Demand for steel is growing globally. Our investments in products and technology secure our leading positions in the high-value market segments.
The success that we as a leading international steel company can achieve in terms of a sustainable corporate policy is determined to a large extent by our working environment, which is shaped by sector, energy and environmental policy and demographic trends.
How we assess developments in our field.
Consolidation and globalization of the steel sector
In recent years, the situation on the global steel market has been shaped by the boom in China. In 2005, world crude steel output grew by 7% to the record level of 1.13 billion metric tons. Of this, 340 million tons was produced in China, where growth was once again 25%. The country will remain the fastest growing market this decade. The flat carbon steel segment on which ThyssenKrupp Steel has been concentrating since the mid-1990s is expected to grow by 7% per year to 2010 due to the high pace of investment. But in the area of high-quality steel grades in particular, China cannot meet demand from its own production and is therefore expected to remain a net importer in the medium term.
In the same period, global demand for flat-rolled carbon steel is forecast to grow by just under 3%, although the picture will differ from region to region. In Western Europe - currently ThyssenKrupp Steel’s core market - the prospects for growth are weaker. But there will be opportunities for sales in the new EU member countries of Central and Eastern Europe.
The soaring trend in China has resulted in a demand overhang for the key raw materials - iron ore, coking coal and coke - and for freight capacities on the world markets. Thanks to long-standing partnerships with the major raw material suppliers, we have managed to secure our supplies. With sufficient iron ore and coal reserves, investments in new mining capacities in the coming years should alleviate the bottlenecks. Far more serious than the physical scarcity of materials are the drastic price increases which had to be accepted. In 2005, US dollar-based prices for iron ore rose by between 70% for fine ores and 87% for pellets, and for coking coal by as much as 120%. That set new record high prices for raw materials which seriously impacted the cost structure of steel producers. For this reason, productivity enhancement must be an ongoing quest.
With consolidation still relatively limited, the steel industry increasingly finds itself sandwiched between raw material suppliers and customer sectors. Whereas the top 5 producers still account for only 18% of the steel market, this figure is anywhere between 30 and 66% for key customer groups, and as high as 75% for the top 3 ore suppliers. Given the increasing competitive pressure being exerted by customers and suppliers, the steel industry needs to consolidate further. In Europe and Japan, this process is already at an advanced stage, and clear progress has also been made in the USA. The Chinese steel industry is still heavily fragmented, but there too the government is creating the conditions for a realignment.
In the meantime, the focus is shifting more and more to global players, defined by increasing size and international presence. Size itself cannot be the target for profitable growth. In ThyssenKrupp Steel’s view, future prospects are reflected most clearly by a company’s position in the relevant market segment and the value of its product portfolio. On this basis we will play an active part in the consolidation of the steel sector.
Energy and environmental policy
Producing steel uses large quantities of materials and energy. For this reason, on cost grounds alone reducing material and energy consumption is a key driver of our company’s environmental and energy policy. Like us, steel companies worldwide are investing in modernizing their plant and equipment and expanding capacities. But European energy and environmental policies are preventing the expansion of production capacities in the EU through a wide variety of directives and laws which do not affect other regions. In part, these measures contradict the objectives of the EU’s Lisbon process, whose declared aim is to develop Europe into the most competitive economic region in the world by 2010.
In February 2005, the Kyoto Protocol came into force. However, China and USA have failed to ratify it. Irrespective of this, trading with CO2 emission allowances became law in the EU from January 2005. This forces German steel companies who expand their production capacities to buy emission allowances. The situation is different e.g. in the UK and Finland: steel companies in these countries were allocated generous emission allowances and can therefore expand without having to purchase expensive allowances. These emission allowances are traded on the European Energy Exchange. The price of the allowances leveled off at around €20/t CO2 in mid 2005, twice as expensive as originally calculated. In July 2005, the price peaked at €29.35 €/t. In countries which signed the Kyoto Protocol without committing to a reduction in emissions, there are no costs to companies either for the Kyoto period or the “pre-Kyoto period” as in the EU.
For this reason, it is virtually impossible to expand iron and steel production in Germany any further. The purchase of emission allowances would add up to €45 to the price of each additional ton produced. That makes neither economic nor sociopolitical sense, as the logical consequence is to relocate production volumes abroad with the loss of many thousands of German jobs.
Price of CO2 emission allowances 2005 €/t CO2
As demand for steel continues to rise worldwide, the volumes which cannot be produced in Germany will be produced abroad on old equipment or new equipment which fails to match high German standards. Global emissions of greenhouse gases can be expected to increase disproportionately. What is more, the scope for reducing carbon dioxide emissions from steel production is relatively low - only 3% according to a study commissioned by the German Ministry of Economics in 1999. For this reason, we are fighting to get differences in the potential for reduction in different sectors recognized in the way emissions trading is organized.
A further example of the EU’s failure to take account of national differences are its regulations on particulate emissions. The EU has tightened limits to such an extent that plants in large population centers which emit particulates in addition to the natural background levels have little chance of receiving approval. In our drive to optimize capacities, over the past two decades we have concentrated our activities in Duisburg, which logically causes higher local emissions. As a result of concentrating our capacities in this way, which serves sustainable objectives such as optimized energy consumption, minimal transportation energy for raw materials and short distances to users, we would now have to introduce measures far beyond the state of the art to satisfy EU law. Our plant configuration with its advanced technology standards is not enough; but at present, it is technically impossible to achieve the additional improvements that are called for.
Demographics and employees
Demographic changes - terms such as “ageing society” and “maturing workforces” are frequently heard in current sociopolitical debate - are of immense importance for the future viability of our company.
They bring with them at least two fundamental challenges. The first is that we must react to an unfavorable age pyramid in our workforce. This is attributable to the fact that the socially acceptable staff adjustment measures realized in recent years have meant that few new young employees have joined the company. With a high share of our workforce over 50, we expect disproportionately high retirement levels from 2011. We will respond to this trend by developing and implementing systematic solutions which will make the knowledge acquired over decades by departing employees available to the subsequent generations, and increase the long-term retention of young, welltrained employees.
The second demographic challenge is the fact that Germany has fewer and fewer young people but more and more older people. In the near future, this will lead to increased competition in the recruitment of school leavers and university and college graduates. Here again, we expect 2010 to mark the turning point. A subject of much debate at present and of great importance in this context are the results of the first two PISA studies. Both these cross-sectional assessments of performance in schools and our own internal long-term studies of performance in recruitment processes have revealed significant deficits in the knowledge of school leavers.
So the situation we face is that our workforce is getting older, and we have a greater need for young, well-qualified young employees, but the numbers of young people are falling, and according to current studies their general educational levels are deteriorating.
continue with: Our strategy and success in sustainable development