Asian Steel Watch vol. 4 Press Release (December 2017)

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Asian Steel Watch vol. 4 Press Release (December 2017)

날짜2017.12.29

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PRESS RELEASE

On December 28, 2017, POSCO Research Institute (POSRI) released the fourth issue of Asian Steel Watch (ASW). This bi-annual English journal is specialized in the Asian steel industry and market. It deals with current issues in the Asian steel industry and features interviews with industry leaders and market analysis. It is comprised of five sections: Special Report, On the Cover, Interview, Featured Articles, and Asian Steel Market Outlook.

Asian Steel Watch aims to provide insightful, in-depth analysis of the Asian steel market. The fourth issue of Asian Steel Watch begins with Special Report by Ohjoon Kwon, CEO of POSCO which explains the history of iron and steel and how they affect our lives under the title, “Steel, Our Timeless Heritage.” The On the Cover section focuses on India, titled “Opportunities and challenges of the Indian steel industry,” featured interview with Thachat Viswanath Narendran, CEO & Managing Director of Tata Steel and Chairman of the Economics Committee of worldsteel. Asian Steel Watch Vol. 4 also deals with steel restructuring in Europe and Japan and development of the Korean steel industry and their implications. The Asian Steel Market Outlook section examines steel-consuming industries, including automobile, shipbuilding, and home appliance, to forecast flat steel demand in Asia over the next decade. This journal hopes to grant insight into the Asian steel industry, lay a firm foundation for the collaborative growth of Asia’s steel industry, and further contribute to the stability and prosperity of the global steel market.

Asian Steel Watch Vol.4 addresses the following issues:

(Special Report) Ohjoon Kwon, CEO of POSCO explains the history of iron and steel and how they affect our lives under the title, “Steel, Our Timeless Heritage”

History tells that people have formed the very backbone of human civilization and modern life with iron and steel. The Hittites, who were able to artificially refine iron for the first time in human history, defeated the bronze-wielding Egyptians at the Battle of Kadesh. The steel technology enabled the Hittites to rapidly expand their empire to match the Egyptians in the competition for regional hegemony around the eastern Mediterranean Sea. Romans held hegemony over the Mediterranean by taking advantage of the superiority of their iron-clad troops, which defeated their enemies across the Mediterranean and all the way to Britain. However, the military advantage provided by the steel stirrups allowed the Huns to drive westward, which gave a rise to an end to the Western Roman Empire.
Steel has also changed human history by influencing our thoughts and philosophy. First of all, steel enriched Confucian philosophy in ancient China. Increased use of farming tools made of steel greatly boosted agricultural productivity and the authority of kings or rulers was weakened with the rise of a new social class. It was inevitable for the royal class to employ a new philosophy, such as Confucianism, to protect their power. In the West, as improved steelmaking techniques increased steel supplies, production methods evolved from workshop-based to factory-based mass production which led to the emergence of industrial capitalism supported by new theories, particularly from the Scottish economist and moral philosopher Adam Smith.
There are multitude of ways that iron and steel have ensured the survival of humanity and other living creatures, as well as shaped our modern lifestyle and culture. Recalling the magnetic field created by the core of iron within the Earth, also known as the Van Allen Belt, it protects people from lethal solar winds. There are diverse applications of steel that ensure safe and convenient living: transportation, pipelines, bridges, transformers, musical instruments, and so much more. Steel technology has also been a major contributor to extending human longevity. For instance, steel pipes have replaced copper to convey clean water.
Improved steel technology is continuously adopted in steel products for safer and cleaner use in our water systems, oil and gas pipelines, and electricity transmission. At the same time, specialized steel products have become the core materials for renewable energy production such as solar, wind, and tidal power generation. In addition, strong and reinforced steel is fundamental in optimizing the use of urban space through super-towers and other skyscrapers, and also for disaster prevention in the form of tsunami protection walls. Steel products continue to foster exciting innovations in critical areas such as mitigating the impact of global warming, helping the disabled recover mobility, and improving the protective qualities of military equipment. The current civilization has been blessed with the fruits of rapid industrialization and emergence of IT technology. Nevertheless, the Age of Steel is an ongoing phase as steel is the enabler of such remarkable advances.

In the “On The Cover” section, four articles are covered under the main theme of “Opportunities and challenges of the Indian steel industry.”

Understanding Incredible India

India is undergoing a great transition as the post-reform generation strikes out into the world. This generation supports growth-oriented domestic economic development creating job opportunities and a strong India internationally. At the onset of the Modi administration in 2014, India’s economic paradigm shifted its focus from distributive or inclusive growth to growth-oriented development. From a structural perspective, India is highly likely to continue to expand at least until 2025-30. Mainly based on the “Hindi belt” and “cow belt,” India is establishing a Hindu state. For a short term, Hindu fundamentalists’ expanded influence is helpful to consolidate power and implement various measures to stabilize the regime. Over the long term, it will pose a threat to the country as it pursues stability, integration of society, and national development. Depending on how the Modi administration wields this double-edged sword, the meaning of Incredible India will change substantially in the future.

Opportunities and Challenges of the Indian Steel Industry in the Context of Future Growth

India has always been seen as a potential for significant steel market expansion. There have been various forecasts at different points, raising expectation of the steel industry and investors about growth prospects of the industry. In the recently adopted steel policy of the government of India, it has stated that India’s crude steel production capacity will have to reach 300 Mt by the year 2030-31, from the current level of about 125 Mt, which incorporates a domestic finished steel consumption forecast of about 225 Mt and export of about 20 Mt. However, the government’s goal is rather optimistic in light of varying structural issues of the Indian steel industry, including delayed projects, high debts, low labor productivity, operation inefficiency, and lack of infrastructure. Overcoming such mounting challenges, the Indian steel industry should move forward taking into account the impact of scrap generation on India’s competitiveness in raw materials, impact of environmental regulations on new investment, and impact of speculative assets on steel prices.

Restructuring Scenario of the Indian Steel Industry to Enhance Its Global Competitiveness

The Indian government has recently released the“National Steel Policy (NSP) 2017,”which declares the aim of increasing steel production capacity from 122 Mt in 2015 to 300 Mt in 2030 in order to attain self-sufficiency. However, the insolvency issue recently looming large in the Indian steel industry makes this goal appear somewhat hollow. As of March 2016, the Indian steel industry’s debt surpassed INR 3 trillion, and between INR 1.15 to 2 trillion within it is categorized as non-performing assets. However, steel imports are not the only culprit in the insolvency of the Indian steel industry. There are other fundamental reasons underlying the insolvency. The first relates to policies based on the ripple effect from the NSP 2005. The second cause of insolvency is investment fervor among Indian steelmakers, which left huge aftermath within the industry. Restructuring of the Indian steel industry will be mainly led by Tata and JSW.
Now is the right time for the Indian government to seek not only quantitative growth, but also qualitative improvement to enhance the global competitiveness of the domestic steel industry.

Can India Become the Next China?

With India’s economic growth rate exceeding that of China in 2016, many people wonder if India can manage to become the next China. A comparison of the two countries should be able to determine if India’s steel industry can match that of China’s. Comparing the ratio of gross fixed capital formation to GDP, contribution of secondary industry to GDP, and urbanization rate of India and China, the gap between the two countries is significant and is less likely to narrow profoundly.
Economic and social characteristics in India hamper high steel demand growth: strict labor laws and practices, the lack of infrastructure, high interest rates, insufficient public financial support, and complex issues related with securing land. India has surpassed China in terms of economic growth. However, its economic development has mainly been propelled by the service sector, and India’s steel-consuming industries, such as manufacturing and construction, are relatively weaker than those of China.

Interview with Thachat Viswanath Narendran, CEO & Managing Director of Tata Steel and Chairman of the Economics Committee of worldsteel under the title, “Rising Elephant: Tata and the Indian Steel Industry”

Thachat Viswanath Narendran, CEO & Managing Director of Tata Steel and Chairman of the Economics Committee of worldsteel talked to Asian Steel Watch about his company, the Indian steel industry and global steel industry: 1) Tata Steel’s brief history and business, 2) factors that drive growth of India’s steel demand, 3) restructuring of Tata Steel’s European operations, 4) restructuring of the Indian steel industry, 5) medium- to long-term outlook on the global steel industry, and 6) advise for foreign investors.
1) Tata Steel’s brief history and business

Tata Steel was set up more than a 100 years ago as our Founder J N Tata felt that for any nation to be able to stand on its own, a strong steel industry is essential. The company was set up not only to become a leading steel company in the world but also to become a benchmark in corporate citizenship. The founder, J N Tata, felt that the community is not just another stakeholder in the enterprise but the very purpose of its existence.
We have a strong culture of continuous improvement and are the only steel company outside Japan to win the Deming Grand Prize. We have done some very innovative work in marketing and sales and have a strong distribution network and a bouquet of very successful brands. We are the leading supplier to India’s automotive industry and have a market share of 44% in our supplies to the automotive industry. We are the number one player in India for wires and tinplates, and we also have a large pipes business. Overall we have a passionate and talented employee base, strong relationships in the market, a great competitive position on cost due to our efficiencies, and a culture of continuous improvement. This explains our longevity and strength even after being around for 110 years.

2) Factors that drive growth of India’s steel demand

India is still at an early stage of development and so the potential for growth in steel consumption in India is immense. Our per capita consumption of steel is currently at 63 kg which is about 25% of the world average and 15% of what it is in China. The per capita consumption of steel in rural India is about 5 kg. If India has to grow at 7 to 8% as has been predicted, the government has to spend on building infrastructure and a lot of actions on that are already evident.
According to the National Steel Policy, the biggest growth in steel consumption is coming from the infrastructure segment where the government is expecting steel consumption to grow from the current level of 10 million Mt to 100 million Mt in the next 10 to 15 years. Tata Steel will continue to invest and grow in our two main production sites of Jamshedpur & Kalinganagar. Over the next 10 years, we hope to grow from the current level of 13 million Mt in India to 25 to 30 million Mt.

3) Restructuring of Tata Steel’s European operations

Tata Steel has a footprint of 2 million Mt in Southeast Asia which is essentially long products for the construction industry through the EAF route. It has three plants in Thailand and one plant in Singapore for steel making and rolling mills and downstream units in both countries as well as in Vietnam, Malaysia and Hong Kong. In Europe, it has a footprint of 12 million Mt now (between the Netherlands and the UK). The focus of its overseas facilities is on efficiency and profitability and not so much on growth. Most of the restructuring in Europe and Southeast Asia is complete but we will continue to look for opportunities to improve the performance.

4) Restructuring of the Indian steel industry

The Indian Steel Industry has a temporary overcapacity problem as I believe that demand growth will outstrip supply growth over the next few years. Restructuring is happening because of the financial health of this sector which has invested a lot of capital in building capacity and has been plagued by a falling market in 2015 and early 2016.
Fundamentally, India’s steel industry is quite competitive. Until 2015 it had no problem competing with imports from anywhere in the world. When a slowdown in China led to imports flooding in from China and other countries at prices lower than the prices in their domestic markets, the industry took up the issue with the government and had got some support. India also allows 100% foreign direct investment (FDI) in steel and mining and so anyone who is keen to participate in growth opportunities in India is welcome to invest in India.

5) Medium- to long-term outlook on the global steel industry

Until a few months back, we felt that growth in consumption in countries other than China will more than offset the shrinkage in consumption in China, so overall global growth in steel consumption will be in the 1 to 2% range.
The most significant demand growth is expected to come from India and Southeast Asia. Together, it is a market of almost 1.7 billion people consuming about 160 million Mt of steel and growing at 5 to 6% on average.

6) Advise for foreign investors

When foreign investors look at India they should take a long term view. It is a challenging market but a market with full of potential. It may be one country but it is not a homogeneous market. There is a lot of talent available in India and it is a young country demographically. There will be challenges in land acquisition and sometimes with the myriad values and regulations. But it is a market worth investing in. Korean automotive companies and appliance manufacturers are great examples of foreign companies who came in well before many others and have built a strong equity in the domestic market. It is one of the fastest growing large economies in the world and still at an early stage of development. It is blessed with a lot of good quality raw materials. It has a government which is trying very hard to improve the ease of doing business and attract foreign investment.

(Featured Articles) In this section, there are three articles: Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry; The Korean Steel Industry in Retrospect: Lessons for Developing Countries; and Learning from the Experiences of the Japanese Steel Industry in the Lost Decades.

Legacy from Europe’s Restructuring Experiences and Its Implications to the Asian Steel Industry

Since the 1973 oil crisis when steel demand peaked, the steel industry experienced a long, hard and costly restructuring process. Restructuring of the European steel industry was taking place from the mid-1970s under such a context that the steel demand had passed its peak level as industrialization and urbanization had seen their close completion. National economic priorities were then transforming gradually from industrial sector to service sector and industrial sector itself was transforming from traditional manufacturing industries to advanced and hi-tech ones. The privatization process lasted for 10 years, involving in many stakeholders. As a result, steel capacity was cut by 20% and steel capacity utilization ratio surpassed 70%, employment reduced by 44%, and labor productivity of the west European steel industry improved by 60%.
As exit barriers and institutional accommodation prevent restructuring from timely start-up and completion, the government has a role to play in the restructuring process at different levels.
It can provide a policy framework where restructuring can take place and ensure a level playing field during the restructuring process. While macro-economic conditions and government favorable measures came out, it is then the individual steel company that plays a vital role in the restructuring process. Besides focusing on internal adjustments, individual steel companies could pay some due attention to changes both in the economy and society, such as social and industrial megatrends (demographics, technologies, process, and IoT), and their possible impacts upon the future steel industry.

The Korean Steel Industry in Retrospect: Lessons for Developing Countries

Rising from the ashes of war, Korea has joined the ranks of advanced countries. The rapid development of the Korean steel industry offers lessons to developing countries. The development patterns differ before and after the financial crisis of 1998. Examining the changes that took place around the crisis of 1998 based on factors related to steel use, there are some distinctive items: a significant slowing in the urbanization rate after 1996, gross capital formation as percentage of GDP declining after peaking in 1996, and the Korean economy being shifted from government-driven to market-driven. The author adopted various theories to re-examine the success factors and offer implications for developing nations—catch-up theory, infant industry argument, fourth factor of production, Lewis turning point, and endogenous growth theory.
Based on its analysis on the development and success factors of the Korean steel industry, this article offers several policy implications for developing countries. The first is the importance of the government’s role and strategic decisions. The second implication is entrepreneurial leadership and a “can-do” attitude. The third is the importance of industrial policy based on medium- to long-term outlook for supply and demand. Finally, there is the importance of determined drive of technological development and R&D investment.

Learning from the Experiences of the Japanese Steel Industry in the Lost Decades

The experience of the Japanese steel industry which underwent a long period of sluggish demand might provide lessons for East Asian steelmakers as they navigate tumultuous times. In the supply chain connecting Japan’s steel-producing and -consuming industries, there exists a long-established order. They do not change existing suppliers or find new suppliers simply to save costs. Many Japanese steelmakers tolerate a rather high cost structure for a time and select steel materials through a long-term perspective, thus increasing the overall competitiveness of their own supply chains. They diversified their export targets from a focus on the USA to include Southeast Asia and other emerging markets. They also shifted their product portfolio for the US market to high value-added products in close cooperation between the public and private sectors.
From the late 1970s to the 1990s, restructuring occurred through two different methods: facility revamps and workforce rationalization. The industry attempted to increase its global competitiveness by enhancing economies of scale through integration and reducing redundancies via reshuffling.

(Asian Steel Market Outlook) Asian Steel Market Outlook: Flat Product Demand for the Next Ten Years

This section forecasts flat steel demand upon close examination of steel-consuming industries, including automobile, shipbuilding, and home appliance, in major Asian countries—Korea, China, Japan, India, and the ASEAN-5—over the next decade (2018-2027).
Steel-consuming industry outlook in Korea, China, Japan, India, and the ASEAN-5

Automobile: Automobile production in China, the ASEAN-5, and India is expected to grow continuously by 2027 thanks to government policy support and facility investment by global automakers, despite low growth trends around the world.
Shipbuilding: Global shipbuilding deliveries will decline to 50.4 mil. GT by 2020 due to the“order cliff” of the last 2-3 years, but will gradually recover by 2025.
Home appliance: As Chinese home appliance makers go global through M&As with US and Japanese enterprises, they are threatening the traditional strongholds of Japan and Korea.

< Steel-consuming Industry Outlook in Asia >

	Automobile production (mil. units)			Shipbuilding deliveries (mil. GT)			Home appliance production
	2016	2027	CAGR (‘17~’27)	2016	2027	CAGR (‘17~’27)	2016	2027	CAGR (‘17~’27)
China	28.1	37.7	2.7%	22.3	24.1	0.7%	417.0	456.0	0.8%
Korea	4.2	4.5	0.6%	25.4	20.6	-1.9%	16.9	15.8	-0.6%
Japan	9.2	9.5	0.3%	13.3	13.9	0.4%	7.59	7.57	0.0%
India	4.5	7.8	5.0%	-	-	-	25.0	34.2	2.9%
ASEAN-5	4.0	5.8	3.4%	-	-	-	64.6	96.6	3.7%

Source: POSRI

Flat steel demand outlook in Korea, China, Japan, India, and the ASEAN-5

Despite sluggish demand for flat products in the construction sector, China’s overall flat product demand is expected to grow at a compound average growth rate (CAGR) of 0.6% to reach 320 Mt by 2027 thanks to robust demand for automobiles.
Flat product demand will remain sluggish until 2020 since the country has the largest share of shipbuilding within total flat product demand among all East Asian countries. However, it is expected to grow at a CAGR of 1% after 2020.
Flat product demand is expected to grow slightly at a CAGR of 0.6% over the next decade due to stagnation in the automotive and home appliance industries and only weak recovery in the shipbuilding industry.
Flat product demand will continue to grow robustly at a CAGR of approximately 6% by 2027, thanks to high growth in major steel-consuming industries, including automobiles and construction.
Flat product demand is expected to increase at a CAGR of 5.2% to reach 67 Mt by 2027 thanks to robust growth in construction investment and rapid expansion of the automotive and home appliance markets.

< Flat Steel Demand Outlook in Asia >

(Mt)	2016	2018	2020	2024	2027	CAGR (‘16~’20)	CAGR (‘21~’27)	CAGR (‘16~’27)
China	297.3	305.6	312.1	314.9	316.7	1.2%	0.2%	0.6%
Korea	28.3	28.1	29.0	30.5	31.4	0.6%	1.2%	1.0%
Japan	29.5	30.1	30.3	30.8	31.5	0.7%	0.6%	0.6%
India	32.7	36.3	41.6	54.2	63.9	6.2%	6.3%	6.3%
ASEAN-5	38.4	42.6	47.8	58.5	67.2	5.6%	5.0%	5.2%

Source: POSRI

Notes to Editors:

POSCO Research Institute (POSRI) is a leading research institute headquartered in Seoul, Korea. Established in 1994, it offers research and consulting especially focusing on steel. However, its research areas are not confined to steel. POSRI conducts research in various fields, including the economy, steel-consuming industries, business, materials, energy, and the environment. POSRI publishes Asian Steel Watch, a bi-annual English journal specialized in the Asian steel industry and market, and Chindia Plus, a bi-monthly Korean journal specialized in China, India and other Asian countries.

이전글: Towards The Circular Economy: What It Means to the Steel Industry
다음글: [Interview] Rising Elephant: Tata and the Indian Steel Industry

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