From December 5 till December 7, 1999, Penang, Malaysia, became the place for the Seventh Asian Steel Conference. More than 100 participants discussed the issues of steel industry’s restructuring in the region and relations among steel manufacturers and t
The wait-and-see policy will make Ukraine lose all foreign markets
From December 5 till December 7, 1999, Penang, Malaysia, became the place for the Seventh Asian Steel Conference. More than 100 participants discussed the issues of steel industry’s restructuring in the region and relations among steel manufacturers and traders. The conference was held under the auspices of Metal Bulletin. Twelve persons representing CIS countries (10 from Russia and 2 from Ukraine) were on the participants’ list. The Metal asked Vadim Gurzhos, member with the supervisory board of the Ukrainian Association for Scrap Metal, to share his experience of the conference and make his predictions for the world steel market for the coming years.
— Mr. Gurzhos, first of all, what are the outlooks for global output and trade in steel?
— On the whole, everything seems rather promising because the world steel market (especially markets of the developed economies) is anticipated to recover. Following the countries of Central and Eastern Europe, CIS countries are showing signs of growth in domestic consumption. Though rather weak economic recovery in EU member-states somewhat slackened business activities on the European steel market, the market may fully recover spurred by growth in automotive industry, which is fostered by devaluation of local currencies against the US dollar.
In North American countries steel has been in a constantly strong demand for the past five years, whereas demands in Japan have been rather feeble. It is still hard to evaluate the effect of economic progress in Korea upon the Korean steel market. Whatever the case, November 1999 saw a 6.0% total increase in manufacturing output of the largest steel-producing Asian countries, despite a 17.6% downswing in Taiwan in 1999. In the 11 months of 1999, Asia smelted 3.0% more steel than in the respective period of 1998.
At the moment, the overall global trade in steel is estimated at 250.0 mln. metric tons. However, the situation is getting more complicated because a couple of new powerful developing economies have recently entered the world market. In response, quite a few developed countries have charged Russia, Ukraine, Kazakhstan and India of dumping, unfair trade and illegal subsidizing. Japan and South Korea have also brought in similar charges and accusations.
— As a matter of fact, almost all the Southeast Asian countries launched extensive technical reconstruction programs in iron & steel industries back in the first half of the 90s. However, the financial crisis resulted in some of these projects being put off. Can the reconstruction projects be recommenced at the dawn of the new millenium? What will be the key changes in Southeast Asian steel industries as the economies move out of the post-crisis stagnation?
— In the last decade, steel output in Indonesia, Malaysia, Thailand and the Philippines followed the general trend. After a slight growth in 1991-1994, visible steel consumption (i.e. local output plus imports less exports) skyrocketed until 1996 and somewhat reduced in 1997. When the crisis hit Thailand and the Philippines, steel consumption in these two countries dropped by 1.3 mln. metric tons and 0.3 mln. metric tons respectively. However, consumption in Indonesia lowered by only some 120 ths. metric tons, while Malaysia even increased its steel consumption by 160 ths. metric tons. However, the year of 1998 saw visible consumption of steel plummeting by 60.0% in Indonesia, by 56.0% in Malaysia, by 47.0% in Thailand and by 30.0% in the Philippines. Moreover, reduction in output followed the drop in consumption volumes.
In the crisis years of 1997 and 1998, recession in demand and reduction in steel prices in Asia-Pacific states caused outflow of capital from new iron & steel projects. Though some companies partially received financial backup, some failed to find the necessary funds to complete the construction works, while the others redesigned their facilities to engage in metal rolling. The companies, which commenced manufacturing activities, came to a standstill owing to shortage of current assets. It is matter of special importance that the most ambitious projects involving modern technologies were the very first to be delayed.
Each country had its own experience of crisis and, obviously, each country will have to find its own way out. The 1998 figures reassure that a slight recovery finally commenced. In the first half of 1999 consumption was about the same as in the first half of 1998; though there was some recovery at the year-end. It is expected that local demand will grow and export situation will improve even in the politically turbulent Indonesia in the near future. Yet, the aggregate steel consumption in Asia will remain below the 1996 level, save for Taiwan and Vietnam. The overall trade turnover will also fail to regain the pre-crisis volumes. The few new mills established in 1997-1998 are only beginning to step up manufacturing output, which means that their products will substitute for only a portion of imports. However, since output has been rather stable and the demands are growing up, it is anticipated that imports will increase. All the signs indicate that pretty soon some of the postponed projects will finally get their financing.
As a matter of fact, the Asian steel industry largely depends on the overall economic recovery in the region. Thus, demand for steel will increase as the economies move out of the recession. In 1999, prices for steel commodities increased by 40.0% compared to the 1998 lows. It looks like the steel prices may gain some more 20.0-30.0% before hitting the next ceiling in late 2000. Perhaps, one can state that Asia will remain a moderate net exporter of steel in the upcoming two years. Excluding China, Japan and South Korea, the other Asian countries will have to import up to 22.0 mln. metric tons of steel per year.
Regardless the political games in the region, the Asian steel industry will inevitably move to larger enterprises via mergers and acquisitions. A number of Korean, Japanese, Philippine and Indonesian manufacturers have already made mergers or currently consider the odds of merging with smaller companies. China Steel of Taiwan and Posco of South Korea can well turn into the main manufacturers on the Asian steel market.
— Well, so far relatively small mills still manufacture the bulk of Asian steel. What are the outlooks for these mills?
— The Southeast Asian steel industry took shape back in the 50s with the main aim of satisfying local demand (mainly demands of the construction sector). As a result, there were established numerous small-size rolling companies either equipped with smelting facilities or not, which worked for the local consumers. For instance, at the moment Thailand is the place for 150 such companies, while the number of merchant mills alone comes to 45 in the Philippines. Most of these enterprises own obsolete and bootless equipment. Though lately they have progressed to application of new technologies, the underdeveloped market is a big trouble especially for freshman mills, which have barely commenced their operations.
Nevertheless, steel manufacturers are absolutely positive that restructuring is the only way to the industry’s future. Here, restructuring does not really imply investment, but thorough revision of manufacturing and marketing systems, which should boost production efficiency in the industry. Companies envision a whole bunch of steps ranging from staff training at individual companies to restructuring of the whole industrial segment within a selected country to get rid of excessive capacities and adjust manufacturing programs to market requirements. Therefore, the restructured industry will be much different from its pre-crisis pattern. Quite a few held up companies will completely go out of business, owners will be replaced and quite a few mergers will take place. For example, the Thai government encourages mergers of steel mills to standardize manufacturing processes and accelerate the restructuring. The leading manufacturers of rolled metal are already negotiating on this issue.
Scrap is the main component of furnace charge for most Asian steel mills. Availability, quality and price of scrap metal are the chief factors influencing price and quality of end products. According to Southeast Asian Iron & Steel Institute, this region consumed 7.13 mln. metric tons of ferrous scrap in 1996, including 2.7 mln. metric tons of imported scrap. As the industry revives and new companies attain their full capacity, demands for scrap metal will exceed 10.0 mln. metric tons per year. It is not an easy thing to satisfy such demands. Thus, the prices will go up and operation efficiency of steel mills will lower. Undoubtedly, exporters will keep an eye on the expanding Southeast Asian market for ferrous scrap.
It was already mentioned that steel industries in most Southeast Asian economies possess redundant capacities (except for primary product manufacturing). Therefore, there is no need in setting up new enterprises to launch production of marketable steel grades. However, as the demands for supreme-quality and special steel grades increase, quality issues get more importance in safeguarding the traditional markets from manufacturers, which function on the verge of dumping, and in setting up new markets for hi-tech commodities. Thus, the imminent restructuring means considerable enhancement of product quality and simultaneous improvement of manufacturing and marketing management. If everything goes well, it is likely that modern mini-mills will be constructed in the region.
— Are there any applicable projects of cost-efficient and productive mini-mills capable of ensuring high product quality with relatively low current expenses? In other words, what is the perfect mini-mill of the 21st century?
— Perhaps, there is no short answer to this question. At the very beginning it should be mentioned that the market for rolled metal products is becoming more infested with competition and more selective. Obviously, offer price alone is incapable of assisting in getting a market niche. Offer price necessarily has to be backed with supreme quality of commodities.
Mini-mills have been a common practice in the world for many years now. Under conditions of mass supplies of commodities at competitive prices, mini-mills have proved to be a highly lucrative business. Not too long ago, a representative of rolling division with the renowned Danielli company set forth the new concept of highly productive and economical mini-mill integrating the latest developments in smelting, casting and rolling.
The new-generation mini-mill combines the novelties in smelting, refining, continuous casting and rolling, which allow boosting product quality and improving cost-efficiency. Such a mill has low current expenses because high-performance automatic system manages the whole production chain from processing of purchase orders all the way to distribution of finished metal. Special heed should be given to the system of equipment monitoring capable of predicting future service directions and the necessary scheduled operations.
Smelting workshop is equipped with double-cathode, direct-current arc furnaces, which consume 35.0% less electrodes than conventional furnaces. Besides, these furnaces consume little power and barely affect the external power source; thus, they can function in low-power circuits. Combined use of electric power and of energy released during chemical reactions enables reaching the project power density of arc (up to 700 kW/ton), thus narrowing the gap between melting operations to 60 minutes. The combined DANARC PLUS unit is also designed to make molten steel. This unit uses the best combination of electric power, chemical reaction energy and heat energy of discharged gases, which lowers the operation time and heat losses in smelting. Electromagnetic agitation of bath improves homogeneity of molten metal’s chemistry and temperature, as well as accelerates chemical reactions. The main feature of this unit is the external stand for preliminary scrap heat, which fully takes advantage of chemical-reaction energy and heat energy of discharged gases. As a result, arc furnace operations do not have to wait till scrap becomes liquid inside the furnace, which enables almost continuous functioning. A 100-150-ton unit consumes almost 1.5 times as low power and twice as few electrodes as a conventional unit. Besides, the production cycle takes half the time.
The new cooling concept, novel design and architecture of cooling bed with narrowed overlap span are applied in continuous steel casters to ensure quick ingot solidification. High-speed water jet provides effective cooling, thus considerably diminishing heat strain. Flow speed can reach 4.5 m/min. in making a wide range of products with supreme quality, including critical steel grades for automotive industry. The casting system is equipped with electromagnetic agitation machines, which improves texture, scatters heat energy released during the solidification stage (consequently augmenting foundry properties of liquid steel) and enhances subsurface purity. Multi-point system of ingot lining maintains strain levels way below the crack formation points, while the system of quick cooling bed replacement allows altering ingot shape within minutes. All this and some other novelties boost productivity by 20.0-30.0% compared to the traditionally applied systems.
This mini-mill effectively incarnates the direct rolling concept saving up to 23.0% of power resources, 17.0% of labor efforts and up to 60.0% of storage costs. Time gap between placement of a purchase order and delivery of the ordered commodities can be narrowed to less than 4 hours owing to permanent feed of metal from continuous caster to rolling mill, as well as due to carefully compiled production timetable. Ready-to-use roll sets adjusted at workshops are handed over to the rolling mill, where the sets can be quickly replaced. All the roll sets are replaced almost simultaneously and the cranage is accomplished right on the functioning mill. It is quite enough to mention that, during dimension alteration of rebars to be rolled, idle time of a rolling mill comes to only 4 minutes! Continuous rolling also boosts productivity (to eliminate the gaps, ends of metal sections are welded together prior to rolling). The rolling rate for carbon and special steels reaches 140 m/s, which adds some 11.0-12.0% to annual output and potentially lowers product costs by 2.5-3.0%. At the same time, rolling can be easily switched to the average mode.
At the pre-rolling stages, item dimensions are automatically measured and gaps are automatically adjusted owing to which dimensions of finished items are four times as precise as required by DIN 1013 standard. The special three-roll stand doubles the precision at the finishing stage. To control grain size and technological properties, the whole range of manufactured products is finish-rolled at temperature below 750 С.
During operations, capacities of the rolling mill can be utilized by over 90.0%, along with effective usage of more than 98.0% of employed raw materials. These and other improvements add some 30% to average output and significantly lower production costs, thus ensuring high rates of return. Such a company can manufacture more than 850.0 ths. metric tons of rolled metal per year, while the existing similar equipment can hardly produce 600.0 ths. metric tons per annum. Is that impressive enough?
— I believe so. Now, let’s get back to the conference issues. Taiwan traditionally has an important position among the regional producers. Will this country retain the leading positions in steel business?
— Taiwan is the leader in steel output and consumption per capita not only in Asia, but in the whole world. In 1998 this country manufactured 22.14 mln. metric tons and consumed some 20.19 mln. metric tons of finished steel. At the same time, the country suffers from acute shortage of crude steel. Back in the same year of 1998, Taiwan produced only 16.9 mln. metric tons of crude steel, thus importing more than 7.0 mln. metric tons of slabs and billets.
The point is that Taiwan has an extremely auspicious location in Asia. It takes less than a week to deliver cargo from Taiwanese ports to the most distant Asian areas. Benefiting from this advantage and enjoying a mighty complete-cycle steel industry, the country intends to strengthen its positions of an integrating power on the steel market. Taiwan definitely shows its intention to cooperate with South Korea and Japan to protect interests of Asian steel producers. The Taiwanese steel lobby is willing to play its part in restructuring the scattered steel industry of Asia-Pacific states. The recent European and American mergers and strategic alliances of steelmaking companies will be the role models for future events in Asia.
Relations between Taiwan and China are the matter of special interest. Steelmaking mills have to supply raw materials to numerous affiliates of Taiwanese companies located in the neighboring countries. During the last five years, China boosted steel exports more than fourfold. Simultaneously, quite a few companies producing end steel commodities started migrating from Taiwan to China. In the past decade China nestled capacities for manufacturing coiled sheets and tubes, while in the last 5 years the country also became home for mills manufacturing long rolled metal. However, lately the Chinese steel producers have made a number of efforts to substitute imports with local products. These efforts also envision construction of up-to-date mini-mills in south China, liquidation of obsolete facilities, output of hi-tech steel grades and thorough audit of all the import contracts. This will undoubtedly lower Taiwan’s role of steel supplier to Taiwanese affiliates in China. However, Taiwan is unlikely to be ridden with oversupply of finished steel. Reconstruction of the country’s infrastructure after the earthquake and introduction of higher seismic-resistance construction standards secure long-term stable demands for high-quality rebars, tubes, coated sheets and plates, prestressed wires and stainless steel. It is anticipated that reconstruction will take three years and will consume 2.0-3.0 mln. metric tons of steel.
— How is the economic environment in the Philippines, which always has demands for Ukrainian-made metal?
— The government of the Philippines believes that the country has left behind the worst period of economic downturn. The GDP has indicated stable recovery rates. The economy is expected to completely recuperate in 2000, when manufacturing output is forecast to gain some 5.6%. In the 8 months of 1999, overall imports increased by 6.0%.
The country’s executive authorities approved a six-year development plan aimed at strengthening of industry’s competitiveness on domestic and global markets. The crucial point of this plan is development of transportation network connecting the Philippine regions stretching over almost 7,000 islands. Besides, there are extensive poverty-aid programs, particularly the large state program for residential construction. Naturally, implementation of these plans will consume great amounts of structural steel.
In the pre-crisis years of 1990-1998, steel consumption in the country grew at the rate of 6.8% per year (this was mainly evident for long metal and especially for rebars). Reduction in duty rates and limited opportunities of local production largely encouraged imports. In 1990-1998, almost 61.0% of flat-rolled steel and up to 20.0% of long steel were imported. However, the 1998 steel imports almost halved in terms of value.
The Philippine steel industry has an irregular pattern. More than 300 companies engage in steelmaking. Steel is smelted in arc furnaces and the country produces billets, yet there are no facilities for slab manufacturing. Main billet-producing facilities have the aggregate capacity for 1.2 mln. metric tons per year, while the country annually has to import 1.0 mln. metric tons of billets. It is funny that the local industry suffered the most during the 1998 recession, when imports remained the same owing to cheap Russian commodities. The Philippines has at disposal some 60 rolling mills (mainly equipped with obsolete machinery) manufacturing long metal. Most of these mills import billets from abroad. There is only one company, which manufactures hot-rolled sheets and plates at the volume of up to 1.7 mln. metric tons per year. Twelve companies produce tubes, manufacturing up to 900.0 ths. metric tons per year, some 80.0% of which are small-diameter tubes.
Low domestic demand is believed to be the chief factor influencing development of the Philippine steel industry. Domestic demands mainly depend on the local construction sector and on large portion of cheap imports (especially in the past 18 months). High cost of electric power and large handling charges hamper development of the steel industry as well.
At the same time, the government plans that 2001 will see steel consumption at the 1996 level (i.e. 4.3 mln. metric tons), while in 2004 steel consumption will rise to 5.4 mln. metric tons. It is stipulated that growth in consumption will be backed by recovery in construction sector (up by 6.4% in 2001 and by 10.0% in 2004), because it is planned to annually construct up to 350.0 ths. residential apartments in the upcoming 5 years. Furthermore, the state program of infrastructure development, which will be backed with USD 4.0 bln. worth of financing per year, envisions additional allocations on pipelining.
At the moment, the Philippines is in strong dependence on semis imports; hence the country fosters the plans for billet and slab manufacturing. At the same time, even after upgrades of the available facilities, the Philippines will require at least 1.5 mln. metric tons of slabs and some 1.2 mln. metric tons of billets till 2004.
— Now let’s concentrate on Ukrainian problems. It is clear that Ukraine faces lots of difficulties in its integration to the world steel market. There is a constant threat of antidumping sanctions and quite a few people blame Ukraine for possessing excessive capacities. What is your vision of the problem?
— Let me venture a comparison: if we want to enter a house built by other people for their own purposes and governed by their laws, we cannot alter the rules. The WTO, OECD Steel Committee and all the other modern institutions were set up by developed countries for their own purposes, such as reconciliation and nowadays prevention of various disputes on the markets. If we really want to live in this house, we have to at least avoid bothering its dwellers, which means that we have to play by the existing rules. At a glance, it seems that representatives of the existing global steel distribution systems act extremely selfish in regard to Ukraine. However, they simply try to safeguard their stability and predictability of the market. It took them a long time to establish these two and now they have to apply tremendous efforts to maintain this stability and predictability.
Ukrainian steel manufacturers should not view advice of coordinating bodies, such as the OECD Steel Committee, as an authoritative command. Quite the contrary, this is a sign that foreign countries now have to take the mighty iron & steel industry of Ukraine for granted. Europe and other countries understand well that this powerful force can destabilize the market. To avoid this, foreigners try to propose the way for Ukraine’s integration to the existing establishments in global steel trade (naturally, the proposed way is a vision of the current market players).
It is also interesting that international experts consider Ukrainian capacities to be excessive. Well, it is true that our capacities are over-excessive for the global market because quite a few countries hardly utilize 60.0% of their own capacities. You will have to admit that Ukrainian iron and steel industry virtually functions for exports intruding its commodities into the existing sale channels, which is quite unhealthy. Ukrainian domestic demand can become the key cure to this situation. As the economy starts recovering (and we still believe that this will happen), Ukrainian steel exports will ease pressure on the global market. This should definitely become an advantage in relations of Ukrainian manufacturers with the other members of the global steel-trading club.
However, at present CIS-made metal products are being carefully watched after. Almost all the analyst companies track and find presence of these products in various regions worldwide. The developed countries, such as the USA and the EU, constantly take steps to restrict imports. The US antidumping measures against Russian-made hot-rolled steel in 1999 are a typical example. So far Ukraine has been overshadowed by Russian exports; however antidumping is our problem just as well. Low offer price causes the major suspicions, which means that clear price formation mechanism should help Ukrainians avoid antidumping inquiries.
Re-export of Ukrainian commodities is another problem that can potentially bring about antidumping persecution of Ukrainian steel producers. It seems that the problem takes root in uncoordinated activities of small exporters, which once had an opportunity to get into various barter and other transactions getting metal directly from manufacturers as debt settlement. Luckily enough, this process is about over because privatization in iron & steel industry nourishes larger exporting companies, which means that producers will have more control over their commodities. By the way, this agrees with advice of the OECD Steel Committee.
— What is Ukraine’s place on the Asian steel market? What prospects does Ukrainian-made metal have on the Asian markets?
— Ukrainian metal products are comparatively cheap and have rather high consumer properties, which is a nice pro on the Asian markets. Although it should be mentioned that cheapness partially originates from noncompliance of Ukrainian commodities with certain commodity standards, which are accepted in the developed countries, but are not crucial for metal-consuming sectors of the developing economies. The authoritative steel manufacturers, such as Japan, the EU or the USA, simply cannot offer their commodities at such low prices. Obviously, as long as the Asia-Pacific market has demands for such commodities, Russian and Ukrainian steel will find its consumer.
Despite the financial crisis and its aftermath in Asia, in 1997-1998 Ukrainian metal exports to this region stably exceeded some 5.0 mln. metric tons per year (exports amounted to more than 6.8 mln. metric tons in 1997). It is just that the importing countries sometimes revised purchase volumes of various commodity types. For instance, back in 1996 Thailand was the main business partner of Ukraine importing some 1.5 mln. metric tons of steel, whereas in 1998 Thailand-bound exports reduced almost fivefold. Simultaneously, Taiwan gained the leading positions and imported more than 1.0 mln. metric tons of Ukrainian steel in 1998. Ukraine also makes stable steel exports to the Philippines and Indonesia. The vast Chinese market remains tremendously attractive. In 1997-1999 Ukraine exported 3.7-4.2 mln. metric tons of steel to China.
It is a point of special interest that semis and bars make up more than 80% of the total metal exports from Ukraine to this region. The portion of semis exports to almost all the Southeast Asian states went up, which reflects the impact of the crisis on the pattern of local steel industry. However, it is pretty interesting that China, Taiwan, Malaysia and Singapore still remain stable consumers of Ukrainian-made HR sheets. For several coming years Southeast Asian states can still be capacious markets for scrap metal. Therefore, it is understandable why Ukrainian steel producers pay so much attention to problems of this region. We believe that the Asian steel market will long be a lucrative place for Ukrainian steel manufacturers. Besides, the leading foreign economists insist that the key integration processes will evolve precisely in Asia in the 21st century.
It is worth mentioning that in the future this market will no longer be a place for low-tech commodities as the national Asian standards advance to the international level. Construction of new mills (capable of producing commodities with much better quality) in selected Southeast Asian states will further aggravate the situation. Thus, if Ukrainian steel manufacturers want to hold out on the Asia-Pacific market, they will have to constantly monitor integration of Asian countries to the world trade. The Ukrainians will have to get ready by taking steps to enhance quality of traditional metal commodities and by offering new types of products. For example, the Taiwanese reconstruction after the earthquake demands a specific range of metal products. Of course, Ukrainian producers will have to focus on thorough lowering of costs to offer qualitative commodities at competitive prices.
— Well, this is quite a task! The situation in the Ukrainian economy and iron & steel industry proves that this will extremely difficult.
— There are no simple tasks in this area. However, I am optimistic about the future. A human being is inclined to hope for the better because a strong and healthy human simply cannot stay frustrated for long. It is about time to do actual things. By the way, what we have discussed today is a great example of desire to improve things. I am speaking about steps taken by executive authorities and business circles of Asia-Pacific countries, Japan and Korea to overcome the consequences of the past devastating crisis. Well, this process takes much more time in Ukraine, but all the signs indicate that the economy will start recovering soon. We have to stop trying to ‘survive’ and try to finally live a full life. The Ukrainian presidential elections further backed the political stability, while the latest market initiatives of the President and the government create new opportunities. There are definite reasons why public opinion polls (conducted in late 1999) revealed that more than 50% of the Ukrainians are positive that changes for the better will take place in the near future or at least believe that such changes are possible. The metallurgists themselves have to initiate these changes practicing a system approach to the situation in industry. The metallurgists have to keep in mind the globalization processes in the world economy and find Ukraine for a worthy place in the dynamic international environment. We are the only ones to do this for ourselves.
- the Metal