Corporate Strategy for Global Steel Manufacturing Industry - Essay Example

THE GLOBAL STEEL INDUSTRY I. MARKET DEFINITION A. Global Market Definition The Global Steel Industry refers to the production of large family of metals. These are alloys where iron is mixed with carbon and other elements. Steels are mild, medium or high-carbon steels in accordance to the percentage of composition of carbon which is never greater than about 1.5%. The use of nickel, chromium, and tungsten iron produces alloy steels including stainless steel and high speed steels. (Chemistry of Steel Making, p.8) The types of steel are plain carbon, stainless, HSLA, tool steels and other iron-based material such as cast, wrought and ductile iron. (Wikipedia, Steel) These are major components in buildings, tools, automobiles and appliances. The life of steel does not stop. If steels become old and torn out, it can be melted again to produce new steel. II. OVERVIEW OF THE GLOBAL STEEL INDUSTRY B. Market Volume and Value Performance 1. Historical performance of steel The US market experienced a decline in production from 110M tonnes in 2004 to 104.6M tonnes in 2005. The decline was a combination of overcapacity and production declines in 2005 of two (2) automobile manufacturers namely General Motors and Ford. These two (2) companies are the leading consumer of steel. (Steel Price and Policy Issues). The same scenario in China, an emerging market, is facing challenges in terms of overcapacity that lead to price erosions. (Rocsearch.com, Executive Summary, Chinese Steel Industry Analysis) Asia will be the leading steel market by 2014. Growth of Japan, China and rest of Asia are determinants of steel demand in the future. (Euro Strategy Consultants, Global Steel Industry Outlook to 2014, p.7, February 2005) C. Global Market Developments and Trends The industry experienced sluggish growth rate in mid-1970s until the turn of the century. There were overcapacity and high exit barriers generated high cyclicality and decades of declining prices. In 2001, the industry climate changed. The demand surged brought about by the boom of China's economy. In 2001-mid 2006, the demand for steel in China increased to the tune of 25%. In about four (4) years from 2001-2005 prices of steel products increased. Prices of raw materials such as iron ore, coke, scarp alloy materials contributed to the high level cost of steel. The growth of global steel market transformed the business activities and outlook of steel companies. There have been restructuring across regions, privatization, re-orientation of companies' focus on high profit margin and modernization of steel-making facilities particularly in China, India and Commonwealth Independent States (CIS). (Boston Consulting Group, Beyod Boom, F. Deforche, J.Hemerling, D.Kim, W.Piacsek, M. Shanahan, M. Wolfgang and M. Wortler, February 2007) . There have been various technological innovations for steel companies to remain competitive in the market. China is facing the challenge of upgrading to high quality steel products to counter the increasing costs of iron ore prices and price erosions due to overcapacity. (Rocsearch.com, Executive Summary, Chinese Steel Industry Analysis). The development of steels in the market also corresponds to the improvement of buildings and other industrial constructions. The industrial buyers of steels are confirming to the new trends that suits the lifestyles of the people in any parts of the world and the creation of new buildings for commercial or any type of industrial construction. There have been some improvements and upgrades of steels. The rods or bars in the past have been improved to ribbed bars, followed by the cold twisted deformed bars and the current thermo mechanically treated bars. (Wikipedia, Steel). Another development in steel industry is the growth of minimills. In the US, large manufacturers concentrate in the market across other regions. The huge volume in manufacturing led to the creation of minimills. Minimills produced small volume of steel products mostly for the local markets. They convert local scrap metal before processing takes place in the secondary steelmaking and casting facilities. (Steel Industry Development, p.17) D. Market Segmentation The top 30 companies generated almost 562M tonnes. The leading global player, Acelor Mittan captured 21% of the market. This is equivalent to the production of key players in China, who produced about 119M tonnes. Japan is the 2nd largest market with 13% share, followed by US with 10%, Russia with 8%, India with 7% and South Korea with 5% market share of the global volume share. The rest had less than 5% market share, which include Brazil, Europe, Germany, Iran and Taiwan. . (Wikipedia, Global Steel Industry Trends) E. Key Market Players The global steel production reached 1,239.5M tonnes in 2006. Acelor Mittal produced 117M tonnes, the largest producer of steel followed by Nippon Steel of Japan and POSCO of Korea produced 32M tonnes and 30.5M tonnes respectively. Narrowing down the market, the top (10) global players are presented below. The ranking was based on total steel production in 2006. Among the emerging markets, India was the 5th largest producer followed by China 6th during this period. (Wikipedia, Global Steel Industry Trends) Million Tonnes Company Country 117.2 ArcelorMittal Global 32 Nippon Steel Japan 30.5 POSCO South Korea 29.9 JFE Japan 28.2 Tata Steel India 23.8 Shanghai Baosteel Group Corporation China 19.3 United States Steel Corporation United States 18.4 Nucor Corporation United States 17.5 Riva Group Europe 16.8 Techint Latin America Source: Wikipedia, Global Steel, hyperlink A closer look on the performance of the BRIC Key Players: The top 30 players in the market produced almost 562M tonnes of steel in 2006. The total market volume of Brazil, Russia, India and China accounted to about 244M tonnes, which captured 43% of the total Top 30 players' production. The top players were Tata Steel of India with 28M tonnes production. Meanwhile, in China the largest producers were Shanghai Baosteel Group Corporation who produced 24Mtonnes while Tangshan and Shagang Group produced 15M and 16M tonnes respectively. EvrazHolding of Russia and Gerdau of Brazil produce 14M tonnes each. III. INDUSTRY ANALYSIS F. Life Cycle Model of Steel The global steel industry is already experiencing maturity. This was brought about by high volume production and over capacity in some regional markets. However, the life cycle of steel industry still depends on the regional consumption and type of industrial trading. 1. Emerging Markets: BRIC (Brazil, Russia, India and China) Brazil is still in the growth stage with a total production of around 30M tonnes, in comparison to the about 40M tonnes annual production of Russia, India and China. Russia on the other hand, is the 4th largest steel manufacturer in the world, about 7% of the global output. Meanwhile, in India, the industry can be considered as in the growth stage. The current production is only 50 million tones, which is still far from the 300 million tones to achieve its goal of being a developed country. India is projected to achieve a market volume of 124M tonnes and 27M tonnes by 2012 and 2020 respectively. (Wikipedia, Steel). India is one of the fastest growing markets and looking at the export business as the driving growth of the industry. Another growing market in the world is China. China is a much diversified market and encompassing the whole lifecycle model of the global industry. The country is a growing market and considered as top steel manufacturer driving the growth of the global steel market. In terms of export business, China is in the introductory stage since in the past the steel business is more geared towards importation. On the other hand, the importation has been practiced for years that explain the saturation of the market. In line with this, is expecting to have more mergers and consolidation (Wikipedia, Steel) 2. Developed Markets The developed regions such as Europe and US are in the maturity stage. Consolidation and mergers are the current trends in these regions to offer a more competitive market place and offer more products, technology improvements and services. IV. PESTLE ANALYSIS G. Political The World Trade Organization mandated trading policies for the Global Steel Industry. The European region and Russia had a trade agreement policy. It covers the increase on quota on steel products. There is an increase of 3.031M tones in 2008 from 2.904 million tonnes in 2007. It covers an automatic renewal. (European Union and Russia sign trade agreement on steel products, Mafra October 2007) In general, the political unrest of a country can also dampen the global business. This will eventually affect the economic stability of the country which will affect the production of any type of industry. H. Economic Steel plays a vital role in the global construction and infrastructure and one of the indicators to gauge the economic progress of the global economy. The economic boom of China and India increased the demand for steel between 2000-2005. Tata Steel of India and Shaghai Baostell Group Corporation and Shagang Group are the manufactures who posted volume increase during the five (5) year period. (Wikipedia, Steel Industry). China's business changed from importer to exporter is another factor in driving volume growth and price increases in the global market. The global challenges to the manufacturers are driving the growth of the international economy. United Steel ventured into acquisitions to strengthen position in the market. In 2003 it acquired National Steel to meet demands of the automotive, containers and construction industries. (United Steel Corporation, Annual Report 2003). The company also expanded its operation in Slovakia to serve growing demand of steels in the Central European automotive and construction industries. The company's 2000-2009 capital expenditure plan exhibits support to the global economy. (USS Subsidiary of United Steel Corporation, Presentation, 2006) In general, the two (2) major global industries driving the growth of Steel Industry are automotives and energy. In addition another growth factor is the growing residential sector in Asia-Pacific. The rapid urbanization is pushing for high quality houses and buildings in China, India, Vietnam, Indonesia and Thailand. I. Social The expansion and consolidation such as of Arcelor Mittal, making it the number one global player. It's subsidiary, Suziki Metal industry and Sumitomo Steel Wire supports the manufacturing and selling of stainless steel wire. The global companies are also in the direction of forming strategic alliances with the suppliers. This is to have easy access and price controls of raw materials. To streamline operations centralization and standardization are some of the business goals of the companies to have a global perspective of the market. In line with this, they are improving their supply chain management. Manufacturers are into diversification programs to enhance skills and talents of the employees to cope up with the global demands. J. Technical The manufacturers are putting large investment on their R&D to offer new advanced products. United States Corporation new product lines are tin mills, strip mills, coated steel and tubular products. The wide product portfolio will cater to the different industries requiring usage of steels in their business. There are also some technology innovations to reduce production processes that will help manufacturers to reduce cost and investment. K. Legalislative The presence of ant-dumping and countervailing proceedings affect the global steel industry. The increase of new dumping duties, countervailing duties, quotas or tariffs on sales in the US, China or European Union will affect the export business. (Antidumping, the Steel Industry and the FTAA, J. Tavares, Pedro Miranda November 2002) At the same time, EU in July 2006, imposed restrictions on usage of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl ether flame retardants in electrical and electronic equipment. (Honeywell, EU Lead Ban Status, Michelle O'Neil, p.4) L. Environmental There are environmental concerns to prevent global warming. The use of asbestos products can weaken relationship with the Environmental Prevention Agency (EPA). Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) raised the cleanup of various waste disposals. V. FIVE (5) FORCES ANALYSIS M. Buyer Power The buyers of steel have limited buyer power. The consolidations of the company, gains foothold in controlling the global prices. The move to acquire suppliers of raw materials is another foreseen upsurge in prices. N. Supplier Power The rapid growth of steel production and demand in China is widely considered as a major cause of the increases in both steel prices and the prices of steelmaking inputs. Steel companies have achieved much greater pricing power, in part through an ongoing consolidation of the industry. Just two companies control most of the integrated side of the industry, nearly half of U.S. production: U.S. Steel, the traditional industry leader, and Mittal Steel, itself the result of multiple international mergers. Moreover, Mittal in 2006 merged with the global number-two producer, Arcelor. Nucor and Gerdau have been active major consolidators of U.S. minimill production. (Price and Policy Issues, Summary, hyperlink) O. Rivalry In 2005 the rate of growth of U.S. industrial output moderated, and the price of steel, domestic steel output, and steel mill companies' earnings all declined. But the growth of China contributed to a large increase in global demand for both steel and steelmaking inputs, thus keeping the cost of domestic steel high. China has become both the world's largest steelmaker and steel consumer. By late 2005, China also became a net exporter of steel, including an increase of exports to the U.S. market. . (Price and Policy Issues, Summary, hyperlink) P. Threat of New Entrants New players are coming in the global market especially the key players of the BRIC market. However, it is still difficult for new players to enter the global arena. Largest global manufacturers are consolidating making small players difficult to compete in the market. Q. Threat of Substitutes The shift in the structure of demand toward products used in energy production and industrial production, even as demand for flat steel softened. The use of plastics or synthetic steels may pose a threat to the steel industry. VI. FUTURE OUTLOOK: 3 SCENARIOS R. Three (3) Major Companies Controlling the Global Industry 1. Arcelor Mittal (Global Player) 2. Nippon Steel (Japan) 3. POSCO (South Korea) S. Supplier Power of Prices 1. Difficulty for new entrants to come in because of the strong position of the top three (3) global players 2. Increase in raw materials for production of steel which will surge prices of steel prices towards customers C. Emergence of BRIC countries which will drive future demands of high-steel products VII. CORPORATE STRATEGY In general, the global companies are into R&D and improvement of processes, market expansion, mergers & acquisitions to remain competitive in the cyclical steel industry. R&D focuses more the higher quality steel products in the growing automotive and electrical sectors. The global presence and cross regional businesses are driving the companies to venture into Mergers and Acquisitions. Majority of the global players are in the direction of geographical expansion especially in China and India. To strengthen their competition they are also into joint ventures especially with the mining companies to control availability and prices of raw materials. A direction for more efficient production methods by developing the manufacturing systems. Consolidation or diversification of management is another move towards global business structure. 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(Accessed Date, November 25, 2007) United Steel Corporation, Annual Report 2003, Hyperlink, http://www.uss.com/corp/investors/annual_reports/2003_AR.pdf (Accessed Date, November 24, 2007) USS Subsidiary of United Steel Corporation, Presentation, 2006, Hyperlink, http://www.uss.com/corp/investors/presentations/USSK%20Investor%20Presentation%209-06.pdf (Accessed Date, November 25, 2007) Antidumping, the Steel Industry and the FTAA, J. Tavares, Pedro Miranda November 2002, hyperlink, http://www.sedi.oas.org/DTTC/TRADE/PUB/STAFF_ARTICLE/tava02_steel.doc (Accessed Date, November 25, 2007) Honeywell, EU Lead Ban Status, Michelle O'Neil,p.4 hyperlink, http://www.ami.ac.uk/courses/ami4982_lfi/u02/resources/Rohm_USA_3.pdf (Accessed Date, November 25, 2007) Read More