Fair trade is most certainly an important pursuit for the North American steel industry. But a single-minded commitment to the topic runs the risk of ignoring other challenges that threaten the steel business.
“Talking about trade takes so much oxygen out of the room,” says John Lichtenstein, managing director for Accenture Strategy and the global lead of Accenture’s metals group. “An exclusive focus on trade issues, if it comes at the expense of looking at other issues, is a real risk to the industry.”
Lichtenstein, who spoke at June’s Steel Survival Strategies Conference in New York, outlined five “inconvenient truths” facing the steel industry, all of which demand attention, even if the details of how those truths will play out are not yet known. They require action today; not sometime in the future, he says.
The first truth, according to Lichtenstein, is that global steel demand is slowing dramatically. Between now and 2035, global demand will increase by only 300,000 tons to 1.8 billion, which is less than global overcapacity today. Among the factors causing the slowing growth environment is a long-term decline in steel intensity, material substitution and the unlikelihood of another country replicating China’s rapid ascent.
Secondly, Lichtenstein contends that the massive overcapacity currently bogging down the industry will persist. China’s production declines are not likely to keep up with its demand declines, China will add capacity outside its borders through its Silk Road strategy and productivity improvements around the globe will lead to perpetual “capacity creep,” he says.
Lichtenstein’s third truth is that the industry’s ability to capture value is in a downward spiral. Lighter and stronger materials are reducing the amount of steel used in a given application, and the higher prices of the advanced steels are not enough to offset the lower tonnages. As evidence, he notes that steel and iron represented 45 percent of the value of a vehicle in 1947 but comprises just 6 percent today.
Truth No. 4: Digital disruption is coming to the steel marketplace. The failed starts at the dawn of the internet age have left industry players skeptical that digitization will succeed this time. But a generation of consumers shaped by the business-to-consumer model of platforms will bring the same expectations to B-to-B transactions. “Ordering steel online is not the same thing as ordering a toaster,” Lichtenstein says. “So, there is complexity, but that’s what the platforms and big data analytics are there to address.”
Finally, while scale was long a source of competitive advantage, the segment is being transitioned to smaller scale operations that are low in energy use and carbon emissions. Additionally, the size and required skill of the steel industry workforce is being transformed, both on the shop floor and in the business office. In fact, Lichtenstein says that reduction in management positions will outpace staff cuts among hourly workers.
For the service center operator, Lichtenstein says the fourth truth will be the most meaningful. “The role of the online marketplace, I see it as more of an opportunity for the mills and a threat to the service centers.”
The change to a digital marketplace is just the latest evolution for the service center business, which has already moved from simply warehousing material to value-adding processing and beyond. “Companies that didn’t get behind that have largely disappeared. That wave is being followed by another wave.”
Of course, that processing will still need to be done. Lichtenstein says the challenge for service centers will be finding where they fit in the new market; that may mean more partnering with mills. He anticipates significant “experimentation” on the path to the most efficient supply chain.
“My advice to service centers is to stop thinking just about the walls of your business and think of how you can get ahead of the curve in terms of marketplaces and new models,” Lichtenstein says. “Look at your position in the value-chain, look at your customer and say, ‘If my customer has instant visibility, how do I create value there?’”