Annex 2
CHANGES WITHIN THE STEEL INDUSTRY
INDUSTRIAL TRANSFORMATION
— Steel is a highly competitive, international
business, subject to periodic bouts of poor demand and overcapacity
with pricing very much dependent on macro-economic factors, eg
exchange rates.
— Currently steel demand is relatively
good, in the main driven by demand from China for both steel and
the raw materials used to make steel. This has had a significant
effect on the cost of raw materials, with Corus consequently facing
recent increases of c. 50-300% in material and freight costs.
— The key exchange rate relationships
in the steel industry are between £/$ and Euro, which have
moved quite substantially against each other over the last 15
years. When one of them is overvalued against the others, there
can follow a period of poor financial returns leading to capacity
reduction. North America also tends to turn to trade protection
measures at such times, although Corus welcomes recent lifting
of Section 201 trade tariffs.
— Eastern Europe and the FSU have also
changed very significantly, with further changes to come in the
new EU members.
— To remain competitive, Corus requires
to continuously focus on product quality, delivery performance
and productivity. Whilst the first two can be changed, productivity
changes are a mixture of steady movements plus occasional step
changes through capital investment—as recently announced
across the Group. The step changes usually draw a lot of attention
at the time, but have proved to be inevitable and necessary.
Specifically—the steel industry has changed
— Competitors are different;
— Developing countries have built new
steel-making facilities and have surpluses to sell;
— The "best" competitors
have improved productivity and optimised plant capabilities (over
4Mtpa is optimal now, compared to 3Mtpa a few years ago);
— Some consolidation and capacity reduction
in EU, but Eastern European competitors will be joining EU in
2004 (see below). Although many E European competitors
aren't as productive per capita (Eight to nine man-hours/tonne
compared to around 4M-H/T), steel industry wage costs are 30%
of EU rates which more than compensates and the plants have significant
scope for improvement;
— There are few opportunities for product
differentiation and most products are regarded as commodities.
This view is enhanced by the actions of traders who are only interested
in shifting volume and not in developing long term relationships;
— Premia based on service, technical
support exist, but tend to support market share retention; and
— New competitors generally make good
quality, but unsophisticated, products.
The marketplace has changed
— Trade barriers have generally come
down and Corus welcomes the government support over the termination
of the US Section 201 measures.
— UK Government policy is to encourage
open international trade, which benefits both, developed and developing
countries—however, this makes us vulnerable to steel dumping
if the policy is pursued blindly.
— Implementation of EU anti-dumping
policy is too slow and often treated as a political matter.
— Subsidies for steel
companies have mainly been eliminated in the EU, which
coupled with privatisation, have brought "real-world"
economics to most EU producers.
— All major EU steel producers have
lost domestic market share since 1990 (data based on domestic
market share for all ECSC products)
— Spain 85%-60%;
— Germany 65%-60%;
— Italy 65%-55%;
— France 65%-35%;
and
— UK 75%-55%.
UK demand has changed
— UK manufacturers (our customers)
must compete internationally and will source raw materials and
components from the lowest cost source.
— If UK suppliers cannot compete,
they will move to a lower cost source.
— If UK facilities cannot compete,
they will move to a lower cost country.
— UK consumers do not automatically
"buy British"—traditionally some imported products
are often seen as better, which has reinforced the trend.
Currency effect
— The last 15 years have seen considerable
turbulence between £ and other currencies.
— The £ was overvalued in the
period when it followed the EMU at £1=DM2.95 (£1=EUR1.51).
— The £ was slightly undervalued
between 1993 and 1996 (£1=EUR1.2).
— The £ has been overvalued since
1997 (£1=EUR1.5) and significantly overvalued from 2000 to
2002 (£1=EUR1.6-1.7).
— The present value of £1=EUR1.42
is still high, but falls at the upper end of the tolerable band.
— The current concern is the under
valuation of the US$.
UK economy is not as strong as expected
— In 2001, we forecast that UK prices
for hot rolled coil would recover.
— We also forecast that economic activity
by UK manufacturers would increase.
— These forecasts were externally reviewed
(including by DTI economists) and considered reasonable.
— In the event, up to end 2002 prices
fell and were below forecast for five quarters by up to EUR70/T.
— UK manufacturing output also fell
below forecast and is still some per cent below expectation.
— Whilst Corus, and other steel producers
have introduced series of price increases, these are as a result
of—and offset by significant increases in raw material costs
driven by demand from China, which is distorting the world steel
market at present.
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