Steel De-commoditization

Posted on 04 January 2013

Source: SEAISI
Although steel consumption in ASEAN has picked up from the financial crisis in 2008 and continued to grow at a satisfactory rate in recent years, regional production has not benefited from the recovery. The increase in demand was met by imports from other countries. Apparent steel consumption in the region registered 27.5 million tonnes in the first half of 2012, an increase of 4% y-o-y. However, regional steel output dropped by a million tonnes to 12.6 million tonnes in the first half of 2012. Demand was well served by import which surged by 19% to 19.3 million tonnes.

According to the World Steel Association, growth in global steel demand slowed down in recent years, including that in emerging countries. Global crude steel output was reported to decline in the second half of 2012.


Other economic indicators have also shown a declining trend. IMF has revised downward its July forecast of a 3.5% increase in global GDP growth rate in 2012 to 3.3% in its latest October report. China’s manufacturing production indices have also declined recently. Steel prices have been volatile, making it more demanding to run a business in the steel industry. Unlike in other businesses, it is not easy for the steel industry to cope with steel price fluctuations. For example, the oil & gas, non-ferrous metal and agricultural sectors have adopted futures and option trading to mitigate price movements. However, it is not the case for the steel industry due to various limitations in the steel related futures trading.

The construction sector is the largest steel consuming sector in all the countries in ASEAN, accounting for an average of 63% of total steel demand. In other words, out of the 52 million tonnes of steel used in the region in 2011, 33 million tonnes were supplied to the construction sector. 

In light of the challenging market environment, Mr. Wikrom Vajragupta, President of the Iron and Steel Institute of Thailand (ISIT), in his presentation at the recently concluded 2012 SEAISI Economic, Environmental and Safety Seminar, presented a case for the de-commoditization of steel to achieve competitiveness. Mr. Wikrom noted that having taken into consideration the profitability of steel mills, there are hidden costs through logistic management, namely indirect costs from account payable period, account receivable period and costs on inventory level. He gave an example of one of steel mills in Malaysia which has done an excellent logistic management to drive down its working capital days to 76 days. However, the best practice given in the presentation was from one of the US steel producers. Its total working capital days averaged 53 days.


Mr. Wikrom also pointed out that the value of steel increases significantly through designing and fabricating processes. For example, ex-work prices of rebar at 19 baht per kg (USD 613 per tonne) in one of the steel mills increased to 23 Baht per kg (USD 742 per tonne) when it reached retailers’ hands. Interestingly, prices go up to 113 baht per kg (USD3,645 per tonne) after the products have gone through fabricating and customizing processes and ready to be used on construction sites. In view of that, Mr. Wikrom suggested that it is time for steel companies to think of adding value to its so-called commodity products in order to enjoy higher profits from value added steel and giving better solutions for customers.

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