The European steel sector has been expanding its scope and now includes European Russia and also North Africa, so stated Dr. Rod Beddows, CEO of Hatch Corporate Finance, in the presentation he made at the SteelOrbis Spring 08 Conference & 58th IREPAS Meeting held in Istanbul.
In the comparison he drew between the European flat and long steel sectors, Dr. Beddows remarked that the region's flats sector was more consolidated than its longs counterpart. For instance, the strip mill sector has an annual output of approximately 100 million tons and there are now only 19 countries operating in the sector.
However, the European longs sector has so far not been much affected by this trend of consolidation. Over 130 plants and probably over 80 companies are currently producing long products in Europe. This fragmentation has many reasons such as economics of scale, national standards, private ownership, high transport costs and under-capitalization.
Speaking about the global longs sector, Dr. Beddows stated that demand is being driven by China and its construction boom.
Meanwhile, production costs are growing in the European longs sector. This growth, however, is symmetrical to the increase in iron ore prices over the last couple of years. Therefore, the question of whether the price rise trend in the European longs sector is driven by demand or production costs has arisen. Answering this question, Dr. Beddows stated that both market dynamics and raw material prices are responsible for the upward trend in the European market. As for the future direction of iron ore prices, Dr. Beddows forecasted that prices would go down due to the development of new iron ore extraction projects which would create a sufficiency of iron ore in the market. However, the prices of iron ore will not fall to very low levels as the cost of iron ore mining is also increasing since the most easily extracted ore has already been exploited. On the other hand, the situation as regards EAF production is much simpler as new technologies may bring a reduction in production costs.
Dr. Beddows added that the logic behind consolidation is to be found in the following factors: (horizontal factors) reduction of overheads, optimization of capital expenditure and thereby reduction through avoidance, greater ease of balancing capacity with demand, process route and order book optimization; (vertical factors) margin stabilization because there are fewer price setters, increase in through margins as processing costs drop, better market intelligence, improvement in customer service and reduced working capital.
Consolidation also entails certain challenges: these are posed by the significant number of private companies, the existence of local standards and specifications (particularly for rebar and coil), high transportation costs, and also differences of culture and language.