Insight into how steel companies can emerge from the current economic downturn in a stronger position.
Martin is the global leader of the steel sector within BCG’s Industrial Goods practice area. He is also a member of the Organization and Operations practices. Before BCG, Martin was the engineering group head at Bayer AG Leverkusen and product developer for Bayer's specialty materials division.
How can companies survive the current economic downturn?
Rather than anticipating the downturn, the steel industry expected to continue enjoying the strong cash inflows it had experienced in recent years, during which many companies added capacity. Many also broadened their product portfolios and acquired other companies, thus loading substantial debt into their balance sheets.
These companies now need to stabilize their cash position. Their short-term focus should be on very tight cash management, reduction of the net working capital (especially elimination of redundant inventories), and cost cutting wherever possible. Given the general uncertainty about how long the recession will last, steel companies must ensure that their breakeven point is as low as possible—a strategy that may include mothballing lines and plants. At the same time, they must make certain that talented people stay in the company in spite of this downscaling.
This is a very complex task and a tough challenge for many industry players. However, it is what finally decides which companies will best survive the downturn phase and become future industry leaders.
Which short-term opportunities will open up?
There are three key opportunities that will arise after the crisis, once the upturn becomes visible again.
First, consolidation will be a major long-term trend. Some companies will surface from the crisis in very strong positions, whereas others will be confronted with deep problems. This disparity will clearly accelerate the consolidation we have seen in the past years and will result in competition between sturdy national and multinational groups on a global scale.
Second, backward integration will be available to steel companies thinking in strategic dimensions. Raw-material security and raw-material supply will again become crucial points for the development of companies—especially the larger steel groups—after the recession phase. Those who can afford to ensure that their raw-material supply is safe for the next ten years will have spotted a key opportunity and will achieve competitive advantage over time.
The third opportunity is further diversification. Companies suffering from very high variability in demand can prosper in the future if they add a set of more stable niche businesses—that is, specialty businesses with higher margins and less risk—to their volatile basic business. Shaping their portfolio in an environment where acquisitions are relatively cheap is another prospect that the current downturn opens up for some steel players.