There is a widespread belief that many of the problems that have recently plagued the EU steel industry can be resolved, or at least alleviated, by increased market concentration. Aligned with this conviction, many analysts and industry executives have positively welcomed the recent merger of the European operations of Germany’s ThyssenKrupp and India’s Tata Steel. The thinking goes that concentrating EU steel production in the hands of a few large firms will lead to more closely aligned prices in the region, improve the efficiency of their EU plants, and ultimately help the entire sector navigate the troubled waters characterising the last decade.
A mature sector suffering from the rising prices of raw materials, fierce competition from international producers, and global overcapacity, mainly due to China’s extraordinary growth, the EU steel industry has been struggling through the doldrums in the recent past. Will increased market concentration help it solve the problems it faces? Will this really contribute to restore profitability and bring the whole sector fully back on its feet?
While economists and industry experts would likely tend towards a yes, we identify here two trends that may radically change the landscape of the entire EU steel sector and lead to a very different answer to this question.
Decades of empirical research has shown that market concentration is positively related to industry profitability. Economists have long debated why this occurs. On one side of the debate, the advocates of the market-power hypothesis have suggested that the positive profitability-concentration relationship is the result of collusion among the few large players that dominate a highly concentrated market. On the other side, the supporters of the efficiency hypothesis have argued that market concentration is the result of competition, as more efficient firms are able to gain a dominant position in the market and command higher profits.
Both arguments seem very relevant when applied to the EU steel industry and its much-awaited greater market concentration. Fewer players will have more power to align prices in the region, respond to new regulations, and manage complex relationships with external stakeholders, especially the unions. At the same time, a greater concentration will imply superior cost-efficiencies and enhanced synergies across plants for the few dominant players in the market.
Globally, the steel market volume has grown 41 per cent from 2005 to 2015, yet EBITDA (earnings before interest, taxes, depreciation and amortisation) margins have declined over 55 per cent in the same period. The EU is the second largest producer of steel in the world after China. Even though over 500 steel production sites exist, split between 23 EU member countries, the newly born Thyssen-Krupp Tata Steel and ArcelorMittal will be responsible for nearly 50 per cent of Europe’s steel output. Will further market concentration help the sector in the future? We argue that the following two trends may lead to a radically different answer from the one many would give nowadays.
First, artificial intelligence and machine learning may disrupt the steel industry in the upcoming future. While their role in manufacturing and operations is still relatively nascent, scientific experts are beginning to discuss the enormous opportunity to use these tools to fundamentally improve the efficiency and effectiveness of steel producers. Their application will be of interest not only for demand prediction and inventory management, but also for scheduling and production optimisation, predictive maintenance, and outbound transportation. This will allow producers to reach new highs in terms of cost-efficiency and effectiveness, especially those small but more flexible EU steel manufacturers that cannot rely on substantial scale and scope economies due to their relatively small-scale operations. As much as fintech companies are expected to disrupt the banking industry that has been long dominated by few very large players, technologically driven small and agile producers may have the same effect in the steel industry.
Second, the anti-globalisation sentiment may disrupt international steel trade in the near future. The heavy tariffs on steel imports recently introduced by Trump, even though EU countries are exempted for the moment, have given origin to an international trade fight that will likely turn into protectionist measures to safeguard local steel production across regions. With protectionist policies prevailing, we should expect localised steel production, even at the level of single EU countries, to become central again for national governments. Especially because steel is a strategically important sector that serves national defence projects that may need to be produced at home for security reasons. Thus, if this anti-globalisation sentiment persists, efficiency and market power considerations will likely become much less relevant. EU countries will have a strong incentive to secure a localised presence of steel producers within their national boundaries at the detriment of market concentration in the industry.
Will it pay to be large in the EU steel industry? The answer to this question may not be as straightforward as conventional wisdom suggests.
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Notes:
- The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
- Featured image credit: Photo by MichaelGaida, under a CC0 licence
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Niccolò Pisani is assistant professor of international management at the University of Amsterdam in the Netherlands. He holds a Ph.D. in management from IESE Business School. His research focuses on the international management domain and the topics of his scholarly enquiry range from global business strategy to international corporate social responsibility. His research has appeared in a variety of journals and business outlets. His work has also been published in leading European newspapers such as the Spanish El País and the Belgian L’Echo.
Emilio Riva is CEO and founder of Steel Hub in London, a consultancy that boasts a professional team of experienced steel industry engineers and technical experts. He holds an MBA from Bocconi University in Milan. Having served as member of the Executive Board of Riva Group, he is a steel industry leader with a remarkable track record of driving global success in reducing the cost of steel manufacturing and continuous casting processes using state-of-the-art modelling and optimisation techniques in steel plants around the world.
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The article is surely right to identify Artificial Intelligence as a potential disruptor. While smaller companies might find it difficult to gain sufficient scale to immediately disrupt major players, the increased application of Artificial Intelligence could lower the risk bar for the introduction of new high-end uses and refinements for steel, likewise for similar materials. By targeting the high-end high-margin sector, smaller and/or new entrants to the market could cause disruption far beyond what would seem likely from their modest size.
The capital concentration strategical option of Corus and *Arcelor, in the last 20 years, demonstrated to *europe steel industry leaders that the philoshopy of the *”European Comunnity of Cork and Steel” was past and not enough in a savage and not regulated Global World.
ArcelorMittal, in 2006, confirmed what really means the concept of “Steel Planet”. The Asian playeres, specially China (actually, biggest producer), have transformed the global commercial trading rules and europe steel leaders were not prepared for it (remember 2004 and **2008 golden years) – stackholders of Arcelor and EU politics proved it, in a polemic way, supporting Mittal not friendlly public *offer in “the steel continent”. But the company stills, today, bieng a finantial higher risk – continuing to *close mills in europe and investing in Worlds South side.
Te reborn of BRITISH STEEL brand in UK (private equity) was a sign that even TATA was not enough to stop the faillure of CORUS project (inicially, Hoogovens and British Steel). And returns the public discussion between global or regional business view.
TATA and THYSSEN, eventually, with this strategical business concept is doing somethyng similar like to ARCELORMITTAL (european and asean capital).
The steel industry has an eternal problem of rentability, since mills were public companies, that privatizations in europe and the M&A operations, in the end od 90’s, didn’t solve.
Electric Production is the future – with lower energy costs by new ecological sources – and the planet most friendlly option (100% reciclable) for a future sostained world.
Capital, nowadays, has no color or location and there is, certannly, no future human evolution without steel, as structural raw material, for sure.
Artificial intelegence is a real status for todays world industry and humanity living, of course, including the steel industry.
Comparing forces and the level of concentration in Auto Industry (main client) is critical, but nothing new for the sector. The same for logic for Cork or Scrapers M&A Operations and stage of negotional power.
Steel industry has to be disruptive in a new business concept. All of this strategical approaches, for me, are past error and more episodes from the same movie.
I’m steel waiting that ARCELOR (2002) slogan could be a world reallity: “Steel Slotions for a Better World”. If we remain thinking equally, for sure, the problem will be the same in 2038. But “I STEEL BELIEVE”. In a new view that will born from a “outside of the box” new leader.
This is, exactly, the oposite of US Trump new steel policy that is saying to the world (specially, EU as main export destination) that in 2018 they simplly don’t now how to produce steel with profit. I belive that President Trump is, in a tactical movement, just gaining time to understand how to produce steel with rentability, because the entire world and, first of all, WTO is on it. A real shame and economical scandle. Today. In 2018.
Congratullations for the researchers of this excelent article.
* AR+CE+LOR (Arbed + Aceralia + Usinor).
** until August 2008, the “subprime” crysis.
Thanks for sharing your thoughts. It will indeed be interesting to see who can find a route to long term profitability in the steel business.
Thank you for sharing the article. The Increased market concentration in the EU steel industry, exemplified by the ThyssenKrupp-Tata Steel merger, is expected to address challenges through aligned prices and improved efficiency. However, emerging trends like AI-driven disruptions and anti-globalization sentiments may redefine the sector’s dynamics, questioning the conventional wisdom on market dominance and profitability.