3 challenges facing the European steel industry

The European steel industry is the engine for the European economy, a key supplier for the automobile industry, machines and other emblematic industries in Europe.

Steel contributes approximately 83 billion euros of direct added value to the European economy. As a basic raw material for other key industries, it also contributes over 1.4 trillion euros of added value in these combined industries. In general, the steel industry and the main consumer industries represent approximately 9% of the global added value in Europe.

However, earnings were weak compared to other heavy industries such as mining or energy.

Following the global financial crisis of 2008-2009, the European steel industry registered a permanent loss of demand of approximately 35 million tons. Falling from 188 million tons (2004-2008 average) to 153 million tons (2011-19 average).

This loss was determined by a decrease in demand from all end-use sectors. Especially from construction after the construction boom (especially in Southern Europe) and from the oil and gas industry.

Europe was once a net exporter of steel products. But it has become a net importer since 2016, with net imports reaching about three million tonnes in 2020. Rising imports, combined with falling demand, has accelerated the decline in capacity utilization.

Steel has strategic relevance for these key steel-using sectors, requiring geographic proximity for just-in-time delivery, a robust supply chain with short lead times despite the COVID-19 crisis, and joint product innovation.

The European steel industry will face three main challenges in the future:

1. An increase in overcapacity as a result of the drop in demand from five to ten million metric tons due to the COVID-19 crisis.

This is primarily due to the fact that players in key consumer sectors such as automobiles. They were forced by the COVID-19 crisis to adjust their activity by closing or moving production from Europe to other regions. Moreover, a lower permanent demand for office spaces after the COVID-19 crisis. The increase in remote work may reduce the demand for office buildings. Which in turn will reduce the demand for steel in the construction sector.

2. Increasing costs related to CO2 taxes.

European steel players must have a short-term answer to offset higher costs with improved profitability. And incremental measures that reduce CO2 emissions – for example, increasing the waste rate.

3. Significant investments required for the decarbonization of the European steel industry in the medium and long term.

Steel companies must adapt their long-term plan and choose technologies that support CO2 neutrality, taking into account the guidance and potential support from policy makers.

European steel producers should consider carrying out a series of strategic operations in the short, medium and long term. To ensure economic and environmental sustainability in the future. These strategic moves could include restructuring steps aimed at reducing capacity. Steps towards strengthening the position of steel companies by diversifying their capacities. And sustainability goes towards the production of steel with low or no carbon emissions.

Article source: www.mckinsey.com