During the 8th Platts/SBB Steel Markets Europe conference held in Brussels, Marcel Genet, founder and managing director of the management consultancy firm Laplace Conseil, examined the current options for crude steel production in Europe, in particular evaluating whether steelmakers should focus on EAF or BOF technology in order to achieve a profitable future for the European steel industry.
Mr. Genet began by stating that the steel markets have become more and more globalized and that the heart of the steel industry is now located in China, while in Europe the market is rather static, also due to significant and persistent steelmaking overcapacity, which has been eroding the profit margins of iron and steel enterprises. The most obvious answer appears to be to cut production capacities, but, according to Mr. Genet, this is not the answer in Europe's case. In fact, since the 1980s various EU countries have been trying to lower outputs though provision of financial stimuli, but the desired output reductions were not achieved. He went on to say that the same is happening nowadays in China, where outdated capacity elimination targets have not been reached, adding that in the last 10 years big steel players in China have been losing market shares to the advantage of smaller players. In Genet's opinion, due to political and social issues it is almost impossible to shut down a steel mill in Europe, although steel groups would be willing to take such action, especially after the 2008 crisis depressed their margins and highlighted the problem of excess production capacity.
Mr. Genet stated that the keyword for European steel producers, rather than closure, is innovation - in technology, in capital and risk management, and finally in relationships with people and institutions. In the last 10 years, he said, European steel producers have undergone significant diversification, effecting a remarkable change in average profitability. Well-adapted technology, indeed, must be coupled to sound labor relations and smart capital management, he stressed.
Back in the early 1980s, the respective shares of EAFs in crude steel output were similar in the EU and in the US. However, by 2010 EAF steelmaking in the EU accounted for about 42 percent of the total EU crude steel output, while in the US the share of EAF output had reached 62 percent. Nevertheless, the EU recycles a greater share of available steel compared to the US (about 70 percent compared to less than 60 percent) and both are major scrap exporters.
One of the advantages of EAF technology is the easier management of operating costs, which are basically lower in a weak market environment, but which, for example, grew during the 2007 bubble. Secondly, the capital expenditure and maintenance costs are much lower, while, last but not least, recycling is much more environmentally friendly than iron ore-based production.
On the negative side, there is the 'steel grades issue', due to the impossibility of eliminating copper pollution from crude steel smelting by EAFs. However, Genet stated, 85 percent of flat steel grades and 95 percent of long steel grades can be produced by electric arc furnaces with the current technology. Another issue against EAF steelmaking is the likely increase in scrap prices if this kind of technology should pick up speed in Europe. Nevertheless, the EU is currently a growing exporter of scrap, and supply is extremely elastic as the infrastructures needed are less expensive than those needed by the iron ore trade (dedicated vessels and port terminals). Accordingly, supplies could be easily switched to the domestic market.
Finally, through two examples taken from France the Laplace Conseil managing director indicated how steelmakers' choices may impact their business. The first example concerns Riva Group's Neuves-Maison mill, which used a small blast furnace to produce wire rods and bars using local iron ore and coal. In the early 1980s, due to shrinking profitability, the former owner decided to switch to an electric arc furnace, and the mill is still smelting scrap today. The company had to reduce its workforce and revise its product mix, but company officials managed to cooperate with local authorities and labor unions and the results have been satisfying. On the other hand, the small integrated steel mill at Mandeville in France, also in trouble with its balance sheets, decided in the same period to focus on special castings in order to gain market shares and prevent job losses, while maintaining iron ore-based production. However, the enterprise was shut down shortly after this decision.