The importance of steel is in no doubt. It is the material from which much of the modern world is made, from skyscrapers to washing machines. Governments everywhere regard a strong steelmaking business as a sign of economic virility, and thus hover anxiously over their domestic producers. A French minister recently threatened to nationalize ArcelorMittal's Florange plant if it pursued plans to cut jobs and close two blast furnaces.
Despite a weak world economy, global production of steel rose 1.2 percent last year to a record 1.55 billion tons.
Yet importance does not always translate into financial success. Steelmaking scrapes by on microscopic margins that make even airlines look like paragons of profitability. This is most apparent in Europe, whose steelmakers are the most beleaguered. Yet China, where the industry is booming — it has enjoyed almost all of the global production growth in the past decade — faces many of the same problems.
The most pressing concern is overcapacity. In Europe especially, the drive to build lots of vast steelworks in the postwar reconstruction effort continued into the booming 1960s, only for demand to hit a wall in the oil shocks of the 1970s. Too little was done to adjust capacity to the meager growth rates that followed. The financial crisis delivered the latest blow. Around half of steel output is used in construction, an industry that took a heavy battering. Steel consumption in Europe, at around 145 million tons in 2012, is nearly 30 percent below its pre-crisis level and demand is still falling.
A declining domestic market is far from Europe's only ill. Labor costs are sky-high (only Japan's are greater). Feisty unions and fussy governments make closing steel plants a difficult, expensive and lengthy process.
American steelmakers, though they are struggling to compete with Latin American rivals, have it a bit better. Signs that the economy is recovering, cheap energy from shale gas and a resurgent auto industry are all bringing good cheer to steel firms. Jefferies, a bank, reckons America's steel consumption will grow by 2.8 percent this year.
In Europe, despite some efforts to manage capacity by idling facilities, there is little chance of the big closures required. No firm wants to be first to shut plants and let competitors reap the benefit. And deals struck when times were good still haunt steelmakers. ArcelorMittal, which became the world's biggest steelmaker in a huge merger in 2006, agreed to maintain jobs and production to persuade European governments to wave the deal through. Now it will be a struggle to break these promises.
Adding to the pressure on steelmakers' profitability is China's growing capacity, which is denting steel prices around the world. After a decade of rapid expansion, Chinese firms are now responsible for half of global production. Although the government seems determined to cover the entire country with steel and concrete in its drive for growth, the steelmakers have expanded so rapidly that they now suffer from massive overcapacity.
