1、Materials PracticeThe resilience of steel:Navigating the crossroads The steel industrys outlook for the next ten years remains fragile.Company leaders can adopt a strategic approach to ride out uncertainties and mitigate risk while the industry is being reshaped.April 2023This article is a collabora

2、tive effort by Artem Baroyan,Oleksandr Kravchenko,Carolina Prates,Steven Vercammen,and Benedikt Zeumer,representing views from McKinseys Materials Practice.Vladimir Zapletin/Getty ImagesThe resilience of steel:Navigating the crossroadsDespite unprecedented volatility,the first half of 2022 remained

3、strong for steel players,with prices and utilization higher than historical levels and unprecedented levels of EBITDA margins across most regions.This cycle was driven mainly by positive demand outlook that followed the recovery from disruptions caused by COVID-19,as well as infrastructure spending

4、that was both long overdue and anticipated as part of the recovery stimulus.However,several signs of market slowdown began to appear in early 2022.As a result,steel demand outlooks have been revised downward:in April 2022,the World Steel Associations short-range outlook was less optimistic than the

5、one from late 2021,and its October 2022 demand forecasts for 2022 and 2023 saw downward revisions of 2.7 and 1.2 percent,respectively.1 Reasons for this include the ongoing war in Ukraine,waves of COVID-19-related lockdowns in China,and supply chain disruptions,as well as the overall macroeconomic s

6、ituation,including repercussions from persistently high inflation and rising global interest rates.In steel markets,EBITDA margins and the margin over raw materials(MORM)have significantly declined from previously unseen highs,mainly due to negative market expectations and high energy prices,and pla

7、yers have reacted by idling capacities.In fact,more than 30 million metric tons per annum(MTPA)of capacities have idled in Europe in the second half of 2022,while approximately half of those capacities have been brought back online in 2023 when margins slightly recovered.As the steel industry contin

8、ues to progress into 2023,we expect this level of volatility to be sustained across the entire value chain.In response,this article lays out four strategies that can help steel players navigate the years to come:preparing for the decoupling of steel markets,strengthening the raw-material supply chai

9、n,focusing on capital expenditures and the balance sheet,and doubling down on technological agility.The steel value chain:A market deep diveAlthough prices reached record highs in 2021,Russias invasion of Ukraine created supply chain disruptions and uncertainties that caused them to spike further(Ex

10、hibit 1).For most commodities,such as metallurgical coal,iron ore,and pig iron,the market has stabilized since then as demand has slowed,especially in China.The strong rebound from effects of COVID-19 has driven record EBITDA margins in Europe and the United States since 2021,largely fueled by stimu

11、lus For most commodities,such as metallurgical coal,iron ore,and pig iron,the market has stabilized as demand has slowed,especially in China.21“Worldsteel short range outlook April 2022,”Worldsteel,April 14,2022;“Worldsteel short range outlook October 2022,”Worldsteel,October 19,2022.The resilience

12、of steel:Navigating the crossroads3Exhibit 1Prices until Jan 31,2023,$/metric tonMetallurgical(met)coalAustralia HCC1 FOB2Iron oreChina CFR,3 62%FeBF4 pellet premiumBrazil FOBPig ironBlack Sea FOBDR5 pellet premiumAtlantic Basin1Hard coking coal.2Free on board.3Cost and freight.4Blast furnace.5Direc

13、t-reduced.6Heavy melting scrap 1 and 2.Source:FastmarketsThe steel value chain has recently experienced a period of high volatility.McKinsey&Company02040608010020102014201820220201020142018202250100150200250120HMS 1 and 26Domestic7008000204060801002010201420182022010020030040050060020102014201820220

14、200400600201020142018202210002010201420182022200300400500600700Invasion of Ukraine1683656739431410647Long-term averageChinaEuropeUS202122 time frame The resilience of steel:Navigating the crossroadspackages from around the world.During the initial waves of COVID-19 lockdowns in 2020,steel stocks and

15、 supply chains were emptied and production capacities idled;when demand later rebounded,supply couldnt keep up,which pushed prices higher.Meanwhile,structurally lower margins in China were driven by the countrys more competitive and regulated market and were affected by renewed COVID-19 outbreaks in

16、 2022.The outlook remains fragile over the longer term,with downside risks for margins amid a cooling global economy.Although steel players were largely able to maintain healthy utilization levels during this time,the following warning signs have emerged,particularly in Europe:Slowing demand.The thi

17、rd and fourth quarters of 2022 saw a substantial decline in steel demand,which more than offset the positive dynamics of the first half of the year.The latest outlooks on 2023 demand remain negative.Declining profitability and MORM.In addition to slowing demand,higher energy prices are creating pres

18、sure on margins,with natural-gas and electricity prices in particular reaching record highs.Since the heights of 2021 and the first half of 2022,EBITDA and MORM have declined,primarily due to the industry slowdown and energy prices.They are currently back to long-term average levels.Dropping utiliza

19、tion.More than 30 MTPA of steelmaking capacity idled in Europe in the second half of 2022 in reaction to the decrease in steel demand and in an attempt to stop prices from falling further.(With a slight price recovery in 2023,some of these capacities have been restarted,as steel players are becoming

20、 increasingly flexible in managing their capacity utilization.)Long-term implications of the steel value chainOver the next ten years,three key trends could shape the steel industry.First,forecasts show an unevenly distributed slowdown in global steel demand across regions and industries.The“normali

21、zation”of demand in Chinawhich would effectively end decades-long rapid growthcould be partially offset by growth in Southeast Asia and India,and slowdown in construction could be offset by growth in energy and transportation,leading to regional overcapacities and imbalances.Second,decarbonization i

22、s expected to ramp up at varying paces across regions.Finally,economies will likely continue to experience supply chain disruptions,including those resulting from COVID-19 outbreaks,the low-cost-gas shortage,and the continuing war in Ukraine and sanctions on Russia.Responding to these trends will li

23、kely require steelmakers to make bold long-term decisions amid uncertainty and volatility and to coordinate with suppliers,financing institutions,vendors,and governments.With this in mind,the aforementioned key trends could have significant implications for the steel value chain.Markets are decoupli

24、ng,and international trade is becoming increasingly important Moderate overcapacity will likely persist on a global level,but substantial shifts in some regions could affect trade flows.China will likely see an increased overcapacity due to a substantial decrease in demand over the coming decade,whi

25、ch could result in increased exports competing with local production in developing Asia and the Middle East and North Africa(MENA).In the former Soviet Union,there are two effects:first,a portion of capacities in Ukraine have been damaged;second,Russia will likely experience a drop in steel demand i

26、n both local and foreign markets,mostly due to sanctions.Green-steel demand growth will likely outpace supply.Moreover,a portion of supply could come from regions with low-cost energy,such as MENA,creating an additional trade flow to key green-steel-consuming regions,such as the European Union.4The

27、resilience of steel:Navigating the crossroadsThe massive energy requirements for green ironmaking could swing the location of new capacities toward regions with lower energy costs,such as Brazil,MENA,and Spain.At the same time,local-employment preservation in Europe,longer distance to customers,long

28、 lead times,and geopolitical complications are sample factors that could negatively affect perspectives of Brazil or the Gulf States as potential green-steel suppliers for the European market.As new capacities are built,some separation of ironmaking and steelmaking will likely occur,changing the ste

29、el industrys geographical footprint.In general,there has been a tightening of global trade over the past decade.After a spike in 2018 due to the United States introduction of Section 232 and other countries subsequent retaliatory measures,the number of trade restrictions related to steel imports con

30、tinued to grow slowly but steadily.In the future,however,because of overcapacity and different paces of decarbonization,even more protective measures,such as the Carbon Border Adjustment Mechanism(CBAM),are expected.Margins are moving toward pockets of growth and areas of scarcityAlthough demand gro

31、wth is expected to slow down or stagnate in some regions,particularly due to the decline in major industries and sectors such as construction,pockets of growth may still develop,driven mainly by the energy and transportation sectors.Similarly,amid even slower growth,there will likely be“areas of sca

32、rcity”in product groups with constrained supply,such as high-performance steels,electrical steel,and wide plates for wind towers.Significant growth in renewable-energy projects is expected in Europe,particularly following the natural-gas shortage.In the United States,higher investment in so-called g

33、reen projects is expected following the Inflation Reduction Act,which was signed in August 2022.This could positively affect steel demand in areas related to the energy transition,with a demand for finished steel of approximately 40 metric tons per megawatt(MW)for solar and approximately 150 metric

34、tons per MW for wind(for example,plates for wind turbine towers).New business models and mobility shifts are also likely to keep propelling the growth in the transportation industry.Meanwhile,global demand for low-CO steel is expected to grow tenfold over the next decade from approximately 15 millio

35、n metric tons in 2021 to more than 200 million metric tons by 2030,representing more than 10 percent of total steel demand in 2030.It will then further grow to approximately 25 percent of total demand in 2040.With these points in mind,total green premiums could reach$200 to$350 per metric ton by 202

36、5 and$300 to$500 per metric ton from 2025 to 2030.Although demand growth is expected to slow down or stagnate in some regions,pockets of growth may still develop,driven mainly by the energy and transportation sectors.52 For more on green steel,see“Safeguarding green steel in Europe:Facing the natura

37、l-gas challenge,”McKinsey,June 21,2022.3 For more on CBAM,see“Carbon Border Adjustment Mechanism:Questions and answers,”European Commission,July 14,2021.4 For more on green premiums,see Marcelo Azevedo,Anna Moore,Caroline Van den Heuvel,and Michel Van Hoey,“Capturing the green-premium value from sus

38、tainable materials,”McKinsey,October 28,2022.The resilience of steel:Navigating the crossroadsThe deficit for high-quality metallics is tightening Decarbonization will likely affect the iron metallics mix(Exhibit 2).For example,the growing supply of direct-reduced iron(DRI)and obsolete scrap will su

39、bstitute for carbon-intensive hot metal or pig iron from blast furnaces.In addition to higher end-of-life volumes,obsolete-scrap supply growth will be driven by higher prices(elastic collection rates).DRI supply will be driven by announced decarbonization projects,especially in Europe,where some of

40、the producers will rely on premelter technology due to low availability of high-quality raw materials.That said,the energy crisis in Europe,as well as availability of capital expenditure financing and the tightness of the vendor market,could delay current decarbonization plans in the short to midter

41、m.Moving forward,demand for high-quality ore-based metallics(OBM)also known as scrap supplementsas well as prime scrap is expected to increase due to decarbonization targets of steel players,leading to high premiums.On this point,6Exhibit 2Web Exhibit of Global metallics mix forecast,metric tonsCAGR

42、,%202231Note:Figures may not sum,because of rounding1Direct-reduced iron.2Per annum.Source:McKinsey Basic Materials Insights;McKinsey analysisDecarbonization will cause shifts in the metallics mix,with major increases expected in scrap and direct-reduced iron.McKinsey&Company1,790201525993762021,160

43、2,0762019358961112301,2812,0752020309871062351,3392,1542021353911192401,3512,0972022E371871222431,2742,1672026F459911552501,2122,236+4.0+3.8%p.a.2+0.3%p.a.2+0.7%p.a.2+0.9+0.9+6.01.22031F534942072621,139Hot metalDRI1Home scrapPrompt scrapObsolete scrapThe resilience of steel:Navigating the crossroads

44、scrap is expected to become a more regionalized commodity,which could affect net import markets in the long term,particularly those of India,Southeast Asia,or Trkiye.As a result,steel players could lock in supply through joint ventures or vertical integration with scrap recyclers.In fact,there was a

45、 wave of such integrations in late 202122 in Europe and North America.Global DR-grade iron ore demand is expected to be at a deficit of more than 100 MTPA by 2031,sustaining high premiums.Another emerging issue is the lack of existing high-quality-pellet capacity to meet this future demand worldwide

46、.This means steel players will probably announce premelter capacities coupled with existing basic oxygen furnaces(BOFs)to enable the use of lower-quality pellets for direct reduction without significant subsequent cost and productivity penalties,reducing demand for DR-grade material and locking in s

47、upply through joint ventures or vertical integration with iron ore producers.Capital expenditure efficiency is increasingly importantEven with only the projects already announced and without potential overruns,estimated capital expenditure needs are already almost twice as high as usual(Exhibit 3).A

48、lthough not all steelmakers have announced investments in electrolyzers or renewable-energy sources,they will likely become exclusive offtakers.Therefore,such capital expenditures,even if borne by others,can be counted toward the total debt of steelmakers,increasing their leverage ratio.Increased le

49、verage during a time of rising interest rates might pose another challenge.For steelmakers to finance such ambitious capital expenditure programs,a systemic increase in profitability(such as through green premiums)or government support could be required.Additionally,OEMs who manufacture shaft DRI or

50、 hot-briquetted-iron(HBI)equipment could become a potential bottleneck in scaling green steel over 7Exhibit 3Web Exhibit of Capital expenditures for six large public steel companies,1$billion1ArcelorMittal,Salzgitter AG,SSAB,Tata Steel,ThyssenKrupp,and U.S.Steel.2Direct-reduced iron and hot-briquett

51、ed iron.3Electric-arc furnace and submerged-arc furnace.4Renewable-energy sources.5Actual total capital expenditures.For Salzgitter,total group capital expenditures are included,which is higher than the capital expenditures of the steel business only;for ThyssenKrupp,the value is 44%of the total(Thy

52、ssenKrupp Steel Europe share in 202021).6The following capital expenditure assumptions are being made:maintenance=$25/metric ton(t);DRI/HBI=$300/t;EAF/SAF=$300/t;electrolyzer=$1000/kW.RES ensures 90%electrolyzer capacity utilization:$3000/kW of electrolyzer capacity(a mix of wind,solar,and battery).

53、Companies have announced increased capital expenditures,mainly driven by decarbonization plans.McKinsey&Company201421554+94%1042914119412023306MaintenanceDRI and HBI2EAF and SAF3HydrogenRES4The resilience of steel:Navigating the crossroadsthe next ten years.In fact,the pipeline of projects already a

54、nnounced will require about two times more projects commissioned in the coming years than the construction pace achieved earlier.Energy-related capabilities are becoming increasingly importantProduction of green steel will require significantly more power.In ironmaking,reductants such as coke,coal,a

55、nd natural gas will likely be replaced by hydrogen(H2),which requires significant amounts of power to produce using electrolysis.In steelmaking,BOFs will either be replaced by electric-arc furnaces(EAF)or accompanied by premelters,also leading to higher electricity consumption.As a result,production

56、 of one metric ton of green steel using the H2-based DRI and EAF route will require more than 3.0 megawatt hours(MWh)of renewable power,while production of one metric ton of steel using a fully integrated blast furnacebasic oxygen furnace(BF-BOF)route currently requires about 0.1 MWh.Navigating the

57、years to comeTo successfully navigate the industrys current circumstances,steel companies can plan ahead along the following dimensions.1.Update the strategy in the context of markets decouplingAs countries double down on barriers to protect the domestic steel industry from external overcapacities a

58、nd slower pace of decarbonization(such as through the CBAM in the European Union5)or to provide subsidies to spur green projects(such as through the Inflation Reduction Act in the United States),friction in global trade flows is expected to increase even more,and markets may become increasingly deco

59、upled.Companies should therefore prepare for a less globalized world by strengthening their supply chains and derisking the geographical aspects of their sales portfolios.Trade measures such as import tariffs or quotas and changes in demand and customer expectations might affect certain sales market

60、s and(more specifically)product and geography niches,and company leaders can strategize accordingly.For example,the products mix can be upgraded to capture new nichesparticularly in energy and transportation.One example is H2 Green Steel,a new entrant that targeted green steel for the automotive ind

61、ustry,which is expected to be a deficit market with substantial green premiums available for first movers.Other players that havent fully decarbonized are being more creative to capture green premiums and market share by introducing mass-balance green-steel certificates.It is fundamental for compani

62、es to plan their decarbonization paths by considering different scenarios and potential risks as well as how to mitigate them.In highly uncertain times such as these,in which decarbonization technologies are still not fully feasible and the world is trending toward a global recession,companies shoul

63、d carefully consider the technological path for decarbonization.They should also consider potential partners,such as technology and raw-material suppliers and finance providers,and the pace of investment and implementation.On this point,the technological path and pace for decarbonization can be opti

64、mized.One example would be a selection of steelmaking technology to convert DRI into steel.Although most announcements made about new capacities in Europe have EAFs as steelmaking vessels,some players have opted for a premelter furnace combined with existing BOFs.This latter technology selection is

65、potentially more suitable for using DRI made with lower-than-DR-grade pellets,and because a deficit of DR-grade pellets is likely,there could be more premelter-BOF announcements going forward.It is important to note that there is not yet a technology that would be a“silver bullet”when solving for de

66、carbonization amid limited availability of high-quality scrap and iron ore.Therefore,we will likely see a mix of technologies,including carbon 5 For more,see“Carbon border adjustments,”Center for Climate and Energy Solutions,accessed February 21,2023.8The resilience of steel:Navigating the crossroad

67、scapture and storage,those aimed at reducing lower-quality iron ores,and,potentially,electrolysis.In these circumstances,careful consideration of strategic choicesand timingis key.An additional aspect of decarbonization is the growing dependence of steelmakers on the energy sector.Steelmakers may fa

68、ce a lack of capabilities and knowledge needed to successfully navigate this domain while rethinking their strategy.Cost-competitive supplies of low-carbon power and H2(and,temporarily,natural gas)are becoming increasingly important for steelmakers long-term success,and regions with structurally che

69、ap energysuch as Australia,Brazil,and MENAmay become growing hubs for production and supply of green metallics and,potentially,steel.2.Strengthen the raw-material supply chain to secure the supply of metallics in the short and long termThe supply of high-quality iron ore and metallics is expected to

70、 be tight over the next decade.Its important,then,for steel players to limit the risk of a shortage of raw materials and of any price volatility that could negatively affect their production and profitability by securing supply through long-term partnerships or upstream integration.For example,Vale

71、is building partnerships with several steelmakers to provide them with low-carbon metallics through the use of biochar in blast furnaces,the codevelopment of other low-carbon solutions,and the supply of higher-quality iron ore.Steelmakers in Europe and North America are also acquiring scrap processo

72、rs to secure supply.For instance,SDI recently acquired five scrap-processing centers in Mexico,while ArcelorMittal acquired several scrap processing companies across Europe in 2022.Value chain relationships of a different nature also occur:Salzgitter and rsted entered a partnership in which Salzgitt

73、er will supply green steel for rsteds wind farms.In turn,rsted will supply green power and hydrogen to Salzgitter to enable the production of that green steel and will also send end-of-life scrap back to Salzgitter for recycling.More partnerships like these are likely to close the critical-material

74、loop.3.Improve capital expenditure management and optimize the balance sheetThe cornerstone of decarbonizing the steel industry and supporting the energy transition is capital projects at a massive scale.To address the demand for zero-carbon energy,the pace of building out new wind-and solar-power p

75、lants(and a related grid)will need to be unprecedented during the next couple of decades,and the capacity of electrolyzers will need to increase by several orders of magnitude from todays level.This will result in energy infrastructure investments growing globally at 5.9 percent per annum in real te

76、rms by 2030(compared with The cornerstone of decarbonizing the steel industry and supporting the energy transition is capital projects at a massive scale.9The resilience of steel:Navigating the crossroadsstagnant spending from 2010 to 2021).In addition,a record number of DRI modules will need to be

77、built during the next decade(Exhibit 4).The sheer scale of these projectsas evidenced by announcements of increased capital expenditures,coupled with a relatively tight and shallow vendor or OEM market and demand stress put on some of the critical components,such as permanent magnets for wind turbin

78、es(among others)could lead to schedule delays and budget overruns.Therefore,the strength of capital expenditure functions(working hand in hand with procurement and finance)will become critical for steel players undertaking large capital investments.Exhibit 4Web Exhibit of Total number of shaft DRI1

79、and HBI2 projects by year of beginning operations 1Direct-reduced iron.2Hot-briquetted iron.3More announcements are likely to follow.Source:Fastmarkets Announced capital expenditure programs could be challenged by tight vendor and OEM markets.McKinsey&Company19717528571013215181524312197680198185198

80、6901991951996200020010520061020111520162020212520263032031353159OperationalAnnounced10The resilience of steel:Navigating the crossroadsBy investing in operational flexibility to adjust the production process for a changing raw-material mix,companies can also increase their resilience in the face of

81、supply disruptions.Effectively managing capacity in response to market dynamics is beneficial because it allows companies to keep costs under control,while improved operational flexibility keeps operations running when disruptions occur or when volatility affects raw-material prices disproportionate

82、ly.The steel industry is at a crossroads,and the warning signs should not be ignored.Amid many competing sources of change and uncertainty,adopting the right strategy in the years to comeand knowing how and when to recognize the opportunities for resiliencewill differentiate the leaders from the lag

83、gards.With these points in mind,steel companies can work to secure critical vendor capacity early in the process.They can determine how much“cushion”is needed in terms of project schedule and budget,maintain flexibility on the financing side,and mitigate or transfer delay and overspend risks(for exa

84、mple,to engineering,procurement,and construction contractors).Access to funding will also be critical to transition to the new sustainable business model at scale and pace.Public funds will likely play an important role in financing this transition.4.Double down on technological agility to adjust fo

85、r more resilient operations One key insight that steel players have gained since the outbreak of COVID-19 is the ability to shut down and restart ironmaking and steelmaking capacity in response to uncertainty and declining demand.In doing so,many were able to avoid significant price drops,thus maint

86、aining healthy levels of profitability.Copyright 2023 McKinsey&Company.All rights reserved.Artem Baroyan is a consultant in McKinseys Amsterdam office,Oleksandr Kravchenko is a partner in the Kyiv office,Carolina Prates is a consultant in the So Paulo office,Steven Vercammen is a senior expert in the Brussels office,and Benedikt Zeumer is a partner in the Dsseldorf office.The authors wish to thank Frank Bekaert,Karel Eloot,and Michel van Hoey for their contributions to this article.11Scan Download PersonalizeFind more content like this on the McKinsey Insights App