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Steel glut could take 'a generation' to fix, industry chief says

FRANKFURT, Germany -- Up to 35% of global steelmaking capacity is superfluous, the head of the World Steel Association noted in a recent interview. The sector is so entwined with politics, however, that it could take many years to solve the problem. 

Wolfgang Eder, who doubles as CEO of Austrian steel group Voestalpine, spoke out strongly against state intervention and stressed the need to "look behind the curtain" of industry consolidation to see whether mergers are spurring real structural change.

Q: Chinese state-owned steelmakers have been blamed for the global glut. How should this problem be solved? 

A: In order to reduce this pressure and find a more balanced situation between supply and demand, it will be necessary to cut capacity and production. Thirty to 35% of global steelmaking capacity can be considered as overcapacity. Because of the proximity to politics, it is, however, extremely difficult to implement any restructuring, as politics -- strongly supported by unions -- is never in favor of any reduction of workforce. 

This is the key problem we are facing globally at the moment in the steel industry. Everybody knows that significant downsizing is unavoidable and it simply has to be done. We are still only at the beginning of this struggle between restructuring needs and political interests. A real solution to these problems will take many years. In my opinion, due to the dimensions of the problems, it's a question of a generation rather than just a few years.

World Steel Association Chairman Wolfgang Eder

In the long run, it doesn't help to subsidize the industry, thereby keeping outdated operations running. A 50- or 100-year-old steel plant is not competitive compared to a modern one just because it is state-supported. When I look back at how the situation developed in Europe in the 1980s, when the steel industry was still heavily subsidized in every country, there was a point at some time when the states simply couldn't afford the enormous amounts of subsidies any longer. Several parts of the world might see a similar situation coming up right now.

Subsequently, the EU [forbids] any price subsidies for the steel industry, thereby driving the recovery in the 1990s. Today, there are some countries trying to change the European position again by allowing subsidies. I think this is a completely wrong way to go -- [it] does not solve but on the contrary will further increase the problems.

Q: Two major Chinese steelmakers, Baosteel and Wuhan Iron and Steel, recently announced restructuring talks that could lead to a merger. Is this a good sign for your industry?

A: In my function as chairman of World Steel, I am not in the position to make any specific comments on Chinese or other companies. But in general, I think it is very likely that we will see consolidation, meaning more mergers or takeovers in China -- and not only there. The question is whether this really helps to improve the situation of the steel industry. Does this really mean that we will see less capacity in the future? Or is it just what we saw in Europe since 2000 -- a legal consolidation?

What's decisive is: Is there only a legal merger or takeover process going on, or are there real structural changes taking place as well? Are capacities taken out of operations? Are plants closed? Have the cost positions of merged entities improved? Do they have advantages in terms of quality levels, of logistics or technology? One has to look behind the curtain. I think it has not yet been published what the structural intentions of Wuhan and Baosteel are.

A further question in China is: To what extent is the industry subsidized? Real and/or presumed subsidies are a core reason for the anti-dumping cases we have seen in many countries recently. It seems that Europe -- which has been lagging behind most other regions in the world -- is now catching up in that respect. I would really appreciate it if we had more cost transparency in the steel industry throughout the world, according to WTO standards. If it were evident that companies are doing well without subsidies, just by having a better cost structure than others, we wouldn't need to argue about penalties.

Q: Under the circumstances, should the EU treat China as a "market economy state"?

A: This is a big issue, not only with regard to China, but China being the most prominent example. I think any country or region must be interested in avoiding any doubts about fair behavior according to international standards, as this is the basis -- the basic prerequisite -- of global business. Otherwise, it will not work.

Q: What is your take on the U.K.'s vote to leave the EU?

A: The outcome was unexpected and is, for sure, not for the benefit of the U.K. But it does not help Europe either. Trying to find something positive in this negative surprise, there is now the chance to create new solidarity among the peoples and nations within the European Union.

I do hope that Europeans and the European nations are now, more than before, getting aware of the fact that Europe will only have a successful future in a globalized world as a strong political, economic and social entity. The individual nations, even Germany or France, are not big enough to successfully compete in a stand-alone position with big regions such as NAFTA, China, maybe also Japan and India in the long run. [Europe] needs this unification in order to create the right balance among the global powers.

Q: How about the impact on the steel industry?

A: I think the impact on the steel industry will be limited, because -- especially these days -- trade flows have become really global. You know about the problems concerning steel imports into Europe from China, Russia and several other regions. I think this situation has affected the U.K. and Europe in a similar manner and will most likely continue for quite some time.

Of course, there might be some positive effects on the U.K. from increasing exports, if the British currency is devaluated. This could mean that we see some additional pressure from the U.K. on Europe, but realistically there will be only short-term effects. In the U.K., the steel industry has already been questioned before Brexit. I think this is not going to change due to the outcome of the referendum.

Q: You are referring to Tata Steel's plans to divest its U.K. business, right?

A: Yes, the announcement of this intention was released before the Brexit decision.

Q: The company has yet to make a decision.

A: Obviously the negotiations are going on, and it might take some more time before we will see an outcome. I think the future [of] most of the U.K. steel operations is still pending.

Q: In the U.K., there has been some discussion about government support for Tata. But Geert Van Poelvoorde, the president of the European Steel Association, says this is a bad idea.

A: I do know pretty well how governments and politicians think, because when I joined Voestalpine in 1978, we were a 100% state-owned company. Based on this experience, I'm strictly against any state interference in classical industrial operations. There is basically no need [for a state to be] either an owner, a financing institution or in any other respect a partner of industrial operations. Such operations should be owned and run on a private basis. The state should concentrate on the definition of a fair legal framework ... and transparent overall conditions for doing business in a country or region.

The core problem in steel is that politics has historically always been very close to the industry. On the one hand, for many decades steel has been seen as a strategically important product -- also with respect to military aspects. On the other hand, a steel operation is always the basis of important industrial value chains. It is therefore also the foundation for broad employment within regions. These aspects have traditionally been the driving forces for governments being closer to this industry than to any other -- and interfering more politically [and] economically than in any other.

This was one of the key reasons that over the last decades, enormous overcapacities were built up, not only in China but more or less all over the world, putting continuously increasing competitive pressure on the individual companies.

Q: The auto industry is a major client for you. After the Volkswagen emissions scandal, some German manufacturers announced they would emphasize electric technology. Lightweight materials will be crucial for this. How does this affect the short- and long-term outlook for steel?

A: The automotive industry is under enormous pressure to build lighter, stronger and safer cars -- particularly with respect to the chassis and the body of the car. Together with our customers, we are continuously developing new solutions in this field, especially high-strength and lightweight steels used for body-in-white components. The basic metrics of this business will not change in [the era] of e-mobility. A different source of power does not change all other rules.

For us, it's not a threat. We see e-mobility more as an additional opportunity to deploy the specific competencies we have in the autoparts and components business.

Q: What about carbon fiber?

A: It will be used to a limited extent in luxury cars, but I do not expect to see a larger number of cars made of carbon fiber in the future. For me, it is even unlikely that we will [see] broad use of parts or components, as carbon fiber will always be much more expensive than any other material.

What we will see -- and what is a new opportunity for us -- are so-called hybrid parts: a combination of carbon fiber or other materials and high-strength steel, as used already in some luxury cars.

Interviewed by Nikkei staff writer Takayuki Kato

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