How do you create and sustain a competitive advantage in the steel industry?

Should steel companies extend their activities downstream or is it best left to independent, local companies?

Does moving along the construction and automotive value chains really add to significant steelmaker profits?

What are the future trends for value added steel products over the next 5-10 years?

Value Creation Strategiesf o r t h e S t e e l I n d u s t r y

S P E C I A L R E P O R T

Part 1: Automotive Steel

Part 2: Construction Steel

AMERICAN METAL MARKET RESEARCH

www.metalbulletinstore.com +44 (0) 20 7779 7999

Steel industry consolidation (at least at some regionallevels) has almost run its course. There will be furtheracquisitions of independent mills but the large-scaleconsolidation within regions has now reached the pointwhere monopoly considerations have started tobecome more important.

So where now for the global steel industry?

This brand new two-volume study from MBR focuseson steel producer value creation strategies gearedtowards the vitally important automotive andconstruction industries.

It describes the opportunities and potentialconstraints for steel companies to create additionalvalue by taking advantage of the ‘downstreamspace’ between the rolling mills on one hand, tothe automotive and construction assembly lines onthe other.

Within this ‘space’ are value-adding activities such asdistribution and stock-holding, further processing ofsteel itself and the additional services related to thedesign and effective use of the product.

Metal Bulletin Research’s (MBR) leading industry experts havecompiled this six-month long study to provide a unique,detailed and completely independent report into steelmakerprofitabil ity over the next 10 years.

Assumes 170Mtconsumption in

EU27

35(plate & coils)

5 (plate)

5 (sheet)

55

20

50

European flat product mill Traders European long product millTraders

General steelstock holders:independent

80%

General steelstock holders:

mill tied20%

Very large usersmaking tubes,

cold formed sections,autos etc.

Other largemanufacturing and

constructioncompanies

Small constructionand manufacturing

companies

Fabricators, wiredrawers, rails, large

constructioncompanies etc.

Mill tiedSCC’s75%

IndependentSCC’s25%

Develop close to raw material sources• Expand internationally through JV, alliances or M&A• Ore Proximity and quality/size optimised slab production

Develop close to market• Build production and distribution networks• Regional and/or product specification specialisation

The European Distribution Chain for Steel Products

Iron Ore SteelMaking

Slabs /HR Coils

Cold Rolling Cold RolledCoils

Finishing FinalProduct

Distribution Market

Upstream Downstream

Reconfigure the value chain to best achieve long-term competitive structure

2

Two particular market areas have been chosen for this study, inseparate yet interdependent reports. Both the automotive andconstruction industries are key demand drivers for the steelindustry but with very different characteristics.

Within each sector l ies the opportunity to improvefinancial per formance within the supply chain. Forexample:

• The concept of the value chain spans from thesimple raw materials valued at only a few dollarsper tonne when they are mined, through tocommodity rebars at a few hundred dollars atonne, to fabricated steel structures at US$3,000-5,000 per tonne, to bui ldings and structuresvalued at a few thousand dollars per square metreof space.

• Simple stockholding and distr ibution (with noadditional processing service provided) results ina significant price mark-up over and above themill price especially when very small productionquantities are involved.

• The price of highly processed automotive steel,for example, tailor-welded blanks or hydroformedparts, will typically have huge mark-ups whenmeasured on a per-tonne basis.

This unique, ground-breaking study examines thevarying strategies already being adopted by keysteel suppliers such as Arcelor Mittal, US Steel,BlueScope Steel, NUCOR, Tata-Corus and Ruukki intheir attempts at adding value in both constructionand automotive steel products and services.

What are the lessons learnt from Arcelor Mittal,Ruukki, BlueScope Steel among others?

What are the measurable benefits?

What have been the major pit-falls?

Value Creation case-studies featured in this report include:Arcelor Mittal, Nippon Steel, US Steel, Posco, ThyssenKrupp, JFE,BlueScope Steel, NUCOR, Tata-Corus and Ruukki.

Brian LevichBrian is MBR’s Head of Research and specialises inthe steel and raw material sectors. He has writtennumerous major studies on the global steel industryand has done extensive consultancy and marketresearch work for a number of major steelproducers, consumers and financial institutions.

Mike MyttonMike is a renowned industry consultant and worksin the areas of business planning, financialmodelling, logistics and market studies. He has wideexperience in Europe, CIS, Asia and Latin America -carrying out feasibility studies, due diligence forbanks and acting as an advisor in M&A activities.

Stuart ReynoldsStuart Reynolds is an industry economist who spentover 25 years with Atkins Management Consultants,carrying out steel investment, privatisation andrestructuring plans worldwide, particularly in the EUand central European regions and Asia, as well asindustry strategy studies for the engineering,construction and related sectors.

Dr Peter WellsDr Peter Wells is a Senior Research Fellow at theCentre for Automotive Industry Research and alecturer in Logistics and Operations Management. Hehas extensive knowledge of the components andmaterials supply industry and of automotivepresswork, on which he is a noted expert. In recent

years his interests in the automotive industry havebecome broader, such that his research interestsinclude the distribution, retail and marketing of cars,government regulation of the sector and the historyof car design.

Dr Robert W LeekDr Robert Leek is a qualified metallurgist havingspent many years in a variety of senior roles inmarketing, sales and operational planning within thesteel industry. His experience includes developingmarketing strategies for a variety of marketsincluding the automotive sector and has consultancyexperience in restructuring, privatisation and in thedefinition of commercial strategies for steelcompanies in central Europe, the Middle East andAsia.

Biographies of Authors

3

The total automotive market consumes around 95-100m tonnes ofsteel per year. The supply of steel to the automotive industry is ahigh-value, high-quality service which requires significanttechnical collaboration. On the supply side, it is centred mainly onlarge producers with important engineering and R&D capabilitiesand a visible presence in the supply chain. This market clearlyrepresents one of the best opportunities for steel companies todifferentiate their products and services with respect to thecompetition and move along the value chain.

But how are steel producers equipped to meet the rapidly changingand complex challenges of the automotive industry’s twinstrategies of:

(a) lower costs through higher volumes (increased commonality)and (b) greater diversity over the next 5-10 years?

Where and what are the profit margins along the entireproduct range for automotive steels?

• How will the migration of vehicle manufacturersto emerging markets affect steel suppliers? Is suchfurther migration inevitable?

• What are the di f ferent manufactur ing andmarketing strategies of the automotive industr y,and how do these affect the way they procuresteel and steel components?

• What is their relationship with steel producers?

• How can t radi t ional suppl iers leverage thei rinvestment and knowledge in th is changingclimate?

• What are the main trends in automotive designand manufacturing that wil l impact the steelindustr y?

• What are the long term demand/supply andpricing trends for automotive steels over the next10 years by major automotive products?

• What is the future demand/supply and pr icedynamics for high-strength steels, coated steels,tailor-welded blanks, tai lored strip and tailor-ro l led blanks, hydroforming, hot- forming andother value-adding processes?

• What does it take to be a major automotive steelsupplier?

• How much, if at all, does this add value to thesteel producer?

• Who are the main players in automotive steelsand what are their current strategies?

• What are the main downstream products in theautomotive steel value chain?

Key questions addressed include:

Value Creation Strategies for the Steel Industry

Part 1: Automotive Steel

Key automotive products covered include: high-strength steels(HSS), coated steels, tailor-welded blanks, tailored strip andtailor-rolled blanks, hydroforming and hot-forming.

4

Contents for Part 1: Automotive Steel

Opportunities and threats of trade

Core Developed Markets Emerging Markets

Increasing environmentalrestrictions

Stagnant demand

Proliferation ofmodel variants

Over-capacity

Opportunities inthe premium sector

Demographic change &increased demand prospects

Migration oftraditional OEM’s

The search for appropriatelow-cost vehicles

The need for investment -at both suppliers and OEM’s

The need for supportinginfrastructure

The AutomotiveIndustry

Introduction andExecutive SummaryThe report begins with an introduction to steelcompany strategy and contains the ExecutiveSummary.

Value CreationStrategiesThis chapter introduces the wider topic of steelcompany strategy.

Downstream integration is only one dimension ofconsolidation and must be seen in this context. Forexample, some companies are aiming primarily forscale and control of the ‘production’ market. Othersseek upstream vertical integration to better controltheir costs and even this strategy has several variants.

Still others are content to focus on specific productsand markets, leveraging their knowledge of particularsegments of the industry.

2.1 Introduction

2.2 Strategy and Industry Structure

2.2.1 Geography2.2.2 History2.2.3 A commodity product?

2.3 Company Strategies

2.3.1 The pursuit of scale2.3.2 Upstream integration2.3.3 Continuous per formance improvement2.3.4 Downstream integration2.3.5 Summaries of strategies and discussion

The AutomotiveIndustry’s Relationshipwith Steel ProducersThis chapter describes the supply and demand forsteel used in the automotive sector.

The value chain is exceptionally long when measuredfrom the mill to the final assembly of the vehicle.

Changes in the market and manufacturing strategiesof the automotive companies are described alongwith the increasingly sophisticated capabilitiesrequired from the suppliers of steel.

3.1 Introduction

3.2 Steel and the Automotive Industry - AnOverview

3.2.1 The perspective of the automotiveindustry

3.2.2 The steel industry perspective3.2.3 Financial per formance and industry

structure3.2.4 The supply chain

3.3 Key Issues Affecting the Automotive Industry

3.3.1 The market for automotives3.3.2 Environmental regulation3.3.3 The search for new business models

3.4 The Demand for Automotive Steel

3.4.1 The use of steel in vehiclemanufacturing

3.4.2 Competing materials3.4.3 Manufacturing strategies in an era of

turbulence

3.5 The Supply of Automotive Steel

3.5.1 Strategic assets3.5.2 Research and development capability3.5.3 Business infrastructure, culture &

capabilities3.5.4 Company profiles

3.6 The Product Value Chain

3.6.1 The use of high-strength steels3.6.2 Coated steels3.6.3 Downstream products and processes

3.7 The Supply Chain

3.7.1 The supply chain within the automotiveindustry

3.7.2 Material flows through the supply chain3.7.3 Information flow & the management of

the supply chain

3.8 Profitability within the Value Chain

3.9 Future Trends, Value Creation Strategies andOpportunities

3.9.1 The market3.9.2 Design, materials selection and

manufacturing3.9.3 Steel supply strategies in a changing

market3.9.4 New product and technology

developments3.9.5 Financial issues

The Key Issues Facing the Automotive Industry’s Relationship with Steel Producers

5

A common problem faced by steel executives is that they havetraditionally been removed from the decisions made by end-usersin terms of the types of construction materials to be used.

However, the global construction market trend is for more off-sitemanufacturing, more outsourcing of assembly processes and theintroduction of pre-engineered and pre-fabricated buildings as theultimate step in the process.

This report explores the strategies that work best to achieve this.

The aim of the report is not only to expose the varying profitmargin mark-ups currently available between ex-works anddelivered prices for commodity structural steels, but alsoexplores the ‘downstream space’ of creating additional value by:

i) the participation of downstream manufacturing processes;

ii) the transformation or design and erection of constructionproducts and building components and

iii) the move towards distribution and services.

• What is the role of stockists, service centres anddistributors in the construction value chain?

• What are the lessons being learnt for the futuremarket ing of construct ion steels to regionalconstruction markets?

• Which marketing and R&D programmes shouldsteelmakers invest in to best capture the pricemargin benefits of the construction steels valuechain?

• What are the key chal lenges fac ing steelproducers over the next 5-10 years in meeting thefuture construction steels demand from projectdevelopers , archi tects , engineers , regulators ,controllers, inspectors, manufacturers, specialistsand contractors.

• What are the long term demand/supply andpricing trends for construction steels over the next10 years by major construction products?

• Where and how should future steel producers marketthemselves to the global construction steel market?

• What will all this mean to price volatility forconstruction steels?

• What role could steel futures have in constructioncontract pricing?

• How is steel industry investment in promotingstructural steels usage, actually working to influencecurrent and future global demand trends relative tocompetitor materials such as aluminium andconcrete?

• What lessons can be learnt from downstreamstrategies being adopted by companies such asBlueScope Steel, NUCOR and Ruukki in capturingvalue in construction steels?

• What are the winning strategies one should adopt toadd value in construction steel products over thenext 5-10 years?

The study looks to address the following key issues:

Key construction products/services covered include: commodityrebars, hot rolled structural steels, galvanised/colour-coatedroofing and cladding panels, sandwich panels, light-weight coldformed sections, hollow sections; steel erectors, reinforcementfabricators; building element systems (floor/roofing systems,cladding systems); pre-engineered and pre-fabricated buildings.

Value Creation Strategies for the Steel Industry

Part 2: Construction Steel

6

Introduction andExecutive SummarySee page 5

Value CreationStrategiesSee page 5

Construction Steel: 21st CenturyOpportunitiesThis chapter describes the trends in the constructionmarket and its use of steel.

The influence of regulations and standards have animportant influence on the use of materials and thereare important changes taking place which this chapterreviews.

It is a more open market and one where it is harderto differentiate the steel products entering it. Somesteel companies are nevertheless trying to circumventthe emphasis on price by branding, by developmentof new construction products, building systems andpre-engineered and pre-fabricated buildings and byproviding supporting services or innovative marketingstrategies. Case studies of such initiatives are given.

4.1 The World Construction Industry: ItsImportance for Steelmakers

4.1.1 Construction output by global region:prospects for steel consumption growth

4.1.2 Long term trends in construction output4.1.3 Long term futures: China, India and

Russia’s importance for futureconstruction technology and steelmarkets

4.1.4 Construction industry structure andglobal trends: lessons for steelmarketing

4.1.5 The value chain in construction

4.2 Steel in Construction

4.2.1 The steel supply chain for construction4.2.2 Steel products used in construction4.2.3 Competition with other materials4.2.4 Trends in construction methods4.2.5 Research and joint initiatives to

promote steel construction4.2.6 Developments in construction steel

products4.2.7 How national regulation, construction

codes and standards restrict innovationin steel construction products andmethods

4.2.8 Eurocodes: a new opportunity topromote steel construction

4.2.9 The impact of harmonised Europeanstandards for structural steel and steelconstruction

4.2.10 The impact of protective measures andmarks on trade in construction steel

4.3 Forecast Demand for Steel in Construction forthe next 10 years

4.3.1 Growth and technology scenarios4.3.2 Key aspects of future construction

demand for steelmakers

4.4 Price Considerations in the Construction SteelSupply Chain

4.4.1 Trends in world prices: an increasinglyattractive market?

4.4.2 Price volatility: prospects for a futuresmarket will increase the benefits ofsteel construction

4.4.3 Mark up in the distribution chain

4.5 The Steel Construction Industry: Who DoesWhat in the ‘Downstream Space’

4.5.1 The steel producers4.5.2 The steel construction industry

structure: opportunities for restructuringand for promotion of steel construction

4.5.3 The design and procurement chain: whochooses the materials?

4.5.4 The role of stockists, service centresand distributors in the constructionvalue chain

4.6 The Strategies of Steel Companies

4.6.1 The value chain and downstreamoptions for steelmakers

4.6.2 BlueScope4.6.3 Ruukki4.6.4 Tata-Corus4.6.5 Nucor4.6.6 Badische Stahlwerke

4.7 The Relative Profitability of Steelmaking andDownstream Construction Products

4.8 Conclusions: Winning Strategies

4.8.1 Key conclusions4.8.2 Winning strategies

Contents for Part 2: Construction Steel

Roofing, flooring,cladding systems

Pre-engineeredbuildings

Erection of steelstructures

Bar & Rod

Welded mesh lattice girders

Rebar bending & prep

Wire drawing, spinningpre-stressing steel elements

Reinforced concrete structures

Pre-stressed concrete elements

HRC CRC galv Colour coatingCF profiles

Roofing / cladding

HRC CRC galv CF light sectionsstuds, purlins

HRC CRC galv Colour coatingSandwich

Panels

Plate Fabricatedstructurals

Fabricated beamsand structural parts

HRsections

Fabricatedstructurals

The Steel Product Chain for Construction

7

Value Creation Strategies for the Steel IndustryP a r t 1 : A u t o m o t i v e S t e e l | P a r t 2 : C o n s t r u c t i o n S t e e l

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