The future of Southeast Asia's steel industry (04-01-2007)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article talks about the current state of the steel industry in Asia and the future of the steel industry in Southeast Asia.
For further reading on this topic, read about the Tata Steel's recent acquisition of Millennium Steel.
For an interesting animation of the steel making process from Tata Steel Corporation.
If you are interested in the technical processes of steel production checkout Steel University's elearning tutorials.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What effect will consolidation in the steel industry likely have on steel prices?
2. Why might a regional consolidation in the steel industry be better than a global one?
3. What kind of consolidation in Thailand's steel industry might be necessary? Why?
4. How does China's steel production compare with India's and the rest of Asia's? Is steel production in Asia highly concentrated? Where?
5. In the near future how much is Asian steel production likely to increase annually?
6. Are steel billet and steel slab finished steel products or intermediate products (inputs into the production of finished steel products) ?
7. Does Thailand import or produce intermediate products?
8. What has the large demand for intermediate steel products within ASEAN led foreign steel companies outside of Southeast Asia to do in Southeast Asia?
9. What key factors will drive growth in Southeast Asia's steel demand over the next decade?
10. What two strategies will be worth pursueing for Thai steel companies in the future? Why?
11. What industry is the biggest consumer of steel products?
12. How should the current focus in Southeast Asian steel production be changed to make the industry more profitable?
Bangkok Post Article: January 4, 2007
Strong case for more consolidation in the steel industry
POST REPORTERSIn the second of two articles on the steel industry in Thailand and the region, we examine the reasons for consolidation. With the robust growth of regional economies such as China and India, demand for steel will assuredly continue to surge, while further consolidation in the industry will likely help reduce volatility in steel prices.
David Stickler, senior managing director of Global Principal Partners, a US-based firm that specialises in steel industry, says it may be be easier to implement and manage a regional consolidation than to have a global one.
In Thailand, consolidation among the country's long-products makers would be beneficial to the industry. In fact, he adds, consolidation is necessary as the country's producers lack local raw material supplies for their products.
China, where a booming manufacturing sector has spurred heavy demand for steel, is also among the world's largest producers. Chinese companies are estimated to have turned out 392 million tonnes of steel this year, against 42 million by India and 38 million in the rest of Asia including Malaysia, Thailand and Vietnam. Global steel production has grown by an annual average rate of 6.2% from 2000 to 2006 to 1.18 billion tonnes.
It is estimated that Asia's steel production will increase to 880 million tonnes by the end of 2010 from the current capacity of 665 million.
But most industry experts believe that although the region has high levels of demand and production, the region continues to lack the billet supply for its finished products. Thailand imports more than 50% of its billet needs. Demand for slab in the region is estimated at around 10.1 million tonnes, while production remains at about half that level.
Wellington Tong, the president of the Asean Iron and Steel Industry Federation, says Asean countries' imports of flat products in 2005 rose by 25% to more than 16 million tonnes.
This kind of demand has attracted many investors, with companies such as Mittal Steel and Tata Steel of India, Posco of Korea and Nippon Steel of Japan all stepping up their presence in Asean.
Thailand, one of Asean's largest steel markets with estimated consumption of 12.7 million tonnes this year, has been the key driver of consolidation and further tie-ups are expected going forward.
Mr Tong expects steel demand in the region to rise by 30 million tonnes over the next 10 years, backed by high economic growth, the use of Thailand as the region's automotive hub, Malaysia as an electronics hub, and various bilateral and regional free trade agreements.
He suggests that companies form alliances with global players, such as the one by Thailand's Thainox Stainless Plc with Posco, to take advantage of the larger company's raw material procurement cost efficiencies. Seeking niche markets to serve in order to gain higher value is another worthwhile strategy.
Experts say the trend reflects a force propelling many companies - a cost-cutting obsession born of necessity.
Also, companies are looking to combat cyclicality by matching supply to demand, shift bargaining power in raw material sourcing from the ore producers back to the steelmakers, while gearing up for structural change imposed by China, which controls 25% of global capacity.
In terms of adding and building steelmaking capacity, India and China are where the action is. Little capacity is being added elsewhere. But India has a lot of catching up to do. With a capacity close to 350 million tonnes in 2005, steel use in China this year is expected to grow at 13%. In contrast, India's finished steel consumption is 33.3 million tonnes.
Mr Tong says that niche players, on the other hand, have higher potential to make greater profits than non-focused ones. Such is the case with China Steel Corp, BlueScope and the company that was recently acquired by Tata, Corus.
"The Asean steel industry has huge potential to expand to the high-end market but to achieve this it has to become part of the global supply chain network."
Construction continues continue to be the biggest steel consumers, but if companies continue to focus on the commodity market, they could be hurt. Instead, a niche market focus coupled with value-creation products will help companies prosper in the longer term.
Vocabulary
a strong case for x - good reasons to accept x a true
consolidation - join or merge smaller companies into a larger company
Global Principal Partners - "a global financial advisory and merchant banking firm. Unlike traditional investment banking firms that focus almost exclusively on the capital raising components of a transaction, GPP's role as financial advisor often begins at the early stages of corporate development and continues through the captital raising process. " (Source)
volatility - (See Bangkok Post Business Words)
billet steel - A small rectangular bar of iron or steel (at an intermediate stage of manufacture) (See About.com Metals and photo)
slab - a thick flat piece of metal, concrete, or rock
Asean Iron and Steel Industry Federation (AISIF) - "The ASEAN Iron and Steel Industry Federation (AISIF) was established in 1977 as a regional industry club under the aegis of the ASEAN Chambers of Commerce and Industry (ASEAN CCI). The primary focus for AISIF is to promote economic cooperation among the iron and steel industries in the ASEAN region. The members of AISIF currently are: Indonesian Iron and Steel Federation (GAPBESI), Malaysian Iron and Steel Industry Federation (MISIF), Myanmar Industries Association (MIA), Philippines Iron and Steel Institute (PISI), Singapore Iron and Steel Industry Group (SISIG), Thailand Iron and Steel Industry Club (TISIC), Vietnam Steel Association (VSA)." (Source)
Iron and Steel Institute of Thailand (ISIT) - "an independent body, established by the Ministry of Industry, under the Industrial Development Foundation. The Institute represents the united intention of the state and the private sector to see effective co-ordination of their efforts in enhancing the strength of the iron and steel industry in Thailand. Its vision mainly is to develop Thai iron and steel industry to be internationally competitive and to support the country future growth. The services include material testing, research and development, training and seminars, information services and consultancy."(Source)
Mittal Steel - world's largest steel producer by volume (See Wikipedia)
Tata Steel - India's second largest producer of steel founded in 1907, as of December 2006 trying to takeover the Anglo-Dutch steelmaker Corus Steel and become number one producer in India (See Wikipedia)
Posco - South Korea's steel producer (See Wikipedia)
Nippon Steel - the world's second largest steel producer after Mittal Steel, a Japanese company (See Wikipedia)
stepping up their presence - increasing the business they do in this place
tie-ups - a business connection arranged between two companies
bilateral - between two countries
Thainox Stainless Plc - "Thailand's only manufacturer and distributor of premium cold-rolled stainless steel sheets and coils, was founded in July 30, 1990 as a BOI-promoted joint venture of the world’s leading steel industry groups from France (the Arcelor Group), Japan (the Nippon Steel Group), and Thailand (the Mahagitsiri Group)." (Source)
procurement - (formal) buying, purchasing
niche markets - small specialised markets
obsession - thinking all the time about something
born of necessity - created to fill a need
cyclical - when something like sales or economic activity goes up and down in a repeated pattern (for example every year around Christmas retail sales in the west rise substantially)
combat cyclicality - make business vary less over time
raw material sourcing - getting raw materials (for example getting iron ore to produce steel from countries that have iron ore mines)
gearing up for - makeing preparations to do something in the future (the preparations take some times to complete)
global capacity - the total amount that could be produced around the world (if all factories worked all the time)
x is where the action is - there are business opportunies in x
x has a lot of catching up to do - x is behind others, not at as high a level as others
finished steel - "Steel that is ready for the market and has been processed beyond the stages of billets, blooms, sheet bars, slabs, and wire rods." (Source: About.com Metals Glossary)
niche players - competing companies in a niche market (see above)
supply chain network - "a coordinated system of organizations, people, activities, information and resources involved in moving a product or service in physical or virtual manner from supplier to customer." (See Wikipedia)
Answer Key:
1. What effect will consolidation in the steel industry likely have on steel prices?
Consolidation will likely reduce steel prices.
2. Why might a regional consolidation in the steel industry be better than a global one?
A regional consolidation would be "easier to implement and manage" than a global one.
3. What kind of consolidation in Thailand's steel industry might be necessary? Why?
Some consolidation of Thailand's "long-products makers" might be necessary because there is no "local raw material supplies for their products."
4. How does China's steel production compare with India's and the rest of Asia's? Is steel production in Asia highly concentrated? Where?
Inidan production was only 11% of China's and the rest of Asia's only 10% of China's, so steel production in Asia is highly concentrated in China.
5. In the near future how much is Asian steel production likely to increase annually?
A 24% increase is projected for the next four years from 2007 to the end of 2010, so that would be roughly 6% annually.
6. Are steel billet and steel slab finished steel products or intermediate products (inputs into the production of finished steel products)?
They are inputs into the production of finished steel products.
7. Does Thailand import or produce intermediate products?
Thailand imports them.
("But most industry experts believe that although the region has high levels of demand and production, the region continues to lack the billet supply for its finished products. Thailand imports more than 50% of its billet needs. Demand for slab in the region is estimated at around 10.1 million tonnes, while production remains at about half that level.")
8. What has the large demand for intermediate steel products within ASEAN led foreign steel companies outside of Southeast Asia to do in Southeast Asia?
Steel companies from India, Korea, and Japan have all increased invest in Southeast Asia (ASEAN).
9. What key factors will drive growth in Southeast Asia's steel demand over the next decade?
Thailand status "as the region's automotive hub, Malaysia as an electronics hub, and various bilateral and regional free trade agreements."
10. What two strategies will be worth pursueing for Thai steel companies in the future? Why?
a. If Thai steel companies make alliances with larger international steel companies they can "take advantage of the larger company's raw material procurement cost efficiencies."
b. Seeking niche markets for steel is another good strategy.
11. What industry is the biggest consumer of steel products?
The construction industry.
12. How should the current focus in Southeast Asian steel production be changed to make the industry more profitable?
Southeast Asian steel companies should shift production from commodities to "high end" niche products ("value creation products").
