By Manolo Serapio Jr and Maytaal Angel
MANILA/LONDON (Reuters) - Steel producers in high-cost countries say their best hope for surviving the global glut is to develop higher value specialised products. But they will still face a tough time competing with low-cost Chinese producers that are breathing down their necks.
The announcement that India's Tata Steel (NS:TISC) is abandoning Britain has hammered home the threat to developed countries' steel industries from a glut caused by over-capacity in China, which has led to a collapse in the global price of commodity steel used mainly in construction.
Firms from Europe, Japan and South Korea say they are trying to keep afloat by increasing the share of higher-value products in their output, focusing on speciality steels used mainly in manufacturing, which command a premium over lower grades.
Some companies are venturing further down the supply chain to make their own aircraft or auto parts. Others are forming tighter relationships with their customers as a way to keep their order books full.
"Sticking to technological and quality leadership will be the only solution for European steel producers to secure profitability and future growth," said Wolfgang Eder, CEO of Austrian steelmaker Voestalpine. (VI:VOES).
Voestalpine is aiming to become less dependent on traditional steel markets by raising its production of finished parts for the aerospace, rail and automotive industries. The auto sector alone generates around 30 percent of group sales.
"Given the cost structure that European steelmakers are facing, they will not be able to produce steel commodities in competition with countries such as China, Russia, Turkey or Ukraine in the long run," Eder added. "Energy, labour and regulatory costs in Europe have reached a level at which mass production has become utterly unattractive."
But the strategy may not be a permanent solution to the crisis that has caused plant closures around the developed world. Making specialised high-end steel still requires huge, capital-intensive smelters that mostly produce the lower value commodity material. And China, which now produces half of the world's steel, is developing more sophisticated production of its own.
Paul Gait, an analyst at Bernstein, said Voestalpine's strategy means the company "essentially provides an engineering service, a solution to a manufacturing process. It is not just selling steel."
But even at a high level of sophistication, the Chinese can catch up.
"Speciality steels will help Voestalpine survive for a few years, but eventually the Chinese will probably be able to produce the more bespoke, more tailored steel," Gait said.
High value speciality products by themselves can't save European steel, says European steel association Eurofer, which wants Brussels to do more to protect the industry from what it says is dumping by China. To be cost effective, a steelmaker still needs to produce large quantities of the lower-margin commodity product, and needs a market for it.
BALANCE SHEET
"Steelmaking isn't on the whole that cost effective if you only concentrate on the high grade or speciality product lines. High end is also usually lower volume, and the rest of the balance sheet is made up of a diverse range of lower grade or non-speciality products," said Eurofer spokesman Charles de Lusignan.
"If China takes the 'commodity' end of the market -- and it's not as if they are only focusing on that -- then it takes with it the speciality segment, because it is impossible to sustainably operate on high-grade or speciality alone."
Heinz Joerg Fuhrmann, chief executive of German steelmaker Salzgitter (DE:SZGG), said an integrated steel plant only makes sense at a scale of at least 3 million tonnes, and must be used to full capacity to be cost-effective.
"If it's only half used, its production costs are far too high. This means that they can't just serve the top 5 or 10 percent where indeed the direct competition is lower, but they also have to include the premium standard product."
For the world's No. 2 steel producer, Japan's Nippon Steel and Sumitomo Metal Corp (T:5401), increasing the volume of high-value products is part of a strategy that also includes boosting volumes of mid-range steel.
"We expand the middle-end to take advantage of economies of scale while maintaining leading position in high-end steel," said Toshiharu Sakae, executive vice president.
PRACTICAL LIMITS
In India, there is also a shift towards producing more high value-added steel. "Clearly the world is moving in that direction," said H. Shivramkrishnan, chief commercial officer at India's Essar Steel.
Seshagiri Rao, joint managing director at India's JSW Steel Ltd (NS:JSTL), said: “Every steel company, particularly the major companies, they're looking at value addition, meaning high-end value-added steel products - tin plates or automotive steel, or high-strength steel or electrical steel."
But ultimately, he added, there are practical limits to how much of a company's output can be higher end steel.
"I don't think anybody can do more than 30 percent, 35 percent so the balance 65 percent remains commodity grade steel.”
Meanwhile, Chinese firms are moving up the value chain too.
Baoshan Iron and Steel Co Ltd <600019.SS>, China’s biggest listed steelmaker, expects its huge, modern Zhanjiang steel production base with annual capacity of about 9 million tonnes and which it calls its "dream factory" to operate later this year.
The companies that survive, especially in high-cost countries, will have to find creative ways to develop closer relationships with their customers. They can do this even when the steel they produce is commodity grade, provided there is a level playing field, said Eurofer's de Lusignan.
"Profitability is all about value creation for your customers. Commodity producers can for example excel in services provided to their customers: short delivery times, small order quantities, 24-7 order intakes, client-specific product dimensions, etc."
Jeremy Platt, an analyst at UK-based consultancy MEPS, said both producers and their customers could benefit from closer relationships up and down the supply chain.
“In future you could see greater cooperation between steel producers and steel manufacturers. It happens to an extent already but it’s something that could be expanded upon in future to the benefit of everyone really. Steel end-users should be looking to do this more and more.”