more general-purpose example is SBQ, Metalloinvest’s new high-quality rolled steel. It is now used in heavy-duty vehicle assemblies and units used by the biggest Russian truck manufacturer, Kamaz, which, as Kamaz deputy director of procurement Rustam Shamsutdinov said, is proof of its quality.

Getting closer to the customer

Meetings with key customers are crucial for developing customer relations. Alcoa Russia (now Arconic Russia) has, on more than one occasion, invited its metal-trading and machine-building customers to annual meetings, where the company’s senior managers reported on past projects and future tasks, and listened to customer feedback. The exchanges are often frank but offer a way of identifying sore points.

There are many different formats for interaction with customers. Metalloinvest, for example, holds regular coordination councils with customers, where almost any issue can be dealt with quickly and efficiently. It also conducts regular customer surveys, organises industry seminars and invites customers to visit and see its production sites. Its own specialists visit the factories of its main partners to see how new equipment and technologies are working and the customers are expanding their brand structure. Permanent working groups have been set up with some customers (in particular, the major Russian automakers Avtovaz and Kamaz). Such groups not only help to quickly resolve any issues that may arise in the course of cooperation, but also play a role in developing new steel products and optimising existing technical agreements and terms of supply.

High-quality rolled steel products (SBQ) are used by the truck and engine manufacturing giant Kamaz for its heavy-duty vehicle assemblies and units, including motor shafts and gearboxes, gears, cogwheels, steering components, rods, pillars and the springs used in shock absorbers

Some companies prefer informal events. A good example is Protec in Voronezh, which organises the ‘The games of olden Russia’, a festival of archery, traditional sports and open-air cooking. When last held, the Games attracted around 700 employees of steel companies and their customers, who not only enjoyed themselves but had the opportunity to discuss work with one another.

In the last decade, Russian steelmakers have been working hard in a variety of ways to develop their sales networks. For example, Severstal has established a number of service centres. One of these, Severstal-SMC-Vsevolozhsk, was set up with Japan’s Mitsui Corporation to serve the automotive, electrical and other industries in north-west Russia, the Baltics and Scandinavia. Severstal has also teamed up with the Spanish company Gestamp to create Gestamp-Severstal-Kaluga, which caters exclusively to car factories.

Traditionally, customers had to organise the transportation of rolled steel products themselves, but now traders are increasingly willing to offer logistics services. Ariel Metal, as a major supplier of rolled steel, has acquired its own vehicle fleet. Sustained work to improve efficiency (planning of traffic flows, routes, fitting trucks with tachographs and trackers, etc) has reduced errors and boosted customer satisfaction.

Experts agree that we are unlikely to see record demand and soaring prices on either the Russian or the global steel market in the foreseeable future. Competition will continue to be fierce. That being so, programmes to improve customer relations will only become increasingly important.

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