Connect with us

Commodities

The Myopic Behaviour of the European Steel Industry

 4 min read / 

Ever since 2008, the European steel industry has found itself in a deep crisis. This was caused by external factors, but also by many problems within the firms themselves. At the worst time, demand for European steel fell by 40%. Although the market seems to have taken a slight turn for the better, demand is still under by 30%, and producers are struggling to cope with it.

 Along with a very weak demand, pressures from India’s and China’s more efficient steel producers are squeezing Europe’s market share. In a necessary restructuring effort, 66,000 jobs were shed by the industry. This was a very painful process, but results have barely shown. The marker is still dwindling, with unclear and unpredictable shifts. The problem is far from being only demand-sided: it is estimated that European steel producers have an excess capacity of 40 million tonnes. This is creating problems as the investment in such capacity is not generating profits, but only raising fixed costs and making the firms even more inefficient.
 
Many industrialists have been blaming the industry’s woes on the attitudes and policies of the governments in the European Union. Their claims are not without merit: France threatened to nationalize ArcelorMittal’s plant in Florange unless the closure guaranteed no job losses in the area. Limiting the ability of companies to restructure makes them inflexible to the market and could just deepen the problem to a more systemic level inside the firm, as the companies are not able to cut off its dead branches. It also undermines the position of the company, scaring away refinancing and investment projects, which could be the difference between profits and bankruptcy. Moreover, the strict energy policies within the EU, according to the steel lobby, result in much higher energy prices compared to the average of their competitors, cutting them out of huge portions of the market. The limitations on carbon dioxide emissions also complicate the situation, making it very hard to produce at costs comparable to the US, never mind India and China.
 
However, this view is very one sided. The EU is not fighting against the Steel industry, which it considers an industry to protect. The shrugging off of any responsibility by the companies is cowardly and counter-productive in the long run. The green policies have set up many exceptions for steel producers to reduce the burden on them, to avoid limiting their exporting ability too much. Furthermore, the increase in renewable energy production has reduced the cost of energy by 10 Euros/MWh. With this reduction, studies have suggested that a smart energy plan can bring energy costs for European steel producers to levels similar to their US counterparts, contradicting the industry’s claims. However the benefits from renewable energy sources created under the policies set up by the EU- and despised by the steel industry- are much greater and much more direct than the simple reduction in energy prices. Building the energy plants require enormous amounts of steel. For example, the average 3MW turbine requires 500 times the amount of steel as a car, meaning renewable energy has the potential to drive demand back up. Moreover, since the construction of green power plants are government enforced with mandated energy production targets, this demand for steel is even more valuable, as it is predictable.
 
Beyond renewable energy, green policies such as fuel efficiencies means there will be a boost in demand for expensive, lightweight steel products. It is therefore clear that environmental policies could contribute greatly to the steel industry, which instead appears too comfortable where it is. The market for higher quality steel is one where they would find a much less competition, and where they would have the advantages of being a European brand and controlling most of the rich European market. However, if the producers remain unwilling to change, pushing only for cost reductions instead of investing in R&D, it is more than likely that they will find less and less room in the market. The companies need to restructure not only relative to size, but in terms of their production and market strategy.

Sign up to Mogul News.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Send this to a friend