A Steelmaker Transforms to Grow Earnings

A major steelmaker revamps to achieve €2 billion in potential earnings increases.

Overcapacity can be a company-killer in the steel industry, causing facilities and workers to lie idle and prices to drop as supply outstrips demand. One large steelmaker saw a threat to its business from such a situation—and asked BCG for help.

The market environment for SteelCo was putting pressure on pricing spreads, but its managers knew structural weaknesses were making the problems worse. Margins were at historical lows in relation to competitors, and the corporate culture was hamstrung by a silo mentality.

After studying the situation closely with SteelCo’s team, BCG’s experts initiated a comprehensive transformation program aimed at closing the competitive gap. The key features of the program included a new centralized project management office (PMO), a top-down evaluation of operational targets to be communicated to all business units, and a bottom-up review of specific measures in areas such as mill production, sales, service efficiency, purchasing, and administration.

The process identified seven important programs to pursue, ranging from purchasing and plant operations to strategy.

The transformation program began by defining the operational footprint of each facility and then adjusting its resources by, for example, mothballing a blast furnace or closing downstream assets such as a caster and a mill. Next, SteelCo focused on reducing the plant’s cost basis. Fixed costs were adjusted to the newly defined output levels, with a focus on improved operational performance.

Working not just with SteelCo management but also with trade unions, BCG identified headcount reductions with an eye toward keeping staffing flexible. The program also worked to increase the share of the plant’s total costs that were variable based on demand, rather than fixed. Finally, the transformation involved improving the plant’s commercial impact by adjusting the product mix and identifying optimal price points.

The transformation at SteelCo identified €2 billion in potential earnings increases, with about half that total reflected in actual earnings within two years. Of the €2 billion in additional earnings, about €530 million is in the form of increased top-line revenues. About €600 million in increased EBITDA will come from purchasing efficiencies (including energy), while €420 million is derived from plant operations, €250 million from administration, and €200 million from logistics.

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