Ernst &Young: Better times on horizon for steelmakers

According to a new Ernst & Young report, Global steel: A new world, a new strategy, steelmakers will need to focus on restoring and maintaining value to survive 2013 and position for growth in the future.

Mike Elliott, Ernst & Young’s Global Mining & Metals Leader, says steelmakers will need to focus on strategic cost reductions and assess optimal capital structure. The report also questions the assumption that vertical integration in the sector adds value.

“The big challenge for steelmakers in 2013 is how to be cost competitive while maintaining enterprise value,” Elliott says.

In recent years, many steelmakers have integrated raw material mines into their supply chains, believing they would protect value by removing volatility in the cost of raw materials. However new Ernst & Young analysis suggests that it may not always improve enterprise value.

“The conventional wisdom is that overall enterprise value is improved with a vertically integrated business, but our analysis shows this isn’t necessarily the case for every business,” says Elliott.

“Steelmakers should critically assess the value of vertical integration to their business and whether separation is more valuable. They should consider alternatives to managing raw material costs and supply.”

Weak market conditions means cost-reduction is essential for steelmakers’ sustainability and future growth.

Measures being taken by steelmakers to reduce cash operating costs include: reducing production volumes from loss-making plants to stabilize steel prices and address oversupply in the market; restructuring labor, and; cancelling or reducing supply contracts.