Why Europe's Steel Industry Is In Structural Long-Term Oversupply

Includes: MT, SLX
by: MetalMiner

By Stuart Burns

If the North American steel industry feels as if it's facing tough conditions, it only needs to look to Europe to see how much worse it could be. European steel producers have been spilling red ink since the 2008 financial crisis, accompanied by ratings downgrades to negative by Standard & Poor's and Moody's last year.

Indian steelmaker Tata Steel reported a third-quarter loss after tax of $139 million, its highest in three years, compared with a loss of $110 million in the same period in 2012. Koushik Chatterjee, group chief financial officer at Tata Steel, is quoted in the Financial Times as saying, "The demand contraction in Europe [in the quarter] has been pretty significant, even structurally so." According to the paper, falling demand again outpaced Tata Steel's cost-cutting efforts, which included announcing 500 job losses at one of its largest facilities in Wales last November and making divestments of $96 million over the past nine months. "The slide as far as the market has been concerned has been too serious for us to make a difference as far as the bottom line is concerned," Chatterjee is quoted as saying.

Even so, the firm still invested $285 million in upgrading blast furnaces at its U.K. operations, underlining steelmakers' dilemmas -- where to invest to improve productivity, and where to simply close overcapacity. Governments, meanwhile, are lobbying hard for the former and aggressively resisting the latter; witness the French government's spat with ArcelorMittal (NYSE:MT) over the closure of blast furnaces at Florange in northern France reported on MetalMiner last month.

Europe is simply producing more steel than it needs, and its high-cost base is making it tough to compete against imports, let alone compete effectively in export markets. Europe produced 22 million tons of steel more than it consumed in 2012. That's almost one-sixth of total production, according to the main steel trade association Eurfer.

An FT article this week reports that Europe's steel industry needs to shed around 25% of its capacity within the next three years if it hopes to remain a global player. "It is a matter of fact that the European steel industry is in a massive structural crisis," said Wolfgang Eder, who, as well as chairing the Eurofer trade body, has been chief executive of Austrian steelmaker Voestalpine since 2004. Eder is further quoted as saying: "We have an annual capacity of around 210m tons in Europe. In my opinion, there are about 40m to 50m tons too much. That is an overcapacity of 25%."

"If the structures and capacities are not adapted in the next two or three years," he continued, "then more than half the steel production sites in Europe will vanish over the next 15 years because of continuous price pressure, and Europe will end up playing nothing more than a marginal role in the global steel industry."

Governments are hampering the process in several ways. First, they are resisting attempts by steel companies to cut overcapacity and so improve capacity utilization, said to be running at 75% or less. Second, high electricity and gas prices make competition against steel producers in North America (who are benefiting from low-priced shale gas) challenging. Lastly, bureaucratic red tape and labor laws making hiring, firing and social welfare costs uncompetitively high in Europe compared to other parts of the world are certainly not helping. In the absence of a highly unlikely massive turnaround in demand, Europe's steel industry is set for a painful period of restructuring for years to come -- during which the pressure for protectionism will only grow.