Organisation de Coopération et de Développement Économiques
Organisation for Economic Co-operation and Development 13-Nov-2012
___________________________________________________________________________________________
English - Or. English DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY
STEEL COMMITTEE
EXCESS CAPACITY IN THE STEEL INDUSTRY: AN EXAMINATION OF THE GLOBAL AND REGIONAL EXTENT OF THE CHALLENGE
Paris, 6-7 December 2012
This document is for discussion under Item 6 of the agenda, which will provide an opportunity for delegations to exchange views on the extent of the excess capacity problem, what kinds of barriers to closure exist in different countries, and how government approaches towards excess capacity may differ. To that end, delegates are invited to consider some of the issues for discussion at the end of this document, and address them at the December meeting.
Contacts: Mr. Anthony de Carvalho, Tel: +(33-1) 45 24 93 77 E-mail: Anthony.decarvalho@oecd.org; org
JT03330630
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DSTI/S U/SC(2012)15 For O ffi ci al Use
English - Or. EngEXCESS CAPACITY IN THE STEEL INDUSTRY: AN EXAMINATION OF THE GLOBAL AND REGIONAL EXTENT OF THE CHALLENGE
1. Introduction and summary
1. Excessive levels of steelmaking capacity have important implications for the steel industry, particularly in periods of market weakness. Excess capacity can be associated with over-supply, low prices and weak profitability. Some of the excess capacity is likely to be sitting in inefficient, high-cost or government-supported plants, but highly efficient plants may also be confronted with excess capacity if they are faced with exceptionally low demand due to poor economic conditions.
2. Typically, the power of the market alleviates excess capacity, by forcing inefficient producers that incur profit losses to eventually exit the market. In the steel industry, however, exit barriers and government impediments to capacity closure can lead to long periods of lingering excess capacity. This can weigh heavily on the overall profitability of the industry, hinder re-investments for modernisation and technology upgrades, and slow productivity growth. In other words, key factors necessary to improve the industry’s future viability and health are potentially put at risk.
3. The purpose of this document is, first, to explore the extent of global excess capacity and examine where some of the excess is situated. Using some basic assumptions about the future growth of demand, the paper then looks at how long it would take for demand growth to eventually eliminate excess capacity, if global steelmaking capacity were to stop increasing in the future. It finds that it could take five to seven years for excess capacity to work its way out of the industry, pointing to possibly challenging times ahead for the industry. If exit barriers and government measures allow inefficient capacity to persist, this could displace more efficient capacity operating in regions where barriers to exit are not so pronounced or where market forces are more prevalent. In sum, international differences with regard to exit barriers and the extent to which market forces re-allocate resources will continue to affect the structure of global excess capacity and the industry’s health in the future.1
4. This document suggests that:
• The world steel industry currently finds itself with approximately 542 mmt of excess capacity (measured as the difference between capacity and demand), and that this figure might grow further in 2013 if demand develops as currently forecast;
• It could take five to seven years to work off excess capacity in the global industry, if capacity stopped increasing and demand grew at its trend rate in the post-2013 period;
• Excess capacity is not linked to a specific region, but affects many economies; and
1 The purpose of the document is only to provide background information for an initial discussion on the extent of the excess capacity problem and is not meant to go into the details about different ways of addressing the situation, e.g. measures to support closures, etc.
• Specific regions may, however, face different barriers to exit, suggesting that there may not be a unique solution to the global excess capacity challenge.
5. The December 2012 session of the Steel Committee will provide an opportunity for delegations to exchange views on the extent of the excess capacity problem, what kinds of barriers to closure exist in different countries, and how government approaches towards excess capacity may differ. To that end, delegates are invited to consider some of the issues for discussion at the end of this document, and address them at the December meeting. Hopefully, an open and transparent dialogue on these issues may ultimately shed light on the right framework conditions necessary for the global industry to thrive in the future.
2. Different types of excess capacity2
6. It is normal for many industries, including steel, to experience periods of under-utilised capacity in response to fluctuations in market conditions. When input costs increase or output prices decline, for example, profit-maximising firms should reduce their production levels, leaving a certain level of excess production capacity in the firm. Although the lower level of production might be efficient, profits will tend to be lower because the firms must continue to pay for their fixed assets, which, in the case of steel, include the under-utilised steelmaking furnaces and rolling facilities. If the situation persists over time, then firms operating under normal market conditions would try to minimise their fixed costs by scaling back on capacity. Excess capacity, then, becomes a short-run phenomenon that is eventually corrected by market forces.
7. For the steel industry, however, the adjustment process can take much longer, and problems of overcapacity have been common for the industry throughout history. During long periods of market weakness, when prices are low and profitability is weak, adjusting steelmaking capacity downward can be a prolonged and painful process. This can be due to exit barriers, namely the costs of closure that make a lengthy exit process a rational response by companies (Carbaugh, 2010). For example, capacity closures entail high costs of dismantling the mills, potential clean-up and other environmental costs, and employee benefits and severance pay depending on the contractual relationships of the company. The operating losses associated with a lengthy closure process and the costs of writing down assets have also formed important exit barriers for the steel industry in the past (Deily, 1988).
8. Alternatively, excess capacity that persists over the longer term may also be indicative of market failures or government actions that hinder adjustments that would normally occur in competitive markets (U.S. Department of Commerce, 2000). That is, market forces alone fail to bring world capacity in line with demand when government support measures and market-distorting practices prevent inefficient capacity from exiting the industry. Due to the importance and strategic nature of the steel industry to many national economies, a tendency during market downturns is to preserve the capacity of the industry, in order to alleviate unemployment and other social problems that would otherwise occur due to capacity closures.
9. Ideally, then, the problem of excess capacity should be considered in terms of how “efficient” it is. Capacity that is not utilised even during market booms － when demand and prices of steel are high － might be indicative of inefficient capacity. Inefficient capacity may also reflect characteristics such as the use of outdated technologies, high relative costs, and low productivity of plants.
2 The definitions of excess capacity used throughout this paper are provided in the Annex.
3. What is the extent of excess capacity and where is it located?
Measures of excess capacity
10. Crude steelmaking capacity, the tonnage of steel that could be produced per year assuming the full use of equipment and a sufficient flow of inputs, such as raw materials and labour, can be compared to steel demand or production to derive estimates of overcapacity. For many years now, the OECD Secretariat has collected information on investments taking place in the steel industry, using public sources, to assess the levels of steelmaking capacity by economy and region. In some cases, members of the Steel Committee provide information on current and expected future capacity for their economies, and these figures are also used whenever possible.3
11. The period since 2000 has been characterised by unprecedented expansion of capacity. Global steelmaking capacity is estimated to reach 2,053 mmt in 2012, a level that is almost twice as high as the 1,079 mmt capacity level observed in 2000. Capacity is expected to continue to increase by an additional 118 mmt over the next two years to a level of 2,171 mmt by 2014. With world steel production and demand having slowed sharply in 2012, the extent of the industry’s overcapacity appears to be on the increase.
12. Comparing world capacity to production indicates that the gap between the two has increased significantly since the financial and economic crisis of 2008-09 (see Figure 1). Excess capacity, which had averaged less than 250 mmt per year during the 1980-2006 period, began rising sharply in 2007 and has remained very high since then in absolute terms. Based on annualised production figures from January to September 2012, capacity could exceed production by as much as 521.9 mmt in 2012.4
13. However, the size of the industry continues to grow, suggesting that excess capacity should also be considered in relative terms. By looking at the rate of capacity utilisation (production as a per cent of capacity), it appears that around one quarter of the industry’s capacity is currently not being utilised. The annual average utilisation rate, which declined to 69.2% during the market downturn in 2009, has fluctuated between 75% and 77% since 2010.
3 This is conducted through the Secretariat’s Continuous Information System survey sent to delegations twice a year.
4 Annualised production in January-September 2012 stood at 1,531.2 mmt.
Figure 1. Measures of excess capacity in the global steel industry Crude steel basis
0 500 1000 1500 2000 2500mmt
Global capacity and production, mmt
Capacity Output
60 65 70 75 80 85 90%
Global capacity utilization rate, %
Utilization
Notes: Production in 2012 is an estimate based on annualised figures from January-September 2012.
Source: OECD for capacity and the World Steel Association for production.
14. Measures of excess capacity as those presented above may nevertheless over-estimate the extent of the problem. Indeed, the steel industry never seems be running at full capacity, even when pricing is attractive and companies appear to be maximising their output. During the peak of the pre-crisis price upturn in the first half of 2008, for example, monthly capacity utilisation did not rise above 91%.5 Seasonal factors as well as the need to occasionally close down operations to refurbish steel plants and add new facilities tend to reduce the effective capacity of steel mills.
15. As a result, some industry analysts note that it is difficult for the industry to operate at more than 90-95% capacity. This reduces the extent of the excess capacity problem, but does not eliminate it completely. Figure 2 makes the assumption that effective capacity is 90-95% of its nominal level for the years 2000-2012. It shows that even in the years leading up to the crisis, when market conditions and profits were favourable, as much as 200 mmt, or more, of effective capacity still remained unused. The presence of overcapacity in relatively profitable years may reflect the difficulty of closing high-cost or inefficient facilities. In 2011, effective excess capacity ranged from 250-358 mmt and in 2012 it is estimated to increase further to a range of 317-419 mmt.
5 Monthly capacity utilization rates are provided by the World Steel Association.
Figure 2. Effective excess global steel industry mmt
0 50 100 150 200 250 300 350 400 450 500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (e) Million tonnes
Source: OECD
Effective excess capacity
Assuming effective capacity is 90% of nominal capacity
Assuming effective capacity is 95% of nominal capacity
Notes: Effective capacity is assumed to be 90-95% of the nominal level. Effective excess capacity is effective capacity minus production. Production figures for 2012 are estimates based on annualised production from the January-September 2012 period.
Source: OECD.
16. An alternative measure of over-capacity is the difference between capacity and demand for steel.
It is useful to use demand particularly when trying to make projections into the future, simply because forecasts for demand are more readily available than those for production. In theory, apparent consumption of crude should equal production of crude steel at the global level because net exports are zero. In practice, however, this is not the case due to inventory changes and statistical discrepancies particularly in the trade data used to determine apparent consumption.
17. Figure 3 plots global steelmaking capacity against demand, the latter of which is defined as apparent consumption in crude steel equivalent terms. The forecasts for crude steel demand in 2012 and 2013 are based on the World Steel Association’s Short Range Outlook (released in October 2012) for world apparent consumption of finished steel after converting this into its crude steel equivalent using the average coefficient of conversion observed during the five-year period from 2007 to 2011.6 Due to sluggish growth in demand in 2012 and 2013, of 1.8% and 3.2%, respectively, excess capacity measured in terms of demand is expected to increase from 491 mmt in 2011, to 542 mmt in 2012 and 559 mmt in 2013.
6 Apparent consumption forecasts by the World Steel Association refer to consumption of finished steel.
However, capacity is defined in terms of crude steel. Thus, in order to be able to compare the two, finished steel consumption has to be converted into its crude steel equivalent. The ratio of world crude consumption to finished steel consumption averaged 1.08 during the 2007-11 period. That is, 1.08 tonnes of crude steel consumption corresponds to approximately one tonne of finished steel consumption.
Figure 3. Global capacity and demand
In terms of nominal capacity (upper graph) and effective capacity (lower graph), mmt
Notes: Effective capacity, shown in the lower figure, is assumed to be 90% of nominal capacity.
Source: Secretariat calculations based on OECD capacity data and demand data from the World Steel Association.
0 100 200 300 400 500 600
0 500 1,000 1,500 2,000 2,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (f)
2013 (f)
2014 (f) Million tonnes Million tonnes
Global Steel Capacity (nominal) and Demand
Excess capacity (RHS) Steelmaking capacity (LHS)
Apparent consumption (Crude steel equivalent) (LHS)
0 50 100 150 200 250 300 350 400 450
0 500 1,000 1,500 2,000 2,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (f)
2013 (f)
2014 (f) Million tonnes Million tonnes
Global Steel Capacity (effective) and demand
Excess capacity (RHS) Steelmaking capacity (LHS)
Apparent consumption (Crude steel equivalent) (LHS)
The regional distribution of excess capacity
18. Figure 3 above suggests that the world steel industry currently finds itself with approximately 542 mmt of excess capacity, and that this figure might grow further in 2013 if demand develops as currently forecast. Adjusting for the capacity that is not used during the normal operations of steel mills, i.e. assuming an effective capacity that is 90% of the nominal level, yields lower levels of global excess capacity of 336 mmt in 2012 and 347 mmt in 2013.
19. Regional differences are very large, however. Table 1 presents measures of surplus capacity for selected regions. Regions that invested heavily in the industry over the last few years, such as in developing Asian economies, or which are currently experiencing exceptionally low demand, i.e. the European Union, are currently facing the biggest gaps between capacity and demand. In addition, some very export-oriented regions, such as the Commonwealth of Independent States, naturally have much greater capacity than domestic demand. For this reason, Table 1 also presents figures for “net excess capacity,” i.e. excess capacity minus net exports of steel, in order to take into account this trade dimension in major exporting regions.7 In other words, some economies may have comparative advantages, in particular access to cheaper steelmaking raw materials and/or energy, that help them satisfy foreign demand and this lessens the extent of their measured domestic excess capacity. In the case of net exporting regions, then, “net excess capacity” is lower than the normal excess capacity measure based only on capacity and demand.
20. The results in Table 1 show that excess capacity is particularly high in Asia, both in “Developed Asia” (the aggregate of Japan, Korea and Chinese Taipei) and “Other Asia” (China and India). As a whole, excess capacity in these Asian regions totaled an estimated 263 mmt in 2011.8 However, because some Asian economies are important net exporters of steel, their net excess capacity is lower. Excess capacity in the CIS was 83 mmt in 2011, but net excess capacity was only 36 mmt particularly in light of Ukraine’s very high export orientation. The European Union appears to have net excess capacity of 79 mmt under the assumption that the region’s steelmaking capacity is approximately 250 mmt. NAFTA and Latin America appear to have relatively low excess capacity (25 mmt and 19 mmt, respectively), while ASEAN-6 and the Middle East have “under-capacity” reflecting high net imports of steel.
21. Figure 4 presents figures for regional excess capacity, including projections until 2013. The figure indicates that Asia will account for the major share of the increase in global excess capacity expected in 2013, while declines in excess capacity levels are expected in NAFTA, the EU and Latin America in 2013.
7 Regional net exports were calculated by employing external trade only, i.e. intra-regional trade was eliminated.
8 The sums in the table do not necessarily match the totals mentioned in the text due to rounding.
Table 1. The regional distribution of excess capacity mmt
Steelmaking capacity, world 1,376 1,453 1,622 1,682 1,787 1,904 1,975
Apparent consumption (crude steel equivalent), world 1,135 1,237 1,319 1,321 1,220 1,400 1,485
Excess capacity, world 241 215 303 361 567 504 491
NAFTA -9 -23 -3 11 65 33 25
EU 62 37 26 45 123 89 81
CIS 75 70 69 83 102 89 83
Latin America 19 13 15 13 27 19 19
Asia:
Developed Asia 1/ 42 47 44 48 100 91 90
ASEAN-6 -17 -13 -19 -23 -16 -23 -28
Other Asia 2/ 70 86 178 189 154 189 200
Middle East -19 -19 -23 -25 -16 -16 -15
Africa 6 4 4 1 -2 3 7
EU 54 46 45 52 111 82 79
CIS 16 6 12 29 49 38 36
Asia:
Developed Asia 1/ 19 19 18 22 64 49 43
Other Asia 2/ 69 51 128 145 155 166 166
Net Excess Capacity in Major Exporting Regions Excess Capacity by Selected Regions
2007 2008 2009 2010 2011
2005 2006
1/ Developed Asia denotes the aggregate of Japan, Korea and Chinese Taipei.
2/ Other Asia denotes the aggregate of China and India.
Notes: Excess capacity is defined in the table as the difference between capacity and demand. Net excess capacity is equal to excess capacity minus net exports, where the latter refer to external trade to and from a given regional aggregate. Because trade data are available only in terms of finished steel, they were converted into their crude steel equivalent using the average conversion coefficients from the five-year period of 2007-2011.
Source: OECD.
Figure 4. Excess capacity by region: projections to 2013 Measured as capacity minus demand
Sources: Demand projections for 2012-2013 are from the World Steel Association’s Short Range Outlook (Oct. 2012), converted into crude steel equivalent. Capacity data are from the OECD.
-50 0 50 100 150 200 250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (f)
2013 (f) Million tonnes
NAFTA EU CIS
-50 0 50 100 150 200 250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (f)
2013 (f) Million tonnes
Latin America
Other Asia
Developed Asia
22. Accounting for countries’ trade orientation adds an important dimension to the debate on excess capacity. Whilst the data suggest that significant excess capacity sits in regions that export steel, some producers in those economies have natural cost advantages, particularly related to access to their own raw materials resources. Large steel exporters such as Russia, Ukraine and Brazil, which have excess capacity, enjoy amongst the lowest costs of making steel via the BF/BOF route, mainly due to advantages related to vertical integration into raw materials (see Figure 5). In contrast, large exporting economies that depend more on imported raw materials, such as the EU and developed Asian countries, typically have higher costs with regard to BF/BOF-produced steel. China is also a relatively high-cost producer that relies on imported raw materials, and suffers from the greatest excess in capacity.
Figure 5. Operating costs for the BF/BOF and EAF processes (USD per tonne of billet produced)
BF/BOF EAF
0 100 200 300 400 500 600
0 100 200 300 400 500 600
Source: McLellan (2012), updated using prices of raw materials in September 2012.
4. How long will it take to work off the global industry’s excess capacity?
23. OECD Secretariat forecasts for steelmaking capacity extend until the year 2014 and demand forecasts from the World Steel Association only until 2013. Assessing the time required to work off global excess capacity thus requires information on the longer-term development of capacity and demand, as the process is not likely to happen at least in the very near term. The question asked in this section is, “how many years would it take to eliminate excess capacity, assuming capacity no longer increases and steel demand grows at its trend rate in the post-2013 period?”
24. One approach for deriving an assumption about the future demand trajectory is to examine the long-term trend of apparent crude steel consumption and assume future demand grows at its trend rate. A number of statistical tools, such as the Hodrick-Prescott and Baxter-King filters, have been used widely by researchers to separate cyclical behavior from the long-run trend of economic series. These statistical approaches are widely recognized as useful tools to extract long-term trends in data, although they also have many shortcomings.9 One major shortcoming is that they ignore the underlying economic fundamentals behind the trend of a particular series. Moreover, the impact of the 2008 financial crisis could not be entirely captured by these statistical methods as it is relatively recent. On the other hand, the benefit of using a purely statistical approach is that it avoids the need to form a consensus view of the fundamentals that will drive steel demand in the future, particularly when reaching such a consensus view might be difficult given the exceptionally high degree of economic uncertainty at present.
9 For an overview of these and other de-trending methods, see Cotis, Elmeskov and Mourougane (2005).
25. Therefore, the Hodrick-Prescott and Baxter-King filters were applied to long-run historical data on crude steel apparent consumption since 1977 to obtain trends in crude steel demand. Both filters yielded extremely similar growth rates of approximately 3.6% for the current trend rate of growth of steel demand.
This is down significantly from trend growth exceeding 5% in the years preceding the crisis. Annual average growth in demand of 3.6% would be consistent with further increases in global steel intensity in the future (assuming world GDP expands at a slower pace)10, which seems plausible given that many developing economies are still in the process of convergence towards the steel intensity levels of advanced economies.
26. Table 2 below presents a scenario showing the time it might take to work excess capacity out of the industry. It assumes that, starting in 2014, global steelmaking capacity remains constant and steel demand grows at its trend rate of 3.6% per annum. For purposes of illustration, a pre-crisis trend growth rate of demand of 5.3% per annum is also included to provide an alternative, higher-growth scenario.11 In addition, it is assumed that the industry’s effective capacity is only 90% of its nominal level for the reasons discussed earlier; that is, effective steelmaking capacity is 10% lower than its nominal level.
27. The results in Table 2 indicate that it could take between five and seven years before excess capacity diminishes, if producers maintain their capacities at approximately current levels and demand grows at the rates assumed. It should be noted, however, that this is a purely mechanical exercise aimed to provide initial insights into the possible magnitude of the excess capacity problem, and is not meant as a forecast of the future situation. The shortcomings of treating demand and capacity as exogenous should be recognized. For example, insofar as profitability declines in response to overcapacity, some mills will reduce their capital outlays or may go out of business. Moreover, some producers may well continue to increase capacity further going forward. India is beginning a phase of rapid capacity expansion, along with several smaller economies in Southeast Asia. The Middle East is currently a significant net importer which is also expected to experience significant capacity expansions in the future. The actual evolution of excess capacity, therefore, will reflect endogenous actions by producers and consumers of steel in response to changing market conditions.
Table 2. Possible scenarios for future developments in excess capacity mmt of crude steel
Steelmaking capacity 2,119 2,119 2,119 2,119 2,119 2,119
Effective steelmaking capacity (90% max utilization) 1,907 1,907 1,907 1,907 1,907 1,907 Apparent consumption (trend growth, 3.6%) 1,616 1,674 1,735 1,797 1,862 1,929 Apparent consumption (high growth, 5.3%) 1,643 1,730 1,822 1,918 2,020 2,127
Excess capacity (trend demand growth) 291 233 172 110 45 -22
Excess capacity (high demand growth) 264 177 86 -11
2015 2016 2017 2018 2019
2014 Global Steel Capacity and Demand
10 Oxford Economics, for example, forecasts world GDP growth of close to 3% per year from 2013-2020.
11 The alternative trend growth of 5.3% represents the average of the Hodrick-Prescott trend observed during the 5-year period of 2002-2007.
5. What are the consequences of excess capacity for the industry?
28. A sustained period of weak profitability due to weak demand and excess capacity would have important implications for the steel industry. Excess capacity can lead to a situation where firms try to reduce prices and increase sales volumes, with a view to spreading fixed costs over a larger quantity of output. For this reason, excess capacity is often associated with oversupply, low prices, and sharp declines in profitability, particularly during market downturns. These problems can, in addition, lead to disruptions in trade flows and intensified trade actions.
29. When exit barriers are low and market forces reign, high-cost or inefficient steel plants making losses might be expected to shut down and eventually plants will close. In this environment, inefficient producers that depend on capital markets might not be able to obtain funding to maintain their operations.
However, the steel industry is known to suffer from high closing costs, such as costs associated with dismantling mills, environmental costs after closure, and low resale values of the closed assets, which tend to prolong the pace at which inefficient capacity is closed. Government support measures that impede capacity closure for economic or social reasons also slow the necessary adjustments.
30. As a result, some inefficient capacity will likely remain in place for the foreseeable future, possibly creating problems for the industry as a whole by displacing relatively more efficient producers that operate in markets with fewer government supports or where closing costs are not so pronounced. If demand remains weak, lingering excess capacity could weigh on industry profitability, and possibly slow investments in modernisation and technology upgrades that would ultimately improve the industry’s viability over the longer term.
31. In some regions, supply has already started to exceed demand, visible in generally declining steel prices since the spring of 2012. In October 2012, the world export price of hot-rolled sheet had fallen to USD 540 per tonne, down from USD 660 in March 2012, according to data from World Steel Dynamics (2012). Taken in the context of industry costs, the current level of prices suggest that the industry may be on the verge of a profitability downturn. For example, the most recent findings from World Steel Dynamics’ World Cost Curve indicated that the world’s median-cost producer (of hot-rolled band) had total operating costs (fixed and variable) of USD 540 per tonne of steel produced, as of September 2012.12 The median producer’s total operating costs are also given for three regional aggregates, broken down into their variable and fixed cost components (see Table 3)
32. Although prices on some home markets vary significantly from world export prices (reflecting local conditions, trade measures, and other factors), current levels may not be so far above the total costs of producing a tonne of steel for the average firm. In some advanced countries, prices may have already dipped below total costs, assuming the Cost Curve data are accurate.13 Prices are, however, notoriously very volatile and would need to fall significantly before reaching the current level of variable costs. As long as steel prices remain above the variable costs of production (labour, energy and material costs), producers will typically remain in operation and continue to produce if they can cover at least some of their fixed costs of production (since fixed costs must be paid whether the mill produces or not).
12 World Steel Dynamics’ World Cost Curve uses extensive information on variable and fixed costs for 176 plants around the world with a gross capacity of 592 million tonnes (World Steel Dynamics, 2012).
13 Much caution should be applied with costs curves. For example, the data do not take into account quality differences in the steel produced nor the end-user markets that purchase the steel from the producer.
Table 3. Steelmaking costs USD per tonne of hot-rolled band
Advanced Economies
Developing World (excl. China)
China
Variable Cost 513 439 449
Fixed Cost 67 63 61
Total Operating Cost 580 502 510
Source: World Steel Dynamics, October 2012.
33. Looking ahead, World Steel Dynamics provides a comparatively weak outlook for profitability developments in the global industry (see Figure 6). Following a 60% plunge in global steelmakers’
profitability in 2009, as measured by EBITDA per tonne shipped, a strong recovery took place in 2010, although this was still down by 36% compared to the peak of 2008. The outlook is for lower steel export prices accompanied by a 32% decline in profitability in 2012 followed by a further 8.7% decrease in 2013, according to the World Steel Dynamics.
Figure 6. Outlook for steel prices and profitability
0 20 40 60 80 100 120 140 160 180
0 100 200 300 400 500 600 700 800 900 1000
2005 2006 2007 2008 2009 2010 2011 2012 (e) 2013 (e)
EBITDA, USD per tonne Steel price, USD
Global steelmakers' EBITDA per tonne shipped (RHS)
World HRB export price (LHS)
Source: World Steel Dynamics, October 2012.
6. Issues for discussion
34. This paper has attempted to provide some background information on the extent of excess capacity, globally and across regions, and possible implications for the steel industry. The December 2012 meeting of the Steel Committee will involve a discussion on overcapacity, with a view to improving participants’ understanding about the extent of the problem, where the excess capacity is located, the problems that it can create for the industry, and ways to facilitate closure where needed. Several possible issues for discussion are outlined below, which delegates are invited to raise at the December 2012 session of the Steel Committee.
• The extent of the overcapacity problem. Some industry observers and analysts note that the problem is not as serious as often alluded to because companies that have earned handsome profits during past years have a buffer to help them withstand the current market slowdown. In addition, demand might develop more favourably than expected, thus reducing excess capacity more quickly than thought.
o How serious is the excess capacity situation for the global industry?
o Is it a short-term phenomenon that will soon disappear with stronger demand growth?
o Can anything be said about the extent of inefficient capacity or how it can be measured?
• Exit barriers. Reference has been made to exit barriers that impede the necessary closure of inefficient capacity. These may include closing costs along with other social, regulatory and economic policy factors that hinder the closure of excess capacity.
o What are some of the major barriers to exit prevailing in the steel industry today?
o Is there a need to lower these barriers and what is the role for governments?
• The role of trade and trade policy. Trade can also play an important role in offsetting the need for building new capacity. Some parties have also argued that restrictive trade measures slow the capacity adjustment by protecting domestic industries from imports. On the other hand, trade protection would have to be permanent in order to prevent uncompetitive firms from closing capacity.
o Do trade actions actually impede industry restructuring in domestic markets? Which trade actions are particularly important?
o Can trade liberalisation promote capacity adjustments?
REFERENCES
Carbaugh, R. (2010), International Economics, South-Western College Pub., Mason, Ohio.
Cotis, Elmeskov and Mourougane (2005), Estimates of potential output: benefit and pitfalls from a policy perspective. In: Reichlin, L. (Ed.), Euro Area Business Cycle: Stylized Facts and Measurement Issues. CEPR, London.
Deily (1988), “Exit Barriers in the Steel Industry,” Federal Reserve Bank of Cleveland.
United States Department of Commerce (2000), “Global Steel Trade: Structural Problems and Future Solutions,” U.S. Department of Commerce, International Trade Administration publications, Washington D.C.
World Steel Dynamics (2012), “Steel Strategist #38, World Steel Dynamics, Englewood Cliffs, New Jersey.
ANNEX: A SHORT NOTE ON THE EXCESS CAPACITY DEFINITIONS USED
At the industry-wide level, excess capacity can be determined as the gap between total capacity and total demand. At the company or country level, it can also be defined as the gap between the company’s capacity and demand for that company’s products (domestic and foreign), which is closely related to the company’s competitiveness. However, given the potential for distortions that can artificially raise competitiveness, the actual measurement of overcapacity based on this concept can be controversial at times.
This paper uses two definitions of excess capacity. At the global level, excess capacity is the difference between capacity and demand. At the regional level, a measure of net excess capacity is also given, which is excess capacity, as defined above, minus net exports of steel. The concept of net excess capacity is used to take into account foreign demand for a country’s steel products.
The term effective capacity is also referred to, in order to take into account the fact that plants rarely run at full capacity due to maintenance stoppages, the temporary unavailability of raw materials, efficiency issues, and other reasons. Effective capacity is assumed to be approximately 90% of nominal capacity.
