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Steel crisis reloaded? Situation and prospects for the German steel industry –
The German steel industry is currently in a difficult situation. Crude steel production is likely to have decreased by around 5% in 2019, after a decrease of 2% in the previous year (see Figure 1). In addition, the overcapacities in many countries and the US import restrictions are putting pressure on steel prices. This worsened the profit situation of steel companies, especially since iron ore had risen sharply in mid-2019. Given this background, it is not surprising that many German steel companies have announced job cuts.
It is not unexpected that the steel industry is struggling with signs of crisis or perhaps even finds itself in a crisis again and again. This is due to two peculiarities of the steel market: Firstly, in advanced economies, per capita steel consumption decreases with increasing income.1 The causes include the shift in overall economic demand in favor of less steel-intensive services, but also the more efficient use of steel. Second, there are economic and political obstacles to adapting generation capacities to falling demand. In economic terms, the high capital intensity of steel production plays a major role, which leads to high sunk costs. This creates the incentive to use systems for as long as possible and to keep their utilization high. In the short term, companies even accept prices that do not cover fixed costs. Politically, the high spatial concentration of jobs in steelworks is a problem, especially since these are often located in old industrial, structurally weak regions. Since several thousand jobs could be at stake if a steel mill closes, politicians will do everything in their power to preserve these jobs
These mechanisms are effective worldwide. One consequence is excess capacities that persist. This is not contradicted by the fact that the utilization of global generation capacities has increased again in recent years, to around 82% in 2019 (see Figure 2). This is because this almost exclusively reflects increasing capacity utilization in China. Capacities there had been shut down since 2015, so that if demand for steel remained lively, capacity utilization reached around 90% in 2018. The strong increase in production so far in 2019 was probably only possible because new, modern steelworks started production.3 Outside of China, capacity utilization was only 73% in 2018, and it is likely to have fallen in 2019.
Crude steel production in Germany
1 Three-month moving averages in%.
Source: own calculations based on information from the Steel Federation; November and December 2019 estimated.
Utilization of the production capacities for crude steel worldwide
1 Three-month moving averages in%.
Sources: own calculations based on information from the Federal Statistical Office; November and December 2019 estimated.
If the steel industry is under pressure, from a national perspective steel imports are the most rapidly influencing factor. There is therefore a high level of willingness to use trade policy measures to bring relief to the national steel industry, especially since hardly any country is “innocent” in terms of trade policy and unfair trade practices are therefore a cheap argument. Actions by a country usually trigger a protectionism spiral. This is shown by the fact that 20% of the anti-dumping measures in force recorded by the World Trade Organization (WTO) and 22% of the defensive tariffs concern iron and steel, and a further 14% and 25% respectively concern steel products. In comparison, the share of iron and steel in the international exchange of goods is only around 2½%. Trade practices are therefore an accompaniment and symptom of the structural problems mentioned, but they are not - as politicians and stakeholders like to suggest - the core of the problem.
The German economy is steel-intensive
These general conditions also apply to Germany. Nevertheless, the steel industry in this country is in a special situation. Because the German economy is extraordinarily steel-intensive compared to many advanced economies. Its key sectors are the automotive, mechanical and electrical engineering industries - all of which are major users of steel. The relative strength of the German steel industry results from their competitive strength. Because their production is tailored to the needs of these sectors and integrated into the innovation systems of the users
The result is that so-called visible steel consumption is high in Germany. According to Worldsteel calculations, it was 499 kg per capita in 2017; in Italy - which of the large European countries comes closest to the German situation - it was 415 kg, in the USA 301 kg, in France 227 kg and in Great Britain only 163 kg.5 The main cause of the differences is foreign trade in products containing steel . This becomes clear when one compares the visible with the “real” steel consumption. Worldsteel calculates this by adding the visible consumption to the goods exported, e.g. B. in cars or machines, contained steel is reduced and increased by the steel contained in the imports. Due to the export surplus for steel-intensive products, the “real” steel consumption in Germany and Italy was below the “visible” at 358 kg and 325 kg per capita, respectively. The other countries mentioned are net importers of processed steel. The real steel consumption was therefore well above the visible: it was 294 kg in France, 254 kg in Great Britain and 376 kg in the USA.
Production of steel users in Germany
Sources: own calculations based on data from the OECD and the World Steel Association; 2019: own estimate.
What has so far been part of the (relative) success story of the German steel industry - its close connection with sectors that are successful on the world market - could increasingly prove to be its problem. The production of the German steel users had increased in trend for a long time and compensated for the influence of the falling specific steel consumption due to technical progress and competition from other materials. But now the production of steel users has been declining since mid-2018. In 2019, the decline is likely to have been 5% (see Figure 3). The situation for industrial steel users is even more unfavorable, while robust construction production is stabilizing demand.
Automotive industry important for Germany as a steel location
It is difficult to assess to what extent this is a cyclical phenomenon or whether the beginning of a structural change towards a less steel-intensive economy is indicated. The automotive industry, which accounts for around a quarter of German steel requirements, is likely to play a key role. In the summer of 2018, in connection with the introduction of the new WLTP consumption and emissions test, production and new car registrations in Germany collapsed. In contrast to the new registrations, production has not recovered from this. The reasons for this are, on the one hand, a significant decline in exports and, on the other hand, increasing registrations of German-made vehicles produced abroad.
The automotive industry is in a process of transformation. With the transition to e-mobility, the technical requirements for the product change and, as a result, the supply relationships of the industry. Electrically powered vehicles are technically less complex and therefore less dependent on the value chains that are well established in Germany. In addition, the battery is the most important cost factor, i.e. a component that is usually not produced in Germany and for which there are currently no location advantages in this country. The probability is therefore high that electrically powered vehicles intended for foreign sales will in future be produced less in Germany and more “closer to the customer”, especially since those intended for Asia, as the majority of batteries are produced there.
If this is translated into steel consumption, Germany's “visible” steel consumption could approach the lower “real” consumption in the coming years. The real problem for the future of Germany as a steel location is therefore not the import competition, but the threatened migration of important customers. This would weaken the previously well-functioning network of steel producers and users. What this can mean has already become apparent in recent years in countries such as Great Britain and France. The important steel users gradually disappeared there, and crude steel production in 2018 was a good 50% or 25% below that of 2000; in Germany the decline in the same period was just 8.5%.
New technologies in steel production
The steel industry is not only faced with adjustments on the demand side, but major technical changes in steel production are also emerging. The steel industry is one of the largest CO2 emitters in Germany. According to the European Environment Agency, it emitted 38 million t of CO2 in 2017, which is almost 30% of industrial emissions.6 Although emissions have already been reduced considerably, this will reach technical limits as long as the majority of the steel is made using coke as a reducing agent is produced. A greater reduction in CO2 emissions requires modified production processes. Direct reduction with natural gas is an alternative, and reduction with the aid of hydrogen is currently being researched and used in pilot plants. This technology has the greatest potential in terms of CO2 reduction, but there is currently a lack of competitive technologies for the production of “green” hydrogen, as well as a transport and storage infrastructure.7 Whichever technology prevails: The changeover changes the site conditions the steel industry and requires considerable investments, which will be accompanied by adjustments in capacities and employment.
Steel industry facing major adjustments
To speak of a steel crisis is probably premature. However, the steel industry is likely to face major adjustments. The question is how to deal with it. “Developing solutions to the problems of our steel industry” was the aim of the 1st National Steel Summit on October 22, 2018 in Saarbrücken.8 The “guard rails” adopted there address three fields of action: energy and climate protection costs (four of the seven guard rails) fair competition (two guard rails) and the qualification of employees. It does not address how to deal with a decreasing demand for steel. The steel summit admitted that the problem of overcapacities must be solved globally. However, there are no indications of a German contribution.
However, the participants at the steel summit can be granted that the utilization of German capacities with values of around 85% has so far been high in an international comparison. In 2019, however, capacity utilization is likely to have fallen below 77%, and there are some indications that demand for steel will not return to previous levels. If this happens, capacity adjustments in this country are inevitable.
- 1 R. Döhrn, K. Krätschell: Long-term Trends in Steel Consumption, in: Mineral Economics, 27th year (2014), no. 1, pp. 43-49.
- 2 For more details, see R. Döhrn: Capacity adjustments in the European steel industry: Inevitable, but difficult to achieve, in: Ifo Schnelldienst, 71st year (2018), no. 2, pp. 3-13.
- 3 According to a compilation by the OECD, four new steelworks with a total capacity of around 34 million t are expected to go into operation in the course of 2019. See OECD: Latest Developments in Steel Making Capacity, Paris 2019, pp. 11-12.
- 4 R. Döhrn, R. Janßen-Timmen: The economic importance of a basic industry using the example of the steel industry, RWI project reports, Essen 2012.
- 5 World Steel Association: Steel Statistical Yearbook 2019, Brussels 2019.
- 6 Corresponding data under European Environmental Agency, EIONET Central Data Repository, https://cdr.eionet.europa.eu/ (10.1.2020).
- 7 The Federal Government has now launched a “National Hydrogen Strategy”. See Federal Government: Hydrogen and Energiewende, Berlin 2019, https://www.bmbf.de/files/Kurzpapier%20Wasserstoff.pdf (12.12.2019).
- 8 Saarland - Ministry for Economic Affairs, Labor, Energy and Transport: Guard rails of the steel states of the Federal Republic of Germany for the 1st National Steel Summit, Saarbrücken 2018.
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