United States Steel Corp.'s permanent shutdown of its steel production in Hamilton, Ont. is a dark day for Canada's once proud steel capital. The temptation is to see this as yet another failure of Canada's manufacturing industry to compete. Yet this decision speaks more to the dysfunctional state of the global steel industry than to Canada's shortcomings.
The former Stelco mill that U.S. Steel is shuttering in Hamilton was already toast before the company signed the death certificate Tuesday. The facility has been gathering cobwebs since October of 2010, when U.S. Steel put it on "temporary idle," citing weak customer demand. Before that, the mill was closed for several months during the 2009 recession. Before that, its previous owner, Stelco Inc., had spent two years in bankruptcy protection.
Yes, it's a story of an outdated, inefficient, high-cost operation that simply couldn't cut it when prices turned south. But this is hardly a story unique to this mill, or to Canada. The global steel industry is awash with unneeded steel mills that are past their prime, overflowing with capacity that post-recession demand hasn't absorbed, and production that continues to exceed consumption. The result has been years of weak prices that make a strong case for locking up many inefficient, high-cost mills and throwing away the key.
Capacity utilization among world producers, at 79 per cent, is up from the low-70s seen in the second half of last year, but it still signals an industry with more capacity than it needs. Analysts say the industry must operate above 85-per-cent capacity to create upward pressure on pricing and turn a profit.
World steel production has surged since the end of the recession. Output jumped 25 per cent from 2009 to 2012. While global demand also posted strong gains in that time, the world last year produced about 9 per cent more steel than it consumed. And demand growth has slowed to only about 3 per cent this year; production is on about the same pace, but there's clearly little impetus to re-start idled mills, especially when the oversupply and excess capacity continues to keep prices below levels where those marginal mills could be profitable.
What about the promise of booming demand from China, which accounts for almost half of the world's steel consumption? Yes, the country's steel consumption is on track to rise by 6 per cent this year; but China's own production, which also makes up roughly half of global output, is headed for a 9-per-cent jump. Nearly one-third of China's steel producing capacity is sitting unused, and the industry has been operating at a loss. This summer, the Chinese central government ordered the industry to take more capacity offline.
Compounding the weak pricing fundamentals is the fact that the industry has way too many small players, competing in a global market where both their suppliers (the mining industry) and their customers (such as the auto industry) have undergone sweeping consolidation. Both from the cost side and the price side, steel producers have been getting squeezed – making profit margins increasingly scarce.
A (largely unexpected) global economic boom would obviously help, and in the long term, the steel industry will thrive on the continued modernization of emerging markets. But over the short to medium term, it is in dire need of modernization itself. A lot more steel towns will have to go through what Hamilton is going through before this industry is on stable footing again.
David Parkinson