Europe's steel industry faces major challenges, says McKinsey

13 April 2021 5 min. read
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Europe’s steel industry has been underperforming for years, mainly owing to structural impediments since the financial crisis of 2008. According to a New McKinsey & Company report, the present crisis might be an opportunity to turn things around.  

Of all the heavy industries in Europe ­– energy, mining, chemicals, oil & gas included – steel has been consistently delivering the lowest dividends for investors since 2008. When markets crashed during the Great Recession, a squeezed economy saw declines in construction, drilling and overall infrastructural investments.

Demand for steel fell by roughly 35 million tonne drop as a result – comparing the period since 2011 with demand between 2004 and 2008. “This decline is also reflected in per-capita consumption,” explained Michel Van Hoey, senior partner at McKinsey & Company inLuxembourg office. 

European steel dividends compared to other heavy industries

“In 2008, the average European citizen accounted for the consumption of about 380 kilograms of steel per year. In 2019, individual consumption dropped to about 300 kilograms, with the majority of the decline coming from construction, oil and gas tubes, and machinery.” Part of this drop relates to the end of the construction boom in Southern Europe. 

At any rate, revenues and production all took a sustained hit from the ensuing demand shock. The result is that steel producers on the continent have been operating well below capacity – steadily using only 75% of their total production assets. This figure hit a new low of 63% last year.

In the backdrop, other markets further East have been building up capacity, which has shifted the steel trade balance in Europe. “Historically, the EU-28 has been a net exporter of finished steel products – from 2010 to 2015, net exports ranged from one million to 13 million metric tons,” noted Van Hoey.

Impact of the financial crisis on European steel demand

“As of 2016, however, the EU-28 has been a net importer, with net imports reaching approximately four million metric tons in 2019 and about three million metric tons in 2020.”Trade partners have also reshuffled – more steel is coming from Russia, Ukraine and Turkey in recent years than from the US and China. 

A growing reliance on imports has meant further asset under-utilisation. Last on the list of structural challenges is the high carbon footprint in steel – once a source of industry pressure and now a cause for tangible revenue loss. Regulatory pressure combined with environmental, social and governance (ESG) portfolio screenings has made decarbonisation a financial imperative

Weighed down by these fundamental burdens, the industry was hit by a new economic slowdown last year – induced by Covid-19. Steel demand fell by another five to ten million metric tonnes due to the investment squeeze in 2020, sending revenues and dividends into a new tailspin. 

Shifting trade balance in Europe’s steel industry

The outlook is far from sunny, although. McKinsey highlights certain factors that might spark a recovery in the near future. Steel demand staged an unexpected recovery at the end of 2020 – spurred on by a quicker-than-expected resurgence in the construction and automotive sector. As a result, steel prices jumped by nearly 50% between September 2020 and January 2021. 

A sustainable future

Steel producers were caught off guard for this uptick, which kept utilisation at a significant low last year. Now having observed a sustained period of high demand, idling plants are being activated – and utilisation is expected to touch up to 75% in the next three years.

Per the researchers, the industry should ride this momentum, with two focus areas. One is to increase asset utilisation: “A reduction of 25 million to 30 million tons of surplus capacity would be required to achieve a sustainable capacity utilisation of about 85 percent,”explained McKinsey Luxembourg senior partner Frank Bekaert.

The second target is decarbonisation. In the short term, immediate measures are needed to offset the cost of decarbonisation investments. Topping this off, the spike in capacity utilisation should be accompanied by investments in innovative, sustainable technologies that can enable carbon neutrality in the long term.

Possible steps include: managing costs; optimising raw materials to make them more flexible; digitalising operations and commercial functions; developing new demand segments such as electric vehicle components; reducing or consolidating overall capacity through mergers; sharing assets to boost utilisation; and engaging with other stakeholders to meet common objectives. 

“In conclusion, the European steel industry needs to make both short-term operational changes and medium- to long-term strategic moves to build an economically viable and environmentally sustainable future. This will require the steel industry and policy makers to be aligned and willing to cooperate,” said Bekaert.