Director General's report at worldsteel-45

As many of you know, this is the first annual conference I attend, and also the first in my capacity as Director General of World Steel Association. Firstly, let me thank all of you for taking the trouble to join our conference in Paris. Also, I want to add my words to previous speakers in thanking the French steel association in arranging this event in the excellent way they have.

During his remarks in the previous annual conference in Tokyo, my predecessor, Ian Christmas, highlighted five challenges to the steel industry. He mentioned safety, business profitability, lack of R&D, creating a level playing field for all steelmakers and lastly, managing climate change as key challenges the industry will need to overcome.

While these challenges still remain, I believe that World Steel Association in the short term will need to focus on those challenges that support the short-term viability in the industry, as a pre-cursor to addressing the long-term sustainability of our industry. From a macro perspective, we can group these challenges that need urgent attention into three broad categories. While the challenges in most cases do not have their origins in the actions of the steel industry, they impact on our industry, forcing us in the steel industry to these challenges.

The global economy

Most uncertain, and also most immediate are the shifts in the global economic landscape. We know by now that the global financial crises that started in 2008, was a drama in two parts. While the crises originated in the financial sectors of developed economies of the US, Europe and Asia, the global economy had the good fortune of strongly performing developing economies – notably that of China, but with good support from India and others – to offset and temper the negative effects of the crises in the developed economies.

Today, while we suspect that the possibility of a relapse in the financial sector is small, the fallout from the 2008 crises still hamper most developed economies. The sovereign debt crises in the EU drains confidence in the region’s economies. Across the Atlantic, the US had to resort to multiple rounds of quantitative easing to counteract sluggish demand and employment creation. In Japan, the sluggish pace of economic progress of the past decade continues. In these regions, the steel industry is today still producing and consuming less steel than before the crises.

During the same period, the performance of developing economies created the certainty that growth will not disappear and confirmed the increasingly important role of growth in the developing economies. Indeed, in our industry, developing economies are now playing a more important role in most elements of our industry than the developed economies. However, developing economies are on the threshold of having to face their own set of difficulties. This creates a number of questions for which the industry as a whole will need to find answers to.

After an impressive growth performance during the last three decades, the Chinese economy is showing signs of important changes. Fixed investment, the primary driver of growth in China is widely expected to be replaced by a growing focus on consumer expenditure as basis for growth. We must expect that China is approaching an important inflexion point in its growth path. The impact of this change is uncertain, and could be a mix of welcome and unwelcome elements for the industry.

We will need to see how refocusing of the Chinese economic growth elements will impact on the demand for steel. Will this lead to growing net exports form the Chinese steel industry or not? How will this impact on the demand for raw materials – notably iron ore – over time? At present we have no clear idea of the impact of these events on the global steel industry, but it is certain that a cough in the Chinese steel industry could easily lead to a cold in the world’s steel industry.

We are also beginning to see India flexing its muscles for a larger role in the world economy. This is not in itself unwelcome, but similar questions are important to answer. How will the growth of the Indian steel industry impact on the global supply of iron ore? More importantly, how does the industry ensure that the exuberance of Indian and Asian demand does not unbalance the market forces of supply and demand in the short term? worldsteel has initiated studies of the future conditions in these two important regions. Our India 2020 and China 2020 studies will be completed in the next year and will be a combined effort of local and global experts, aiming to shine a light on the important questions around the development of the steel industry in these two important economies.

Raw materials

The second major challenge we in the industry face, is the global re-valuation of raw material values. This is partly the result of the impressive strength of the economies of the developing world, that contributed to continued demand for raw materials in substantial quantities throughout the financial crises. The demand strength, combined with a concentrated supplier base in iron ore specifically, lead to not only a re-arrangement of the historical supply relationships, but also to a significant adjustment in the valuation of raw materials.

This development not only had a significant impact on the margins in the steel industry, but presently leads to a number of new developments which will require careful evaluation.

Firstly, the industry has developed a strong interest in acquiring own raw material capacities. While this may not in itself be ill-advised, it is clear that mining assets are presently available at high asset valuations that increases the long-term riskiness of the steel industry investments into raw material capacities. Moreover, as availability of own raw material capacities increase, we as an industry should take care to determine transfer price relationships in such ventures with an eye to what the real value of the raw materials are rather than at cost.

While I am aware that many of the available raw material sources could be defined as not marketable and that it needs the process of steelmaking in order to add sufficient value to bring the raw materials to market, transfer prices should not be used to improve the profitability of steel. As an industry we will need to work hard to improve the margin on steel as a versatile product, rather than to just add a convertor’s margin to raw materials.

Secondly, the steel industry in the short term is destined to live within very narrow producer margins and as such will need to focus on the efficiency of its operations. The unintended benefit of the present system where raw material values are very similar for most producers and are regularly adjusted, is that the difference between the average cost to produce a tonne of steel and the cost of a marginal tonne produced are rather small. The discipline this enforces on market behaviour of all participants can only benefit the industry in the future. But, at the same time, in an effort for short term survival, the industry will have to continue to search out ever more efficient ways to bring steel to the market.

This will – as in the past – continue to make this a difficult industry to operate in with a continued focus on efficiency. In the focus on efficiency and best practice, worldsteel can and will continue to play its natural role as a benchmarking institution and disseminator of best practice information.

Thirdly, at present industry margins, the attractiveness of new greenfield investments are sure to be less so than a few years ago. Provided that no undue intervention from governments support new investment in the industry, lower investment margins may be part of the self-regulating condition in our industry that will enforce disciplined expansion in capacity. By itself, this can support the future health of the industry by keeping capacity to levels that are aligned with market demand and we should take care not to undermine this discipline.

Nevertheless, the industry will need to evaluate the full impact of the re-adjustment in raw material values on our industry. The final answer will require information on future investments in mining resources – by the industry and by outsiders – and how this expected future supply of raw materials will on a global level relate to expected growth in demand for steel products. This evaluation will at the very least shed light on the potential risks the industry faces – either a shortage of raw materials, or a surplus. In case of a surplus, we will need to be careful not to fuel the present concentrated state of raw material suppliers as we in the steel industry tries to rid ourselves of underperforming raw material assets.

The short-term margin pressure may re-ignite the debate on ways how the industry reduce the volatility it faces in the very short term by making use of financial market solutions to hedge against short term volatility. These have not yet developed to a level of maturity where confidence in the freedom from market interference by specific interest groups are assured. As long as this suspision remains, the future growth of such hedging mechanisms for the steel industry will be slow.

Environmental concens

The third major challenge deals with the need to address the environmental concerns facing our industry. The impact that steel production has on the environment is too important to ignore, but at the same time the record of the industry in steadily reducing its impact on the environment cannot be ignored. The industry did not and should not move away from its present stance of a responsible interaction with the environment.

The present process of evaluating the specific impact of this industry on the environment – whether in the field of emissions, water management, use of by-products and in countless other areas – should continue. What is becoming ever more clear, is that it is not possible to talk about a sustainable future society without steel. The debate ahead of us is not how to reduce the role of steel in a future sustainable society, but rather how to ensure that the steel industry is ready and able to grasp the challenge contained in moving towards a sustainable future society.

The present reduced margins in the industry makes it more difficult in the short term to make the investments in improved equipment and practices that will ensure a more environmentally sustainable industry in the long run. Secondly, significant differences in opinion between different governments make it unlikely that a single course can be charted for the steel industry to progress towards improved environmental sustainability.

It is, however, important for the industry to convey the conviction that steel has an important and rightful role to play in the progress towards an environmentally sustainable society. In this, we in the industry need to develop a united front to ensure that reasonable and deliverable objectives for sustainability are agreed.

The role of worldsteel is to be a part of this debate and to work very closely with local organisations and associations to align messages across borders. It remains important for all participants in this industry to ensure that this industry is correctly positioned to share in the move towards a green economy. Few other industries produce products that are as well suited to play a role in a future green economy than steel. Few other products combine the strength to weight ratio, durability, formability, availability and applicability in hot, cold, dry or wet environments. Few other products rival steel for the ability to be recycled easily, effectively and without loss of quality.

We need to position our industry as part of the future solution, and should not allow to be cast as part of the problem.

worldsteel will focus on those things we can do. We can and will play a role in sharing information, coordinating action and guiding strategic thinking in our industry. We will need the support from producer members, local associations and organisations to bring the message of steel as a green product to society.

I thank you for your support in the future and whish you all the very best of success in your endeavours in this industry.