The current capacity shake-up in steel and how the industry is adapting

The current capacity shake-up in steel and how the industry is adapting

The current capacity shake-up in steel and how the industry is adapting

The early years of the new millennium were a profitable period for steelmakers, largely driven by the surging Chinese economy. Now, with China’s growth slowing, a new reality has set in.

Starting in 2014, growth in steel demand began to stall. While the industry situation has improved quite markedly since then, surplus steel capacity is likely to remain a long-term problem. The purpose of this report is to outline the implications of the overcapacity challenge for the global steel industry in the main steel-producing regions with regards to industry consolidation, capacity rationalization, and return to economic profitability.

While the steel industry had reached its demand peak in 2013, capacity continued to expand all the way up to 2016 due to inertia of capital investment, adding another 60 million metric tons of worldwide capacity against a backdrop of falling demand. As a result, by the beginning of 2016, the industry had fallen into a severe crisis with too many plants producing too much steel relative to dwindling demand, and industry profits plunging to zero or into negative territory for the majority of players.

While the industry situation has improved quite markedly since then, surplus steel capacity is likely to remain a long-term problem. Despite this year’s rebound in steel production, much of the demand growth is rather virtual, due to the impact of China shutting down its illegal induction furnace (IF) capacity and replacing it with production from legal plants. Globally, excess steelmaking capacity reached about 375 million metric tons per annum (MTPA) in 2015-16 (in addition to more than 100 million tons of illegal IF capacity in China). The excess is now projected to drop to around 300 MTPA towards the end of the decade, with total production capacity stabilizing at 2.2 billion metric tons by 2020. As a result, average plant utilization is expected to improve gradually, yet remain below 76 percent – a significant drop from the high of 83 percent 10 years ago, when the industry was at its peak.

This overcapacity is especially pronounced in China, Europe, the Middle East, and North Africa. As the imbalances have resulted in poor industry economics, producers have felt compelled to turn increasingly to exports. The rise in exports has, in turn, been driving a new wave of trade disputes and protectionist measures. Since 2011, OECD statistics show that anti-dumping and countervailing duty cases, many of them involving China, have been up five-fold for complainant economies and three-fold for defendants.

With demand expected to recover slowly – at just 0.8 percent per year on average from 2016 to 2025, the industry faces a volatile decade. The slowdown in China caught most industry players by surprise. Consolidation efforts in some parts of the world have been largely offset by continuing expansion elsewhere and, in some countries, state intervention has prevented closure of inefficient plants, distorting market dynamics. The result is a global industry that remains fragmented and ripe for further restructuring. So, how are steelmakers adjusting? What differences exist across markets? What moves could help the industry shape up or position an individual steel producer for success?

About the author(s)

Avetik Chalabyan is a senior partner in McKinsey’s Moscow office, Lapo Mori is a partner in the Brussels office, and Steven Vercammen is a specialist in the Belgian Knowledge Center.

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