Asian Steel Watch Vol. 5 (June 2018)

05 JUNE

2 01 8

INTERVIEW with HBIS Group Chairman

The Challenges and Responses in the Chinese Steel Industry Yu Yong, Chairman of HBIS Group

ON THE COVER

Improving Sustainable Competitiveness in Preparation for a Circular Economy Yoon-Gih Ahn, POSCO

SPECIAL REPORT

Current Status and Future Prospects for the Japanese Steel Market Kiyotaka Terashima, JISF

FEATURED ARTICLES

The Decoupling of GDP and Steel Demand: Cyclical or Structural?

MARKET TREND AND ANALYSIS

A Comprehensive Survey of Steel Demand Forecasting Methodologies

TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

05 J U N E

2 0 1 8

ASIAN STEEL WATCH

05 J u n e

2 0 1 8

Asian Steel Watch Bi-annual

c o n t e n t s Publisher

Kwag, Changho Published by

POSCO Research lnstitute Editor-in-chief

Chung, Cheol-Ho

04

On the Cover

Towards the Circular Economy:

What It Means to the Steel Industry

Editing Advisor

Jun H. Goh Managing Editor

Sojin Yoon Editorial Board

Moon-Kee Kong Dong-Cheol Sa Ji-mi Chu Chang-do Kim Yoon-Chung Chin Kiyong Jeon Designed by

www.thegraph.co.kr Park, Hyunil / Lee, Seunghyun Baek, Eunwon / Cha, Seoyeon Printed by

Gaeul Planning Date of lssue

June 30, 2018 Copyright 2018 POSCO Research Institute All rights reserved.

Production in whole or in part without written permission is strictly prohibited.

Registration number

Gangnam, Ba00170 Registration date

September 7, 2015 Contact

asiansteel.w@ posri.re.kr

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Asian Steel Watch

06 How Steel is Helping to Achieve a Global Circular Economy Improving Sustainable Competitiveness in Preparation for 14 a Circular Economy: The Case of POSCO Tata Steel Europe’s Approach to the Circular Economy 24 in a Life Cycle Perspective 34 Steel in a Circular Economy: Change, Impact, and Prospects

44 54 64

Interview with HBIS Group Chairman Challenges and Responses in the Chinese Steel Industry Yu Yong, Chairman of HBIS Group

Special Report Current Status and Future Prospects for the Japanese Steel Market

A Comprehensive Survey of Steel Demand 84 Forecasting Methodologies and their Practical Application for the Steel Industry

Featured Articles

Issues and Prospects

72 The Decoupling of GDP and Steel Demand:

Market Trend and Analysis

Kiyotaka Terashima Managing Director, The Japan Iron and Steel Federation (JISF)

66 The Asian Stainless Steel Market: Trends,

82

Cyclical or Structural?

On the Cover

Towards the Circular Economy: What It Means to the Steel Industry 06 How Steel is Helping to Achieve a Global Circular Economy

Clare Broadbent

14 Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO Yoon-Gih Ahn

24 Tata Steel Europe’s Approach to the Circular Economy in a Life Cycle Perspective Peter Hodgson and Paul Brooks

34 Steel in a Circular Economy: Change, Impact, and Prospects

Yoon-Chung Chin

TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Clare Broadbent Head of Product Sustainability World Steel Association (worldsteel) broadbent@worldsteel.org

How Steel is Helping to Achieve a Global Circular Economy

Summary Environmental considerations are increasingly

sumption in product design or the focus on zero

being included in every day decisions on a global

waste from different products. However, these

level, by consumers, policy makers and product

issues do not address the overall environmental

designers.

impact from products, for different environmental

This can be for anything from the energy con-

impact categories (air pollution, resource con-

sumption of a washing machine, the CO2 emis-

sumption, water pollution, etc.) nor for the full life

sions from driving a vehicle, the resource con-

cycle of a product (from raw material extraction to

Sustainable Development Meeting the needs of the present without compromising the ability of future generations to meet their own needs

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Asian Steel Watch

Circular economy An economy system where products and services are traded in closed loops

How Steel is Helping to Achieve a Global Circular Economy

the end of life of a product). This also means that

This article outlines how the steel industry is

it is quite possible that the environmental “burden”

addressing current environmental issues as well

is shifted from one life cycle phase to another.

as how regulations can be utilized to generate an

In addition, there is an increasing focus on

overall environmental improvement of products

making products last longer, reusing or mending

and services. Developing higher strength and

them, or even remanufacturing them. This is by

value-added steel products will have an ultimate

no means anything new; we are coming back to

benefit to the environment despite the higher en-

practices we used to employ decades ago, but

ergy demand and environmental impact for their

unfortunately in the meantime we have become a

production. This is because these higher value

“make, take, and throw away” society.

products will be more resistant to corrosion, need

This new concept has been branded a circular economy where the focus is on reduce, reuse,

less maintenance, and have a greater length of life.

remanufacture and recycle. The steel industry is

Undertaking a full life cycle assessment of a

well placed to contribute to a circular economy

product will clearly show the overall benefits of a

and is part of the solution in addressing environ-

product’s design throughout its life cycle as well

mental concerns for many products and services.

as where the greatest potential for environmental

Key properties of steel (strength, durability, mag-

improvements can be made. Examples of steel

netic properties) make steel a key enabler of a

use in society will be given, particularly from the

circular economy.

automotive and construction sectors.

Life Cycle Thinking Accounting for environmental and social impacts across all stages of a product and process life cycle

4Rs Reduce, Reuse, Remanufacture, and Recycle

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

The concept of sustainability is understood to include current economic activity and the changes in such activity to ensure that the activity can continue into the future. This implies that economic activity must continually strive to become environmentally neutral, that is to not deplete natural and other resources as a result of the activity and reduce the ability of future generations to continue with such economic activity.

Introduction The climate change debate in recent years has evolved into a discussion on sustainable development and the circular economy and encompasses much more than just CO2 emissions. This debate will continue for the foreseeable future. What is certain is that our environment will undergo changes in the future and the objective is to aim for future sustainability. Based on the United Nations definition of sustainable development1, worldsteel describes the Green Economy2 in the following way: The steel industry believes that sustainable development must meet the 1 needs of the present without comproBrundtland Commission mising the ability of future generations (1987), Report of the World to meet their own needs.

Commission on Environment and Development, United Nations Within this, a green economy delivers 2 prosperity for all nations, wealthy and “Sustainable Steel: at the core poor alike, while preserving and enof a green economy”, worldsteel (2012) hancing the planet’s resources.

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Asian Steel Watch

Sustainability The concept of sustainability is understood to include current economic activity and the changes in such activity to ensure that the activity can continue into the future. This implies that economic activity must continually strive to become environmentally neutral, that is to not deplete natural and other resources as a result of the activity and in doing so reduce the ability of future generations to continue with such economic activity. For the steel industry, this implies different challenges that will be addressed in this article.

The concept of the Triple Bottom Line expands the traditional accounting techniques to also include performance on social and environmental impacts and is today widely used as a measure of sustainability of an enterprise. This approach measures the impact of an enterprise on three levels—economic (or financial), environmental, and social. The aim is to show that posi-

How Steel is Helping to Achieve a Global Circular Economy

Figure 1. Steel in a Circular Economy5

d

e uc

ular Ec ono my St eel

Raw ma ter ia

sign De

R

eu

Production

Manufacturing

Use

The circular economy The circular economy refers to a move from linear business models, in which products are manufactured from raw materials and then discarded, to circular business models where products or parts are repaired or remanufactured, reused, returned and recycled.4 This concept is nothing new, but is something that has been forgotten as people become more affluent and businesses want to make money out of people having to buy new updated products.

In economic theory, the concept of the circular economy equates to optimal resource efficiency, which implies the most efficient allocation of

yc Rec

tive financial results can be achieved, while at the same time realizing no negative impact on the environment or society around the enterprise.3

e us c Re nufa a Rem le

Source: worldsteel

Disposal & tu rin g

ac t

Raw materials

nu uring fac ture

Design

uction Prod

Recyclin g

ls

Linear Business Model

se

Re

C irc

Use

f nu Ma

ma Re

resources to the areas of use that will maximize economic well-being. In economic terms, it assumes that all resources are correctly priced and therefore supports the reuse and recycling of resources as far as is possible.

A circular economy ensures that 3 value is maintained within products Since 2004, worldsteel has been publishing its Sustainability while reducing or eliminating waste.

Report and in 2012, published the This concept is fundamental to the “Sustainable Steel: At the Core of triple bottom line concept of sustain- a Green Economy Report”, both ability, which focuses on the interplay of which provide a sustainability overview of the steel industry between environmental, social, and that mirrors the concept of the economic factors as a result of enter- triple bottom line. prise activity. This should all be based 4 “Scoping paper: Mining and on a life cycle approach.

Metals in a Sustainable World”, In a well-structured circular econ- World Economic Forum (2014) omy, the steel industry has signif- 5 “Steel in the Circular Economy: icant competitive advantages over A Life Cycle Perspective”, competing materials. Four keywords worldsteel (2015)

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

define these advantages: · REDUCE: Reducing the weight of products, and therefore the amount of material used, is key to the circular economy. Through investments in research, technology and good planning, steelmakers have over the past 50 years drastically reduced the amount of raw materials and energy required to make steel. In 6 addition, the steel industry is actively Lund, R. 1984. Remanufacturing: promoting and developing the use The experience of the United of high-strength and advanced highStates and implications for developing countries. World strength steel grades in many applicaBank technical paper, ISSN tions. These grades contribute to the 0253- 7494, no. 31. Integrated light-weighting of applications, from resource recovery series 2.

Washington, DC: World Bank wind turbines to construction panels and United Nations Development and automobiles, as less steel is needed Program, The International to provide the same strength and funcBank for Reconstruction and Development. tionality.

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Asian Steel Watch

· REUSE: Because of its durability, steel can be reused or repurposed in many ways, with or without remanufacturing. This already occurs with automotive components, buildings, train rails, and many other applications. Reuse of steel is not limited to its original application; repurposing dates back to ancient times (turning swords into ploughshares). Reuse occurs in sectors where it is technically possible without reducing safety, mechanical properties and warranties. Rates of reuse will increase as eco-design, design for reuse and recycling, and resource efficiency become more commonplace. · REMANUFACTURE: Many steel products, such as automotive engines and wind turbines, can be remanufactured for reuse to take advantage of the durability of steel components. Remanufacturing restores durable used products to like-new condition.6 It differs from repair, which

How Steel is Helping to Achieve a Global Circular Economy

Pr e-c o ns 1 00 % u me RE r s CY

P o st- c o ns u m 100 % RE e CY

rap l sc te e L E s B r A CL

rap sc E L AB

Life Cycle Assessment (LCA) is a tool that can be used to measure the ‘circularity’ of products, by measuring the costs and discounts to society of

Steel production

CL

Life cycle thinking

Raw material extraction

el

Steel has significant competitive advantages over material competitors in the circular economy and will need to focus on these benefits as part of enhancing the attractiveness of steel in inter-material choices. It is an area that is as yet under-developed and under-utilized in the steel industry. In the future, manufacturers of steel products may also have an important role to play as certifiers of used steel products before they go to market, ensuring the integrity and safety of the product.9

Figure 2. The Life Cycle of Steel

te

is a process limited to making the product operational, as opposed to thorough disassembly and restoration with the possible inclusion of new parts.7. · RECYCLE: Recycling has been carried out in the steel industry since steel was first made.

Steel is 100% recyclable and can be recycled over and over again to create new steel products in a closed material loop. Recycled steel maintains the inherent properties of the original steel. The magnetic property of steel ensures easy and affordable recovery for recycling from almost any waste stream while the high value of steel scrap guarantees the economic viability of recycling.

Today, steel is the most recycled material in the world. Over 630 Mt of steel are recycled annually8, including pre- and post-consumer scrap.

Manufacturing Steel recycling

Reuse and remanufacturing

Use Source: worldsteel

using specific materials and products throughout their full life cycle. Assessing the true benefits of conserving resources demonstrates the real savings due to the recycling and recyclability of steel and encourages the reuse and recycling of these products.

LCA becomes a tool to measure the impact of decisions taken in an enterprise with respect to production techniques, raw 7 material and energy use and product Lund, R. 1993. Remanufacturing.

In The American edge: Leveraging allocation design on the environment. manufacturing’s hidden assets, To this effect, LCA is presently the only edited by J. Klein and J. Miller. tool by which an enterprise can truly New York: McGraw-Hill.

8 measure the extent to which its actions worldsteel estimations are resource neutral. Without LCA, a 9 true triple bottom line reflection is not Allwood J.M., Cullen J.M., et al., 2012. Sustainable Materials: with possible. both eyes open, UIT Cambridge, A life cycle approach should be con- England.

Vol.05 June 2018

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

As steel is everywhere in our lives and is at the heart of our sustainable future, the steel industry is an integral part of the global circular economy.

The circular economy promotes zero waste, reduces the amount of materials used, and encourages the reuse and recycling of materials, all fundamental advantages of using steel. A life cycle approach is very important in delivering true sustainability.

sidered within the concept of the circular economy to create a more resource-efficient world, focusing on waste minimization. The steel industry has been doing this for hundreds of years.

In order to further contribute to the circular economy, a number of key areas that the steel industry should focus on include the following: · Water used in the production process must be handed back to society in the same or better condition as it was received, and that emissions to atmosphere will be minimized as much as possible. · Regarding the raw materials consumed, such as coking coal and iron ore, strict adherence to sustainability is impossible as raw materials, once consumed, can clearly not be replaced and as such would reduce the ability of future generations to produce steel in the same way as today. This challenge can be bridged by the construct of reuse,

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Asian Steel Watch

remanufacture and recycling, to design products for easy reuse and to recycle as much steel from products at the end of their life as possible to make new steel products. Clearly this requires that in time, sufficient quantities of reusable and recyclable steel are available to satisfy market demand for steel. In addition, the concept of responsible sourcing needs to be addressed further, taking consideration for the sourcing of materials in the supply chain. · Emissions into the atmosphere (e.g. CO2 and other GHGs) can be reduced by ensuring that the application of steel leads to reduced emissions during the product use phase. This can be done through the use of, for example, high-strength steels or more efficient steels used in motors. · Many competing materials have ‘light-weight’ properties (more specifically lower density materials) and can help reduce the emissions of energy intensive products in the use phase. However,

How Steel is Helping to Achieve a Global Circular Economy

these materials are often so much more energy and CO2 intensive to produce than steel products, negating the use phase benefits that these alternative materials offer.

Conclusion As steel is everywhere in our lives and is at the heart of our sustainable future, the steel industry is an integral part of the global circular economy.

The circular economy promotes zero waste, reduces the amount of materials used, and encourages the reuse and recycling of materials, all fundamental advantages of using steel. A life cycle approach is very important in delivering true sustainability.

Legislators and industry decision makers need to understand the importance of analyzing the entire life cycle of a product before making legislative or manufacturing material decisions.

Too many legislative bodies around the world still enact regulations which only affect the “use phase” of a product’s life, for example water and energy consumption for washing machines, energy consumption for a refrigerator or CO2 emissions while driving a vehicle.

This focus on the “use phase” can lead to more expensive alternative lower density materials being employed but which typically have a higher environmental burden when the whole life cycle is considered.

This use phase limitation cannot continue.

Life cycle thinking must become a key requirement for all manufacturing decisions.

This article is modified from “The Role of Steel in the Circular Economy” presented at METEC & 2nd ESTAD 2015 Conference on 16 June 2015 in Düsseldorf, Germany and published in stahl und eisen 135 (2015) Nr. 11.

Vol.05 June 2018

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Yoon-Gih Ahn Senior Vice President Energy and Environment Business Office, POSCO

Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO

Sustainable circular economy and steel products We are now entering an era of “sustainable competitiveness” defined as looking beyond simple economic performance to pursue environmental soundness and balance with the social aspect.

Considerable economic research, including Wernerfelt, B. (1984), M.E. Porter (1996), Prahalad, C. K. (2002), Wilson, M. (2003), and Y.G. Ahn (2007), has suggested this concept as a direction for corporate competitiveness. Given the imminent depletion of the natural resources that fueled the Industrial Revolution, such as oil, coal, and gas, and growing environmental concerns regarding the use of fossil fuels, both academia and industry are paying keen attention to sustainable competitiveness as a new means for achieving competitiveness. At the 2012 World Economic Forum, economists and scholars stressed the importance of a transition by the global economy to a circular economy to address pressing environmental issues such as resource

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Asian Steel Watch

scarcity, climate change, fine dust, wastes, and toxic chemicals—the key challenges for sustainable competitiveness.

When looking at the steel industry from the perspective of sustainability and a circular economy, process and product should be considered separately. In terms of the steel-making process, steel is not free from environmental concerns such as energy scarcity, CO 2, fine dust, and wastes.

For the products, however, the drawbacks of the steel-making process can be overcome.

Lightweight steel products help to reduce CO2 and NOx emissions and improve fuel efficiency and give a tremendous opportunity to the overall industrial ecosystem and society.

In particular, steel has a much longer service life than other materials, so it contributes greatly to improving efficiency in a circular economy.

With its high recycling rate, infinite recyclability, and relatively easy removal of impurities, steel has proven to be a key material for addressing resource scarcity.

Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO

Figure 1. Global Discussions on Sustainable Competitiveness and the Structure of a Circular Economy

• Capitalism 4.0

Economic Integrity

Environmental Soundness (eco-efficiency)

Social Responsibility

(Anatole Kaletsky, 2010)

• Sustainability and Resource Models (Davos Forum, 2012)

Low Carbon & Circular Economy (Carbon & Resource Efficiency)

• Green Economy (UN Summit, 2012)

The Limits to Growth 1972

RIO Summit 1987

Our Common Future

1992

2000

RIO+10

RIO+20

2002

2012

2020

UN Global Compact

Source: Compiled by the author

Manuf act uri ng

Resources Recycling

Waste

se

Considering the extent of current iron ore reserves, steel can become a cornerstone for a sustainable circular economy and industrial ecosystem. Steel slag, a by-product of steelmaking, provides an alternative to cement and can be used as a fertilizer to help increase agricultural production, demonstrating how steel can stand at the center of the shift to a new industrial ecosystem.

Life Cycle Assessment (LCA) is a technique used to determine the potential impacts of a product at all stages based on life cycle thinking.

The global community uses this technique to identify products suitable for a circular economy.

Ever since the International Organization for Standardization (ISO) adopted LCA as a global standard in the mid-1990s, it has been used for

n& ptio Consum

Linear Economy

Circular Economy =

+

U

+

Source: Shutterstock

product development and marketing strategy.

ISO is also discussing a new and improved global standard for a circular economy as a global standard.

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 2. The Contribution of Steel Products to a Circular Economy from the Life Cycle Perspective Improving eco-friendliness of products by reducing weight Fuel efficiency 2.8%

Manufacturing

40% lower automotive steel weight

10 kg lower vehicle body weight

CO2 4.5% NOx 8.8%

Lightweighting of automotive steel: 5%

('04) / 35%

('09) / 40%

('12)

Long durability of steel materials

Use

Lifespan

Infrastructure

Machinery

50–100 years

10–20 years

Automobile 15 years

Superior recyclability in both quality and quantity

Disposal

High recycling rate

Infinite recycling

Low impurities

70–90% (Al 42%–79%, Mg 39%)

Retaining innate properties and qualities

Easier to remove impurities compared to other materials

Source: POSRI

Taking up the OECD’s Polluter-Pays Principle (PPP) and Process and Product Methods (PPM), the European Community adopted its Integrated Product Policy (IPP) based on life cycle thinking and life cycle assessment in 2000. Several directives and regulations have taken effect based upon the IPP, including the Restriction of Hazardous Substances (RoHS) in Electric & Electronic Equipment, Waste Electrical and Electronic Equipment (WEEE), End-of-Life Vehicle (ELV), and Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH).

These are already being used as a basis for global and domestic regulations and will become a sticking point in future trade concerns.

Clearly, steel products will be subject to more

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Asian Steel Watch

stringent regulations. This article discusses POSCO’s preparations and measures for improving its sustainable competitiveness in the face of shifting global and domestic market conditions.

POSCO’s responses for a circular economy era The economic system of the future will pursue not only traditional economic profits, but also environmental soundness and social needs for sustainable growth. This requires all economic players to cooperate on dealing with environmental and social challenges. In particular, sustainability will be highly dependent on the capability to alleviate or address resource scarcity. In this process, the recyclability or eco-friendliness of

Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO

Figure 3. POSCO’s Approach to Sustainable Competitiveness

In charge by the Energy and Environment Business Office

• Taking corrective measures based on responsiveness • Reflecting improvements in plans

Top management

• Setting goals and scope for LCA

Act

• Third-party conformity assessment

Plan

• Selecting products subject to LCA

Dynamic Analysis

Market needs • Life cycle assessment of products and outcome analysis

Collaboration between the Energy and Environment Business Office, Marketing Department, and RIST

Check

In charge by the Energy and Environment Business Office (third-party verification authority)

New business

Do

• Creating LCI database • Analyzing LCI data

In charge by the Energy and Environment Business Office (Providing information to related departments)

Source: Compiled by the author

resources will have a significant influence. For these reasons, POSCO has been seeking the improvement of the steel-making process, product development, and utilization of by-products from the full life cycle perspective. Considering that the steel-making process is energy-intensive and burdensome to the environment, the company has been working to enhance energy and carbon efficiency and emplace eco-friendly process technologies. It has designed high-performance lightweight steel products with improved recyclability and circularity. By doing so, POSCO helps to make steel-consuming industries less carbon-producing and more eco-friendly. This contributes to the overall sustainable competitiveness of all global industry. Furthermore, it undergoes

third-party monitoring and supervisions (conformity assessment) to assure the sustainability of products and ensure customer trust in a society seeking low-carbon eco-friendliness.

To this end, POSCO has adopted Life Cycle Thinking and Analysis as a basic methodology and been interested in the global discussion on Life Cycle Analysis since the mid-1990s. POSCO has developed the Life Cycle Inventory (LCI) database and analytics suitable for steel-making processes and products. It has also actively participated in the global discussion surrounding Life Cycle Analysis, such as Environmental Labeling (ISO 14020) and Life Cycle Assessment (ISO 14040) under ISO/TC/207. In addition, it has developed products and improved recyclability of by-prod-

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

POSCO believes that sustainable competitiveness can be attained only when process and product are innovated in terms of eco-friendliness and recyclability. Therefore, it has spared no efforts in producing steel products offering higher performance and lighter weight.

ucts from the sustainability perspective and it has been certified by international certification bodies to ensure customer trust in the eco-friendliness of its products and by-products. POSCO has a dynamic Plan-Do-Check-Act (PDCA) approach in place for continual improvement. It is conducting Life Cycle Thinking and Analysis from the PDCA perspective for improving circularity of products. The “Plan” phase sets the goals and scope for LCA and selects designated products.

During the “Do” phase, database is compiled for LCA. In this process, informatization by data analysis is important for interpretation of the environmental impacts from the perspective of whole life thinking.

The “Check” stage conducts Life Cycle Assessment for evaluation, and the outcomes are subject to third-party conformity assessment.

Finally, in the “Act” phase, the outcomes are reported to top management and used to take corrective action taking into account the original targets. The next plan phase is then initiated and

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Asian Steel Watch

the PDCA cycle is infinitely repeated for troubleshooting and continuous improvement.

These processes are conducted in close cooperation with the Energy and Environment Business Office, Department of Technology Management, RIST, and Marketing Department.

POSCO products from a sustainability perspective POSCO believes that sustainable competitiveness can be attained only when process and product are innovated in terms of eco-friendliness and recyclability. Therefore, it has spared no efforts in producing steel products offering higher performance and lighter weight. Based on whole life cycle thinking, It is applying LCA to develop products from the perspective of sustainable competitiveness and improve especially their eco-friendliness.

Representative products to which LCA was applied include advanced high strength steel (AHSS), Hyper NO electrical sheet, Giga Steel,

Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO

Figure 4. Improved Fuel Efficiency of a Vehicle with AHSS Fuel consumption (ℓ / year, unit)

CO2 emissions (kg CO2/year, unit)

1,467,397

2,189

1,019

Fuel costs (Won/year, unit)

301 140

879

201,882

1,888 1,265,515

Previous model with less AHSS

New model with more AHSS

Previous model with less AHSS

and PosMAC. POSCO has also developed its PosMent cement with a higher slag content to improve overall resource efficiency and reduce CO2 emissions. Through the recycling of steel scrap and off-gas, it is strengthening its eco-friendliness and improving profitability. Below are details on some examples of POSCO’s preparations for a sustainable circular economy.

Advanced high strength steel (AHSS) – Lighter car bodies to raise fuel efficiency 1

New model with more AHSS

Previous model with less AHSS

New model with more AHSS

than twice as strong as conventional steel sheets for cars. A new 2016 model using more AHSS is 130 kg lighter than the 2015 model with less AHSS but boasts even higher crash performance.

Annval fuel use of a vehicle is reducsd by 140ℓ CO2 emissions by 301kg and fuel costs by KRW 201,882. If Applying the Lifetime Driving Distance (LTDD), the new model can reduce fuel use per vehicle by around 2 kℓ, CO2 emissions by 4.4 tCO2 and fuel costs by KRW 3 million.1

Hyper NO electric sheet – Reducing electricity consumption of home appliances through improved motor efficiency 2

AHSS applied to gasoline vehicles reduces vehicle body weight, improving fuel efficiency and reducing greenhouse gas emissions

Improving power efficiency in

In close cooperation with its domestic automaker partners, POSCO begins suggesting steel products from the design stage and has developed lightweight products that enhance fuel efficiency and reduce greenhouse gas emissions.

AHSS is about 10 percent lighter but more

home appliances to reduce energy consumption and cut greenhouse gas emissions

1

A lifetime driving distance (LTDD)

POSCO has developed a top-grade non-oriented electrical steel, Hyper NO.

of 200,000 km from the World Auto Steel UCSB model has been applied.

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 5. Improved Power Consumption of a High-Efficiency Motor with Hyper NO Electricity consumption (kwh/year, unit)

CO2 emissions (kg CO2/year, unit)

Electricity costs (Won/year, unit)

346 4.0

342 65,042

161 159

2.0

781

64,262

Previous model with H-NO

New model with hyper NO

Previous model with H-NO

Hyper NO can be used in motor cores, a key component in motors that converts electric power to mechanical power. It helps to make motors more efficient and improves the energy efficiency of home appliances.

Motor cores with Hyper NO minimize core losses, thereby improving the power efficiency of home appliances using compressor motors with these motor cores.

In a pilot test, a refrigerator using a motor with Hyper NO in place of a compressor motor with a conventional motor core saw its compressor motor efficiency improve by up to 2 1.5% and electricity use efficiency rise Assuming that motor accounts by 1.2%.2 for 80% of electricity If these figures were applied to the consumption of a refrigerator (Source: manufacturer) total sales for the refrigerator model, it

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Asian Steel Watch

New model with hyper NO

Previous model with H-NO

New model with hyper NO

would reduce annual electrical power consumption by 2.1 GWh and save annual electric costs of KRW 390 million.

Moreover, assuming that a high-efficiency motor with Hyper NO steel were used in all refrigerators sold in Korea, it would reduce annual electrical power consumption by 89.5 GWh and annual electric costs by KRW 16.8 billion.

PosMAC and Giga Steel – Building the Life Cycle Inventory database and conducting third-party certification 3

Preparing for a low-carbon circular economy characterized by eco-friendliness and recycling of resources through a full life cycle database and third-party certification

Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO

Figure 6. Life Cycle Assessment (LCA) of PosMAC by Environmental Impact Category (Tentative result)

40%

3

The Life Cycle Inventory database (LCI) is a database on resource

20%

and energy inputs into product systems and environmental

0%

Global warming

Ozone depletion

Acidification

Eutrophication

Smog

ADP (Elements)

ADP (Fossil)

loads released from the systems for all stages of a product’s life from raw material extraction to

-20%

processing, transportation, use, and disposal.

4

-40%

The EPD (Environmental Iron ore Coal Limestone Iron scrap (External) Quick lime Industrial water Electricity Direct air emmission from production site Waste treatment (production) Transportation of raw materials C4 (Eol Stage) Disposal D (Benefits & Load Beyond the system boundary) Reuse, recovery, recycing

LNG

Product Declaration) is an objective report that sums up the environmental impact of a product based on components of life cycle assessment: resource consumption, global warming, impact on the ozone layer,

Acknowledging that the future will be characterized by a circular economy dominated by sustainable competitiveness, POSCO believes that eco-friendliness, and recyclability in particular, will become a key to product quality.

The company has begun evaluating the eco-friendliness of its steel products based on whole life cycle thinking. A first for a Korean steelmaker, POSCO established the Life Cycle Inventory database (LCI).3 Since January 2018, it has been preparing for obtaining Environmental Product Declaration (EPD)4 certification at home and abroad.

It has selected PosMAC5, the construction steel materials produced at the Pohang Steelworks and Giga Steel 6 for automobiles produced at the Gwangyang Steelworks as its WP

(World’s Premium) products.

In May 2018, it compiled quantitative environmental informationw on PosMAC taking into consideration the extraction of raw materials, supply, manufacture (cradle-to-gate) and recyclability. This information can be used for setting directions for reducing the environmental impact of the steel production process by considering the use of resources and energy in the whole life cycle of steel products and potential effects on climate change.

In addition, POSCO is building the environmental information on Giga Steel from the whole life cycle

acidification, eutrophication, photochemical oxidation, etc.

5

PosMAC (POSCO Magnesium Aluminum alloy Coating product) is a ternary alloy coated steel (Zn, Mg, Al) with high corrosion resistance developed using POSCO technology. It provides five to ten times greater corrosion resistance compared with ordinary hot-dip galvanized steel sheet (GI, GI(H)) of the same coating weight. Its longer life span is highly environmental and economical.

6

Giga Steel is hyper high-strength steel with a tensile strength over 980 MPa (1GPa) mainly used for automobiles to ensure car body safety and improve fuel economy by reducing vehicle weight.

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 7. Comparison between Conventional vs. Slag Cement

Limestone, silica stone

Crusher

PosMent – Eco-friendly cement with a higher slag content 4

Developing “PosMent” with a higher slag

CaCO2 + Heat → CaO+ CO2 Electricity

content, a by-product from the steel-making

Fuel

process, to strengthen the circular industry ecosystem and reduce greenhouse gas emissions

Plaster

t Cemen

Grinding mill

Clinker

Slag Max, 5%

Avoided CO2 emissions 8.6 Mt/y (Clinker process can be omitted)

Ground-granulated slag

ment Slag ce General cement Crusher

nt PosMe

Slag 40-60%

Ground-granulated blast furnace slag is a sandtype slag manufactured by spraying high-pressure water jets on molten slag from a blast furnace. It has a chemical composition similar to cement. As an alternative to cement clinker,7 granulated slag is used up to 5% in a cement mixture to conserve natural resources such as limestone and reduce energy and CO2 emissions associated with cement calcination. In cooperation with RIST and POSCO E&C, POSCO developed PosMent in 2012, which has a higher slag content but demonstrates improved physical properties such as pressure resistance and strength. It can reduce CO2 emissions by up to 60% compared to conventional cement.

In 2017 alone, the company used 10.95 Mt of ground-granulated blast furnace slag for the production of cement and reduced 8.6 Mt of greenhouse gas emissions.

Utilization of process off-gas – Innovative energy efficiency improvement and CO2 emissions cuts 5

perspective. It plans to obtain Environmental Product Declaration (EPD) certifica7 tion from an international certification Clinker is made by heating body and the Korean Ministry of Envilimestone and clay to create a fine powder for cement. ronment by August 2018.

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Asian Steel Watch

Using off-gas created in the steel-making process to improve energy efficiency, reduce CO2 emissions, and minimize electricity costs

Improving Sustainable Competitiveness in Preparation for a Circular Economy: The Case of POSCO

POSCO collects most of the off-gas (BFG, COG, LDG, FOG) created in the steel-making process for use as a process energy source and power generation. In 2017, Pohang Steelworks and Gwangyang Steelworks self-supplied 72% of their electricity needs through energy collection equipment, offgas generators, and LNG power generation equipment, such as Coke Dry Quenching (CDQ) and Top Gas Pressure Recovery Turbines (TRT). This figure has increased by 6%p from the generation rate of 68% in 2016.

To prepare for stricter greenhouse gas restrictions and rising electricity prices in the future, the power generation rate using off-gas will continue to increase.

ucts and by-products from the whole life cycle perspective. It applies the analytic outcomes to product development and processes to cut energy and CO2 emissions across the entire industrial and social ecosystems. In particular, it seeks to explore new markets by ensuring the eco-friendliness of both its products and by-products through third-party certification.

Thanks to such efforts, the steel industry can remain a staple of industry in the circular economy and POSCO will stand firmly as a sustainable, competitive company.

Reference S.H. Yoo, et al. Environmental Economics: Theory and Practice (in Korean), Park Young SA, Mar. 2003

Suggestions for the future It is an undeniable fact that the global economy is shifting toward a low-carbon and eco-friendly sustainable circular economy in order to address the potential depletion of energy resources, climate change, and air pollution. The steel industry will not be exempted from these changes in the business environment.

Although steel is a CO2-and energy-intensive industry, recently developed lightweight and high-strength steel products bolster the sustainable competitiveness of the steel industry, demonstrating that the steel industry can become a representative industry for sustainable competitiveness in a circular economy.

POSCO utilizes Life Cycle Assessment for product development. The company analyzes the recyclability and eco-friendliness of its steel prod-

B.W. Lee and Y.G. Ahn, Understanding Environmental Management (in Korean), Ecolivres, 2015 POSCO, POSCO Reports, each year Anatole Kaletsky, Capitalism 4.0: The Birth of a New Economy, Bloomsbury Publishing, 2010 Porter, Michael E., “What is strategy?,” Harvard Business Review, Boston: Vol.74, Iss. 6; pp. 61~79, Nov-Dec 1996 Prahalad, C. K., “Strategies for the Bottom of the Economic Pyramid: India as a Source of Innovation,” Reflection: The SOL journal, Vol. 3, NO.4, pp. 6~18, 2002 Wernerfelt, B., “A Resource-based View of the Firm,” Strategic Management Journal, Vol. 5, pp. 171~180, 1984 Wilson, M., “Corporate Sustainability: What is it and where does it come from?” Ivey Business Journal, London: Mar/Apr. 2003 Y.G. Ahn, Strategic Sustainability Management for Enhancing Corporate Value – in the context of Korean Business Circle, Erasmus University (Ph.d Thesis), 2007

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Dr. Peter Hodgson and Dr. Paul Brooks Group Health, Safety and Environment, Tata Steel Europe

Tata Steel Europe's Approach to the Circular Economy in a Life Cycle Perspective

S

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Asian Steel Watch

teel has excellent credentials as a sustainable

in other initiatives embrace those with a process

material for a circular economy compared

as well as a product focus. These include custom-

to many other engineering materials, on account

er-centric approaches in communicating on life

of, among other attributes, the very high recycling

cycle environmental performance, such as an En-

rates throughout its life cycle. There are nonethe-

vironmental Product Declaration Programme, for

less further opportunities for greater circularity in

which the company was awarded the 2017 World

steel and Tata Steel Europe is one of the several

Steel Association ‘Steelie’ for Excellence in Life

steel companies at the forefront of exploring these

Cycle Assessment. Tata Steel Europe has retained

opportunities. Links between life cycle thinking, the

the principles of its founder and those values are

circular economy, and sustainability are many and

embodied in the company’s future vision, to be-

are at the heart of Tata Steel Europe’s own journey

come the leading steel business that is sustain-

towards a more sustainable organization. Exam-

able in every sense. This article concludes with a

ples of the company’s activities include its active

view of future possibilities for steel to further its

role in the policy and standards arena, where life

circular economy credentials and relevance as a

cycle and circular economy aspects are increas-

sustainable material and how taking a whole life

ingly prevalent. Tata Steel Europe’s engagement

cycle perspective helps tell its story.

Society around the world is increasingly demanding services; infrastructure and products, energy solutions, buildings and transport (vehicles), as

populations and their expectations for development grow.

This demand is concurrent with the need to ad-

Tata Steel Europe’s Approach to the Circular Economy in a Life Cycle Perspective

Figure 1. The Life Cycle of Steel P re

Raw material extraction

s u m er st e el s cr -c o n R E C Y C L A BL ap % E 100

Steel production

o n s u m er s te e P o s t- c l s cr ap % 0 10 R EC YC LA BLE

dress global environmental issues such as greenhouse gas emissions and resource consumption, delivering a tension which is a fundamental challenge of today.

The paradigms of circular economy and material (or resource) efficiency aim to address this sustainability challenge through the principle of delivering the same or greater functionality provided by materials and products, while using fewer resources.

The circular economy is a synthesis of a number of pre-existing, related concepts in sustainability, all underpinned by the objective to maximize or maintain the value (optimize the utility) embodied in materials and products at all times through their life cycle.

There are many initiatives and drivers; in Europe, the European Union Action Plan for the Circular Economy, has built on the concepts and established an ambitious program of innovation and legislation, with measures covering the whole life cycle: from production and consumption to waste management and the market for secondary raw materials, with the objective of "closing the loop" of product life cycles. Specific strategies include, for example, setting new recycling rate targets for packaging materials.

Much of the increasing functionality demanded by society will continue to be delivered or enabled by steel and steel products. Steel already has excellent credentials and a strong story to tell as a circular material compared to many other engineering materials, on account of, for example, the very high recycling rates after manufacture and use phases of its life cycle (Figure 1).

Reuse and remanufacturing

Steel recycling

Manu -facturing

Use

Source: worldsteel

There are nonetheless further opportunities for greater circularity in steel and Tata Steel Europe is one of the several steel companies at the forefront of exploring these opportunities.

However, it is not necessarily the case that all strategies for greater circularity will lead to an improvement in environmental terms and therefore it is essential that opportunities, initiatives and new product developments are evaluated to help answer the questions: what is worth recovering and why is recovery worth?

Life Cycle Assessment (LCA), as a technique for the evaluation of the environmental benefits and impacts of systems, has a key role in answering those questions, for example in terms of greenhouse gas emissions. Tata Steel Europe’s team of life cycle experts are focusing on discovering and communicating those answers.

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Why has Tata Steel Europe adopted life cycle thinking?

Tata Steel Europe recognizes full life cycle thinking, from the sourcing of feedstock materials like iron ore and scrap to the fate of products at endof-life, plays a significant part in the company’s journey towards a more sustainable organization.

There are three primary drivers for this journey: 1

Commercial

Across all the market sectors, Tata Steel Europe serves its customers and other stakeholders’ expectations and requirements which are becoming more demanding when it comes to sustainability and the circular economy. Customers need to be sure that materials are sourced from responsible suppliers and Tata Steel Europe has responded to this requirement by embarking on a program of certification to the responsible sourcing standard, BES 6001.

2

Standards and regulations

Taking a whole life cycle approach is vital if the goals of environmental improvement through greater circularity are to be met. This is being recognized in the development of international standards and legislation, which are increasingly including LCA and related environmental themes.

The international standard for environmental management systems (ISO 14001) now includes clauses on the life cycle perspective, meaning that companies seeking certification must consider the environmental impacts of their activities,

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Asian Steel Watch

products, and services beyond the boundary of their immediate operations. A new ISO standard currently in development (ISO / DIS 20915) will give guidance when conducting a life cycle environmental study of steel.

Aside from ISO standards, different regions of the world have their own frameworks for environmental and sustainability legislation. Tata Steel Europe, along with others in the steel and broader metals sector, actively engages in the development of national, regional and international standards and regulation founded on life cycle thinking, including the examples above.

The company is also a partner in the European Commission’s Product Environmental Footprint (PEF) program and provides experts for the development of standards that cover Environmental Product Declarations (EPDs). However, greater participation in standards development from steel industry representatives around the world is required to articulate and argue for the importance of whole life cycle approaches against alternatives.

Engagement with the development of international sustainability standards is critical to ensure that there is a level playing field for steel in markets like construction.

3

Tata brand

When Jamsetji Tata founded what was to become the Tata Group of Companies in 1868, his well-documented beliefs in what we might nowadays call ‘sustainability’ were imprinted so strongly on the Group that even now, 150 years later, his statement that “In a free enterprise, the commu-

Tata Steel Europe’s Approach to the Circular Economy in a Life Cycle Perspective

Steel has a clear role as part of the solution for decarbonization, greater material efficiency and circularity.

Tata Steel Europe recognizes that this will consist of new processes in steelmaking and through the enabling role of steel products in society and is actively pursuing new developments in both.

nity is not just another stakeholder in business, but is in fact the very purpose of its existence” still runs through the core of the Group.

Tata Steel Europe has not lost the principles of its founder and his values are still embodied in the vision for the future, to become the leading steel business that is sustainable in every sense.

“Sustainability is about being able to demonstrate to your stakeholders—such as governments, customers, but also society—that you will be relevant to them not just today, but also in the future,” says Roger Steens, Director Sustainability, Tata Steel Europe.

What are Tata Steel Europe’s activities?

Steel has a clear role as part of the solution for decarbonization, greater material efficiency and circularity. Tata Steel Europe recognizes that this will consist of new processes in steelmaking and through the enabling role of steel products in society and is actively pursuing new develop-

ments in both.

1

Steel processes

One of the areas where Tata Steel Europe is leading the way on sustainable production is through the revolutionary HIsarna process.

HIsarna is a breakthrough technology, a substitute for the blast furnace process, with the potential for future production of steel with a 20% smaller carbon footprint. The HIsarna installation produces carbon dioxide that is ideally suited for immediate carbon capture and utilization or storage (CCUS), which could lead to an 80% reduction in CO2 emissions from the steel production process.

HIsarna is also expected to play a crucial role in achieving future recycling ambitions in the circular economy, allowing for high levels (up to 50%) of steel scrap input, a wide range of steel production by-products to be reused and the recovery of zinc from galvanized scrap, further closing the loop of the steel manufacturing pro-

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 2. Tata Steel Europe’s HIsarna Pilot Plant

Source: Tata Steel Europe

cess. The HIsarna pilot plant, at Tata Steel Europe’s IJmuiden site in the Netherlands (Figure 2), with a capacity of 60,000 tonnes of iron per year, has entered its fifth test campaign and is at the forefront of the global search for the step change in steelmaking needed to address environmental concerns.

2

Steel products and services

As well as the opportunities for circularity in steel making processes, which, other than HIsarna, are often based on the established principles of industrial symbiosis (e.g. utilizing wastes from other sectors as valuable process feedstock), some of the more innovative conversations and greater opportunities for greater circularity in society are based on steel products and their role as enablers

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Asian Steel Watch

through the life cycle.

These opportunities are realized, for example, through greater product durability, the design of products to enable enhanced recovery of materials (including for recycling and reuse) at the end of product life and using less material to provide the same (or better) functionality, such as in light-weighting of vehicles or packaging. This is of course consistent with what the steel industry has been doing for many years, through the development of advanced high strength steel grades and is another testament to steel’s excellent credentials as the perfect material with which ‘to do more with less’ in a circular economy.

Heather Wijdekop, Tata Steel Europe’s Director Marketing and Business Development, has long recognized these credentials, saying “Steel

Tata Steel Europe’s Approach to the Circular Economy in a Life Cycle Perspective

Figure 3. Carbon Footprint in Materials Production and Use Phase (Al vs. Steel (AHSS)) Carbon Footprint

Steel (AHSS)

AI

Vehicle use Crossover distance

AI

Steel (AHSS)

Material production & recycling

Total distance car travels during life

truly is a sustainable material, with a powerful combination of functional properties and whole life cycle performance. Think about safe and lightweight vehicles through the use of advanced high strength steel, durable construction products lasting and looking good for decades, if not centuries, and steel packaging which is easily recovered after use rather than being discarded.

Steel can be used over and over again without loss of its inherent properties and underpins the transition to a lower carbon, more circular world, adding value to society, true to Jamsetji Tata’s principles.”

Our own product development is indeed geared towards developing steel grades and steel products that are able to improve the sustainability performance of our customers. These

Distance travelled

approaches have led to the development of many products which specifically address energy-efficiency issues within end-user markets. For example, a range of our advanced high-strength steel makes cars lighter and more fuel efficient.

Life cycle studies have shown that approximately three quarters of all emissions related to vehicles occur in the use phase and therefore there is now a significant focus on vehicle mass reduction and alternative powertrain technologies to improve fuel economy. For both of these cases, the technological solutions for reducing emissions should be analysed by taking a full life cycle perspective, to avoid an unintended increase of CO2 emissions in material production and at end-of-life (Figure 3). Steel has an important role to play here because new grades of Advanced

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 4. Demountable Connections in Fokker 7/8 Distribution Center, Schiphol Airport, the Netherlands

High Strength Steel (AHSS) have been developed which allow vehicle light-weighting without compromising on manufacturing emissions ‘embodied’ in products.

Tata Steel Europe has been at the forefront of the Future Steel Vehicle project, led by WorldAutoSteel, in which its concept car, based on a battery electric vehicle platform, uses the latest steel technology and has a body that is 35% lighter than conventional steel grades, plus a five star safety rating. These results were achieved at no additional overall cost and with no increase in the environmental impact of its production, compared to using materials other than steel to achieve the same standards.

Tata Steel Europe’s product innovation in support of greater performance through the whole life cycle includes, as well as grades for light weighting of vehicles and advanced coatings for more durable products in the construction sector, high performance electrical steels that deliver use phase benefits through more efficient motors and fewer transformer losses in electrical power

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Asian Steel Watch

grids. Indeed, when a life cycle perspective is taken, it becomes clear that, across a wide range of applications, the benefits of using advanced steel products outweigh the impacts of making steel.

The company is also engaged in collaborative working to reduce yield loss in the steel supply chain through its distribution and service centers incorporating state–of–the–art tailor welded blanking facilities for automotive and other customers. The Active Classroom at Swansea University in the UK is a Tata Steel Europe-sponsored full-scale building demonstration project, in which design for end-of-life to optimize the value and utility of materials and products at the point of material recovery is a key feature. Elements of design for deconstruction include removable and re-usable steel screw pile foundations, off-site manufactured panels, which are also removable and re-usable and the use of recyclable materials for the main structure.

Incorporating a range of Tata Steel Europe products, the building has also been designed and built to test and prove the ‘buildings as power sta-

Tata Steel Europe’s Approach to the Circular Economy in a Life Cycle Perspective

tions’ concept for the education sector. Similarly, the Fokker 7/8 Distribution Center at Schiphol Airport in the Netherlands (Figure 4) includes elements of design for deconstruction such as adapted anchor bolts for demountable beam and column connections. Key elements to success are standardization, traceability, demountability, and supply chain cooperation.

One further area where Tata Steel Europe’s new product developments can reduce environmental impacts across the whole life cycle is in steel packaging, where the use of a three-layer polymer coating system (Protact®) provides a reliable food-safe barrier between the steel substrate and the packaging contents. Protact® removes the need for cost-intensive unit operations in can-making plants, eliminating volatile organic compound (VOC) emissions and reducing energy and water consumption.

3

Measurement and communication

Taking a full life cycle approach is increasingly demanded by our stakeholders and is an opportunity for steel as it helps in articulating the strong sustainability narrative that steel has. There are significant opportunities in higher value products and to displace less ‘circular’ materials. Life Cycle Assessment and Sustainability Assessments are tools that are available to support products and markets and in their development (e.g. as part of new product development processes), through the provision of credible quantitative and qualitative sustainability information.

Along with a continuous effort to optimize production processes to minimize energy use

and CO2 emissions associated with manufacture, Tata Steel Europe also facilitates its customers in making their products more sustainable. In order to help do so, LCA is extensively used to advise our customers in the design of their products made from steel. For over 20 years, we have been supplying life cycle data on our products and during this time we have grown our expertise in the field of LCA, which has been internationally recognized. In 2017, Tata Steel Europe won its fourth World Steel Association ‘Steelie’ for Excellence in LCA, awarded for our ‘Creation of an Environmental Product Declaration (EPD) Program.’ An EPD is an internationally recognized communication tool for conveying potential environmental impacts associated with a product across the whole life cycle. Establishing the independently verified program (the first steel

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 5. Tata Steel CEO Thachat V. Narendran (left) Accepting the 2017 ‘Steelie’ Award for ‘Excellence in LCA’ for Tata Steel Europe’s Environmental Product Declaration Program

company to do so) allows the production of EPDs in accordance with the relevant standards (Figure 5). Tata Steel Europe’s previous worldsteel ‘Steelie’ awards for LCA were for studies highlighting the credentials of steel against competitor materials, a case study of steel reuse and for the development of a comprehensive LCA model for construction applications. In terms of manufacturing data, Tata Steel Europe has detailed Life Cycle Inventories (LCIs) for over 85% of our product range in a ‘cradle to gate’ format. Working closely with worldsteel and many other steel companies, our LCIs contribute to industry–best standard life cycle average datasets for products such as hot–rolled coil and structural steel.

These average datasets are freely available to users of life cycle environmental data, including customers, consultants, and students for use in their work. worldsteel’s life cycle program is an excellent example of the industry working together in the interests

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Asian Steel Watch

of making the best possible information available in support of steel. And of course, the more companies that participate, the more representative and credible the results will be.

Future As macro trends such as more efficient use of resources, circular economy, climate change, increasing sustainability expectations of steel customers and the growing availability of end-of-life steel develop further, it will become ever more incumbent on the steel industry to innovate and be part of the solution to these global challenges.

Innovations such as Tata Steel Europe’s recently launched mobile canning concept could be part of this future. According to the United Nations Environment Program, a third of all food production worldwide is lost or wasted before it even reaches

Tata Steel Europe’s Approach to the Circular Economy in a Life Cycle Perspective

Getting more functionality from the same resource is critical to environmental improvement over the whole life cycle. A key enabler for greater circularity is having the right information available at the point of making a decision about the optimal use of products and materials.

Industry 4.0 is one concept covering the exchange of digital data across many manufacturing technologies and industrial systems, not just steel.

consumers. This is mainly via the post-harvest handling, storage, processing, packaging and distribution stages, i.e. before it even reaches a retailer. The mobile canning line would allow farmers, anywhere in the world, to process and preserve their produce on site, not only reducing the amount of food lost but also eradicating lost revenue for producers caused by spoilt goods, another example of steel’s role as an enabler for sustainability.

Getting more functionality from the same (or less) resource is critical to environmental improvement over the whole life cycle. A key enabler in this and other strategies for greater circularity is having the right information available at the point of making a decision about the optimal use, now and in the future, of products and materials. Industry 4.0 is one concept covering the exchange of digital data across many manufacturing technologies and industrial systems, not just steel.

In the construction sector, digital platforms such as Buildings Material Passports (BMP) and Buildings Information Modelling (BIM) are becoming widely used through the design, manufacture, and operation of a building, including for future reference regarding suitability for reuse. New initiatives in the sector are also seeking to integrate environmental information (such as LCA) about construction products into BIM, so that choices can be made on environmental criteria as well as others. Tata Steel Europe’s ‘DNA profiler’, developed to support construction customers meet new industry standards and enable circularity in the building industry, is one such example.

Steel, through its strength, durability, recyclability and many other attributes, has excellent circular economy credentials, more so than many other materials. Taking a whole life cycle perspective helps tell its story.

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Yoon-Chung Chin Principal Researcher, POSCO Research Institute chin@posri.re.kr

Steel in a Circular Economy: Change, Impact, and Prospects

T

oday a linear “take, make, and dispose” eco-

of certain hidden strengths of steel—high-quality,

nomic model is regarded as reaching its limits.

high-quantity recycling.

As a sustainable growth model to overcome such

To this end, some challenges should be addressed:

limits, a circular economy is increasingly being

improving the purity of scrap and maximizing recy-

discussed at the global level. The shift to a circular

clability; the ease of reuse and remanufacture tak-

economy may bring tremendous changes to supply

en into account from the design stage; and building

and demand of the steel industry and ultimately its

a cooperative linkage system with steel-consuming

future competitiveness. On the demand side, the

industries. To deal with opportunities and threats,

falling steel unit requirement of steel-consuming

the steel industry should ensure circularity of steel

industries, expanding service life of steel products,

to maintain its competitive edge and prove to

and falling demand for new steel products will fuel

steel-consuming industries and society at large

a decline in steel demand. On the production side,

that steel is a competitive material for the circular

however, it provides a chance to take advantage

economy era.

The USD 76 trillion global economy1 has been built on a linear “take, make, and dispose” 1 economic model. We “take” raw materiAccording to the World Bank, als from the ground, “make” products, global GDP (current USD) and then “dispose” of them. Through recorded USD 75.87trillion in 2016. this process, resources are depleted,

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Asian Steel Watch

wastes increase, and the environment becomes polluted. Many experts believe that the development of non-conventional energy sources such as shale gas are merely delaying the inevitable oil depletion. Other key minerals, such as copper and iron ore, are expected to run out within 50-100

Steel in a Circular Economy: Change, Impact, and Prospects

years.2 Every year the world generates more than 2.1 billion tons of waste, an amount that is expected to triple by 2100.3 Climate change, the most pressing environmental issue of the 21st century, is having an aggravating impact. What is worse, it is ever-harder to satisfy the growing demand stemming from rapid global population growth and urbanization.4 The concept of a “circular economy” is emerging as a solution to these problems.

In fact, the “circular economy” is a long-established notion that dates back to at least the 1970s when resource depletion and environmental pollution were widespread. Since then, a circular economy has become a vison and agenda for the international community, including at the UN, and a policy goal for governments. The concept has recently been treated as a significant

and largely untapped business opportunity for industry. Since 2013, the World Economic Forum (WEF) has been suggesting a circular 2 economy as a global business agenda US Energy Information Administration Statistics (2015), and called for industry to take action.

The World Business Council on Valero, A. and Antonio V. (2010) 3 Sustainable Development (WBCSD) “World Waste Facts, has adopted a circular economy as for The World Counts” (2017), the mission for its Vision 2050. Many World Bank Statistics (2016) 4 global consulting firms, including Mck- The gap between the supply and insey & Company and Accenture, have demand of natural resources is emphasized that a circular economy predicted to reach eight billion tonnes by 2030. This translates to will provide tremendous business op- USD 4.5 trillion of lost economic portunities, and many companies are growth by 2030 and up to USD already building circular economy busi- 25 trillion by 2050. The world population is expected to reach ness models.

9.5 billion by 2050.

For instance, Renault is remanu- (Accenture, WEF, World Bank)

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

In a circular economy, resources are used repeatedly rather than being depleted, and the ultimate destination of a product is not waste but a further product. It means that companies must take a fresh look at resources and waste. For the steel industry, the transiation to a circular economy will bring about rapid changes in supply and demand as well as impact its future competitiveness in quite a different manner compared to in the past.

facturing thousands or even tens of thousands of mechanical parts, from water pumps to engines, and uses these components to repair vehicles that are in use. The company not only creates jobs and profits through this practice, but also saves over 80% of the energy that manufacturing a brandnew part would have required. Renault redesigns selected components to make them easier to reuse and remanufacture, and it is exploring new areas for sharing profits with suppliers and recycling companies in order to expand its business model.

With more than 100 zero-waste facilities, GM is generating over USD 1 billion in profits through recycling and reuse of waste.

Philips has pioneered the collection and recycling of used lighting in the EU. It has recently expanded its “lighting-as-a-service,� through which users pay only for the light they use rather than purchasing lighting equipment. These kinds

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Asian Steel Watch

of cases are evident in a wide range of sectors and global companies.

The circular economy is a paradigm shift that goes beyond sustainable production and consumption to pursue sustainable development.

This article explores the meaning and progress of the circular economy and the changes and impact they will bring to the steel industry.

Understanding a circular economy When it comes to the idea of a circular economy, we often simply imagine recycling. However, this provides only one part of a circular economy.

A circular economy sustains the added value in products for as long as possible and eliminates waste. It holds resources within the economy when a product has reached the end of its life so that they can be productively used again and again and create further value (European Com-

Steel in a Circular Economy: Change, Impact, and Prospects

Figure 1. The Concept of a Circular Economy 6R5

Recycle

A series of activities by which discarded materials are collected, sorted, processed, and used in the production of new products

Raw materials supplier Reduce

Recycle

Parts manufacturer Remanufacture

Returning a used product to its original performance with a warranty that is equivalent to or better than that of a newly manufactured product

Reuse

Using a product multiple times within its functional life by different end users

Reduce

Remanufacture

Product manufacturer

Refurbish

Bringing a product back to required aesthetic specifications

Repair

Fixing faults or damage to bring a product back to the required functioning order

Reduce

Decreasing the amount of material, energy, and other resources used to create the product

Reduce

Reuse & Refurbish

Service provider Reduce

Repair Consumer

Reduce Incineration and landfill

Source: Compiled by the author based on technical materials on a circular economy by the Ellen MacArthur Foundation and McKinsey (2015) and Circular economy diagram by Philips

mission, 2014). It fundamentally means the decoupling of economic growth from resource use and environmental pollution. Simply put, past economic growth has inevitably boosted resource use and environmental pollution, but in a circular economy, economic growth is attainable while reducing the use of resources and alleviating environmental pollution. More than that, it ultimately means economic growth that is not dependent on limited resources and energy.

In a circular economy, resources are used repeatedly rather than being depleted, and the ultimate destination of a product is not waste but a further product. It means that companies must

take a fresh look at resources and waste. All waste has potential value as a resource. From this point of view, there no longer exists waste. This concept can be realized by the “6Rs” (reduce, repair, refurbish, reuse, remanufacture, and recycle), an approach expanded from the conventional “3Rs” (reduce, reuse, and recycle).

Many organizations, including the Ellen MacArthur Foundation and Ac- 5 “Reducing Waste: Repair, centure, have concluded that a circular Recondition, Remanufacture or economy will create both environmen- Recycle?”, A.M. King (2006), tal and economic benefits: reduced use “Steel in the circular economy, A life cycle perspective”, worldsteel of resources, improved resource pro- (2016), National Recycling ductivity, minimized risks from price Coalition & Carbon Trust website

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

fluctuations in raw materials, and new opportunities for business innovation, just to name a few.

This translates into USD 4.5 trillion of economic benefits worldwide by 2030 and EUR 1.8 trillion to the EU alone.6 For instance, the steel industry could save up to 100 Mt of iron ore by 2025 by improving the circularity of materials flows, and this would help the steel industry conserve raw materials costs and reduce raw materials prices, thus potentially reducing demand-driven volatility.7 In addition, many other circular economy business models are being implemented and deveoped. In 2014, Accenture classified five new business models for the circular economy by analyzing more than 120 case studies of companies: Circular supply-chain; Recovery and recycling; Product life-extension; Shar6 ing platform; and Product as a service “Waste to Wealth: The Circular Economy Advantage”, (PaaS). In 2015, IMSA suggested six Accenture (2015), “Growth circular business models, including Within: A Circular Economy Vision Short cycle, Long cycle, Cascades, and for a Competitive Europe”, Ellen MacArthur Foundation, Pure circles. Furthermore, Forum for SUN, and McKinsey (2015) the Future and Unilever co-developed 7 ten business model archetypes for a “Intelligent Assets Unlocking the Circular Economy Potential”, circular economy in 2016: Closed loop Ellen MacArthur Foundation and recycling, Downcycling, Upcycling, WEF (2015) 8 Industrial symbiosis, and Collection ”Circular Advantage”, Accenture services, among others.8 (2014), “Circular Business Model These research outcomes suggest Scan”, IMSA (2015), “The Circular that a circular economy is not mereEconomy Business Model Toolkit “, Forum for the Future (2016) ly an abstract ideal, but has already 9 reached the level of being practical and EU Circular Economy Package applicable in business. A circular econ(http://ec.europa.eu/environment/ circular-economy/index_en.htm) omy started as a solution to environ-

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mental problems, but companies facing limited growth are now adopting it as a business model for growth.

Enablers for a circular economy What are the enablers of a circular economy? Key enablers that will accelerate the transformation and innovation of industries and companies can be found in the areas of policy, technology, and customers.

To promote both the transition to a circular economy and business growth, innovative policy and institutional changes should follow. Many countries, including the EU, are setting mid- to long-term targets to shift to a circular economy.

They are meeting these targets through policies and regulations such as setting goals for resource productivity by sector and product; publishing recycling rates; encouraging reuse and remanufacfuning and strictly regulating reclamation and incineration.

In January 2018, the EU released its new “Circular Economy Package” setting waste recycling and reclamation targets to be achieved by 2030.

In particular, it aims to recycle 100% of plastic packaging. To achieve this goal, it is implementing directives for waste control, reuse as secondary raw materials, and eco-designs. Furthermore, the EU is standardizing environmental information disclosure on the life cycle of a product. It expects that companies in the region will be able to save more than EUR 600 million in costs and create two million additional jobs if a circular economy is adopted.9 Facing resource depletion

Steel in a Circular Economy: Change, Impact, and Prospects

and environmental pollution in the process of rapid economic growth, China put a low-carbon, circular economy on the national agenda in the 13th Five-Year Plan released in 2015. China also pledged to build a framework for a circular economy and increase its recycling rate to over 40% by 2020. In January 2018, China banned the import of foreign plastic waste, bolstering the system for a circular economy. The China Association of Circular Economy (CACE) estimated the value of China’s waste recycling industries to be approximately USD 293 billion in 2015 and its future market potential is projected to become the global leader.10 Together with the strengthening of policies for a circular economy, the most noticeable enabler is the advancement of digital technology and engineering innovations. The fundamental distinction between the circular and linear economy is that resource management abandons traditional practices of resource extraction and production and instead takes life cycle approach to pre- and post-production.

Digital technologies enable the collection of massive amounts of data and resource flows can be managed through innovative technologies such as mobile, machine-to-machine communication, cloud computing, and big data analysis. This is laying a fundamental basis for the transition to a circular economy.11 Representative examples include monitoring and analyzing customer patterns when using and disposing of products and emplacing a tracking and collection system across the entire supply chain. Finally, just like with other great shifts, the

most important enabler of the transition to a circular economy is the customers themselves, or in other words, market change. This change in value is all made possible by the development of new technologies.

Notably, customer demand for 10 eco-friendliness is increasingly expand- China Association of Circular ing in scope. Despite the global eco- Economy (December 2013) nomic recession, the eco-friendly goods 11 Accenture suggested 10 and services market reached EUR 4.2 innovative technologies to trillion in 2012 and has increased by support circular economy business models in 2015: as much as 4% annually since 2010.12 Mobile, Machine-to-Machine More and more customers want (M2M) Communication, Cloud products made from eco-friendly raw Computing, Social, Big Data Analysis, Modular Design materials that were prepared with less Technology, Life and Material energy, have a minimal impact on the Science Technology, Trace and environment, and are easily recyclable Return Systems, and 3D Printing. after disposal. In other words, “circu- 12 UK Department of Energy and larity of a product� has become a new Climate Change (July 2013)

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

Figure 2. The Impact of a Circular Economy on the Steel Industry Enablers

Policy and regulation

Changes in consumer behavior

Advances in technology

Effects of a circular economy Circular economy concept Global and regional markets Steel-using sectors (e.g.construction, machinery, autumotive, etc.)

Impact on steel production demand

Lower steel intensity Longer service life of steel products • Reduced demand for new steel products • •

Impact on steel production

Improve energy and raw material productivity Reuse and remanufacture of steel products • Maximize the value of scrap • •

Source: Compiled by the author

value for customers.

Impact of a circular economy on the steel industry The steel industry has maintained the competitive edge of steel being the cheapest and most economical material through continuous efforts at ensuring high-performance lightweight products.

Thanks to such efforts, it has secured a large proportion of steel-consuming industries amid the fierce competition among materials.

However, the transition to a circular economy,

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which will entail tremendous shifts in production and consumption in the global economy, will bring about rapid changes in supply and demand within the steel industry as well as impact its future competitiveness in quite a different manner compared to in the past.

Impact on steel demand On the supply side, steel-consuming industries including automobiles, shipbuilding, and construction are developing toward a reduction in resource productivity, meaning a reduction of unit requirements and steel intensity. Less steel

Steel in a Circular Economy: Change, Impact, and Prospects

materials will be consumed to produce the same amount of steel products. Although steel-consuming industries will sustain or raise the current production level, steel demand could decline.

In particular, steel intensity in the automotive industry is expected to fall to 80% of 2015 levels by 2035 due to the increased manufacture of electric vehicles, improved fuel economy, lighter weight, and lower steel intensity.13 This trend will be accelerated by circular economy policies such as producer responsibility to recycle end-of-life vehicles and the expansion of the market for remanufactured automotive parts.

A product’s service life is also an important factor in changes of steel demand. In a circular economy, durable products have a greater competitive edge than do less durable products; therefore, steel-containing goods are developed to have as long a useful life as possible. This will primarily lead to a decline in new demand. Based on the concept of a circular economy, the extended use of sharing products, i.e. car sharing, will further accelerate this trend.

However, there is a quite opposite analysis noting that product service life is being significantly reduced as steel-consuming industries diversify and demand for metals by new growth industries is rapidly changing. In 2012, the Korea Evaluation Institute of Industrial Technology (KEIT) suggested that general-purpose steel has a service life exceeding decades, whereas that of high-end metal products is merely 5-10 years.

To sum up the causes of supply-side changes and the impact of a circular economy, the falling steel unit requirement of steel-consuming indus-

As a key material for a low-carbon circular economy, ensuring the competitiveness of steel products is a pivotal task for the survival and sustainability of the steel industry.

tries, expanding service life of steel products, and falling demand for new steel products will fuel a decline in steel demand. A report by Accenture suggests that in the baseline forecast global steel demand will grow by a CAGR of 1.4% through 2035, but after applying the impact of a circular economy, the projection drops by 0.3%p (130 million tones, on a crude steel basis) to a CAGR of 1.4%.14

Impact on steel production At the steel-making process stage, resource productivity is being improved and environmental impact is being minimized through the development of innovative 13 Steel Contents Per Vehicle, technology and introduction of new 1,546 kg in 2015, 1,391 kg in types of production methods. Since the 2025, 1,252 kg in 2035, 1960s, the global steel industry has cut POSRI analysis (2017) 14 the energy required to produce a tonne “Steel demand beyond 2030, of crude steel by more than 60%15, and Forecast Scenario”, presented to resource productivity has been continu- the OECD, Accenture (2017) 15 ously improved in response to high vol- “Steel’s Contribution to a Low atility in raw materials prices. Despite Carbon Future”, worldsteel (2014)

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TOWARDS THE CIRCULAR ECONOMY: WHAT IT MEANS TO THE STEEL INDUSTRY

such efforts, the steel industry is often regarded as being energy and CO2 intensive. Currently, the steel industry is being asked to innovate even beyond its efforts of the past. This is where tangible changes should come in the mid- to long-term as many countries work to reduce the carbon footprint of the steel-making process by restricting greenhouse gas emissions.

The potential for the recycling of scrap is the largest advantage of steel and a project that should be developed further. Steel scrap has over a 90% recycling rate (UNEP, 2011) and can be infinitely recycled without 16 any loss to its properties (worldsteel, “Understanding Steel Recovery and Recycling Rate and Limitation 2015). However, there are numerous to Recycling”, Bowyer et al (2015) barriers, such as customers’ behavior 17 patterns in using and disposing of “Towards the Circular Economy”, Ellen McArthur Foundation steel, the level of technology for sepaand WEF (2015) rating and removing impurities during 18 the recycling of steel, recyclability con“Steel demand beyond 2030”, Accenture (2017) sideration at the product design stage,

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and lack of integration of supply chains by country and region.

Without addressing purity challenges, more than half of the old steel scrap generated annually will have to be down-cycled by 2050.16 The Ellen McArthur Foundation & WEF (2015) has placed steel in the “Golden Oldies” category, which means that a high volume of recyclable materials are widely collected, but they suffer from contamination and quality loss in the cycle. It has stressed that improving the purity of scrap and maximizing recyclability are challenges to be addressed.17 In addition, the integration or linkage of scrap supply chains by country and region is the most important challenge for maximizing recyclability and expanding related businesses.

These shifting conditions for recycling scrap will accelerate the increase in the share of electric arc furnaces (EAF), which is forecast to rise from 25.3% in 2016 to 39.9% by 2035.18 Combined

Steel in a Circular Economy: Change, Impact, and Prospects

with stricter environmental regulations and policies for promoting a circular economy, this trend will become particularly evident in China.

The recycling of scrap through recovery is being expanded to include the reusing and remanufacturing of steel products. To this end, the ease of reuse and remanufacture should be taken into account from the design stage, and it is essential to build a cooperative linkage system with steel-consuming industries. In addition, further developments will be made in the methods for recycling slag and by-product gas created from steel-making process and the ways of making them into new products.

What’s next The shift to a circular economy has already begun.

Related policies and regulations will be strength ened to drive this transformation. The advance ment in technologies will further accelerate this

process while customer demand for products that adapt to such changes grows continuously.

This transformation poses a challenge to the steel industry, but at the same time it provides a chance to take advantage of certain hidden strengths of steel—high-quality, high-quantity recycling. Global steel companies, including POSCO and Tata Steel Europe, are trying to take this chance by embedding life cycle thinking and seeking innovation in their production processes and products based on life cycle thinking. Developing automotive steels through environmental load analysis of the full life cycle of a vehicle and creating slag cement from steel by-products are some good examples.

In the meantime, worldsteel sees the circularity of steel based on the 4Rs (reduce, reuse, remanufacture, and recycle) is the best means to ensure the competitive edge of steel amid the fierce competition among materials.

Over the last three to four decades, the steel industry has been trying to minimize energy use and environmental pollution associated with manufacture and actively publicizing such efforts.

However, over the next 50 years, it is increasingly essential for the steel industry to prove to steel-consuming industries and society at large that steel is a competitive material for the circular economy era.

As a key material for a low-carbon circular economy, ensuring the competitiveness of steel products is a pivotal task for the survival and sustainability of the steel industry. This is why we must pay keen attention to the circular economy.

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I N T E R V I E W with HBIS Group Chairman

Challenges and Responses in the Chinese Steel Industry Yu Yong Chairman, HBIS Group Dr. Yu Yong came into the steel industry in 1987. In January 2006, he became Vice President of Tangshan Iron & Steel Company. In 2010, he was appointed Chairman of HBIS Tangsteel Company. From 2012 to 2013, he served as President and Vice Chairman of HBIS Group. In December 2013, he was appointed Chairman of HBIS Group. Since January 2018, he has been Chairman of Chinese Iron & Steel Association(CISA).

Dr. Yu Yong holds a master’s and doctorate degrees in Metallurgical Engineering from University of Science & Technology Beijing (USTB). In 2002, he went to Singapore as a Senior Visiting Scholar in Nanyang Technological University, where he got a Doctorate in Economics.

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Challenges and Responses in the Chinese Steel Industry

Q: Please tell us about the businesses, core values, and vision of HBIS Group.

A: HBIS Group is one of the world’s largest

iron and steel manufacturers and comprehensive service suppliers.

The Group encompasses over 30 subsidiaries with 120,000 employees. In 2017, our revenue stood at RMB 306.8 billion and year-end total assets at RMB 376.2 billion, ranking 221st among the Fortune Global 500.

The Group received “highly competitive”—the highest rating of the Report on the Comprehensive Competitiveness of Chinese Iron and Steel Enterprises in 2016, released by the China Metallurgical Industry Planning and Research Institute (MPI). HBIS is currently a member of the World Steel Association’s Executive Committee and the rotating Presidential Enterprise of the China Iron and Steel Association.

Bearing the motto “Assuming the Responsibility of a National Industry”, HBIS maintains a vision of becoming a highly competitive steel company.

While following its environmental protection doctrine of “green steel-making for human civilization,” HBIS pursues the “customer-oriented” sales ideology and the philosophy that “employees provide the irreplaceable competitiveness of a company.”

We are striving to transform ourselves into a multinational conglomerate with globalized resources, markets, and customers.

Keeping steelmaking at the core of its business, HBIS is committed to becoming an

Bearing the motto “Assuming the Responsibility of a National Industry”, HBIS maintains a vision of becoming a highly competitive steel company.

integrated conglomerate with a top global brand and comprehensive competitiveness.

Business Areas Dedicated to producing strong and superior steel products HBIS has in recent years been pursuing vertical expansion in the steel industry chain and expanded use of the full resource chain from the perspective of the entire industry value chain. Also, we are making significant strides in growing our non-steel and overseas businesses.

Steel products: Equipped with globally competitive facilities, HBIS fully meets the steel-making standards of China. HBIS has a strong reputation at home and abroad for cold-rolled steel sheets, high strength steel bar, wide flats, pipeline steel strip, and special steel round bar. We hold the largest market share in China of steel products for home appliances and the second-largest market share of automotive steel.

Non-steel business: HBIS maintains business segments in mining, finance and securities, modern logistics, steel trading, and

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INTERVIEW

equipment manufacturing. For our future development, we are focusing on the extensive use of steel by-products, as well as new materials and new energy businesses.

Finance sector: We have four subsidiaries— HBIS Finance, HBIS Leasing, HBIS Factoring, and Caida Securities. In order to seek efficient industrial capital financialization and finance capital industrialization, the industrial finance chain has become an important means to improve benefits for the Group.

Overseas business: We are committed to securing global resources, global markets, and global customers. We are ensuring the globalization of our full industrial chain from resources and manufacturing to trading. In the past few years, HBIS has acquired the South African copper producer Palabora Mining Company (PMC) and Swiss iron and steel trader DITH. In 2016, HBIS assumed full ownership of the only state-owned steel mill in Serbia.

Q: HBIS Group is regarded as a successful model for integration and restructuring in the Chinese steel industry. Please share some of the experiences from the success.

A: The integration and restructuring of HBIS

have taken place against the backdrop of Chinese economic development entering a new phase, the so-called “new normal”. After the winding down of the high-growth era, China has begun a development stage char-

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acterized by market saturation, fierce competition, credit crunches, and low benefits.

HBIS management recognizes that industrial development must necessarily become rationalized and mature and that it is an irreversible trend for the steel industry to move forward to full marketization and globalization. This “new normal” creates a strong mechanism forcing steelmakers to improve competitiveness through genuine reform. Under this ideological guidance, we are equipping HBIS with clear strategies, flexible tactics, cohesion, and reform & opening through multifaceted reforms.

Establishing a modern group management system for strategic management and control To apply the three core functions of our headquarters—strategic decision-making, resource sharing, and cooperation services— HBIS is bolstering the group’s determination and principles. Emphasizing top-level goal setting and target management, headquarters resolutely sets a development direction and focuses on ‘what’ to do. Subsidiaries decide the ‘how’ and execute these decisions in order to enhance competitiveness.

The three functions are categorized into nine key areas: strategic planning, investment decision-making, HR affairs, overall budget, financial management and control, operational adjustment, sales management and supervision, external partnership, and risk management.

Advancing the steel business with central

Challenges and Responses in the Chinese Steel Industry

financial management and control as a breakthrough To change yourself, you must create the proper environment first. HBIS has recently set a program of “zero new loans� as a redline that cannot be crossed. We have continuously reduced our debt-to-equity ratio, standardized costs, and established a settlement center and financing source for the group. We have also expanded low-cost lending channels at home and abroad, actively reformed financial products, and extensively sophisticated our debt structure.

Through the financial management and control reforms, subsidiaries of HBIS Group have discarded the conventional management practice of being highly dependent both on the group and on loans. Instead, they have formulated production management methods focusing on highly efficient

use of funds in order to ensure sustainable development.

The Group has reduced external consignment projects and established policies for managing traders. By distributing such policies to its subsidiaries, the group has led them to cut costs and restore the market competitiveness of the steel business.

Pursuing reform through a f lattened management structure with the production line as an independent market unit To adapt to increasingly individualized and differentiated customer demand, HBIS is seeking production structure and resource allocation reform. We have been working toward a flattened management structure with the production line as an independent market unit. By shifting the focus of the management of steel subsidiaries to pro-

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duction lines, we have driven the production lines to the center of corporate resource allocation, operation, and management and to the frontline of customer services.

Currently, HBIS has 16 integrated product segments encompassing production, sales, and research. Each market unit is led by top management. In the face of changing market conditions, each unit is equipped with three special teams of production operation, technology development, and sales services. Along with increases in resource allocation and operational efficiency, they improve the product structure and corporate benefits.

products, HBIS Group has established customer-oriented ideology of steel industry and upgraded the product mix by satisfying customers’ needs for high-end products.

Since 2016, we have expanded our fund input and R&D from production to customers. We have established a joint laboratory for high-quality steel products with client companies. We have utilized this to build strategic capital partnerships with companies in steel-consuming industries, including automobiles, home appliances, and equipment manufacturing, thereby expanding the industrial chain.

Q: Thanks to active restructuring by the Chi-

Upgrading product mix by satisfying increasingly sophisticated customer needs and expanding the industrial chain to downstream customers With a strong emphasis on markets and

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nese government, “ditiaogang” (low-quality steel made from scrap metal) has disappeared and overcapacity has somewhat eased. What is the direction for restructuring by the Chinese government in the future?

Challenges and Responses in the Chinese Steel Industry

A: China is the only country that announces

targets for reducing steel production capacity both by degree and scope of execution. It is the only country in the world that actually meets these targets. However, the effects of the timing and execution of the capacity cuts benefit the entire world. Beginning with a capacity cut, China has implemented restructuring, improved the path of growth, and significantly elevated environmental protection. China has offered its own solution for addressing overcapacity in the global steel industry.

In February 2016, the Chinese government announced a capacity reduction target of 100-150 Mt over the next five years. It had reduced capacity by 120 Mt by the end of 2017 and plans to cut an additional 30 Mt of capacity in 2018. If this is realized, China will be able to advance in its capacity-cut target for two years.

These capacity reductions have allowed the Chinese steel industry to overcome difficulties and upgrade itself. For its contribution to the recovery of the global steel market, China has been appreciated in the global steel industry.

As the Chinese economy is shifting from rapid growth to qualitative growth, the steel industry will pursue the following five types of restructuring in the new-normal era.

First, the Chinese steel industry will coordinate products and customers in line with government supply-side reform. Facing the evolution of steel-consuming industries, it will seek mutual growth with these industries by actively coordinating the customer

and product structures.

Second, it will achieve low-carbon green growth by improving environmental technologies. Pursuing a philosophy of “coexistence of humans, steel, and the environment,” it will produce green steel for human development by implementing an environmental action plan and establishing a carbon emissions control system.

Third, it will bolster innovation strategies and improve production efficiency in all factors. Changing the corporate development ideology from the investment drive to an innovation drive, it will strengthen innovation in technology and management and fuel growth as well.

Fourth, it will continue the ideology of reform and opening and accelerate the globalization of the Chinese steel industry. The Chinese steel industry has already achieved localization of major steel-making technologies and key production facilities. It has clear relative competitiveness in the global market. Under the open cooperation platform known as “One Belt One Road” (OBOR), the Chinese steel industry is both confident and capable of playing a more important role in the economic growth of countries along the OBOR route and in other developing countries.

Fifth, the steel industry will enhance efficiency through mergers and acquisitions (M&A). During the period of the 13th FiveYear Plan (2016-2020), the phased and structural supply glut will linger in the Chinese steel industry. China is encouraging M&A in the steel industry to funnel idle

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capacity into capable companies and regions with relative advantage. By doing so, it can achieve a rational division of labor, complement mutual weaknesses, and improve the overall efficiency of the industry.

Q: China is strengthening environmental regulations. What does HBIS think about it?

A: We strongly believe that environmental

protection is a fundamental essential principle for any company and reflects comprehensive corporate competitiveness. Since our integration, HBIS has maintained its development philosophy of “coexistence of humans, steel, and the environment” and designated “making green steel for human civilization” as its environmental protection ideology. We have taken the lead in formulating and implementing our “Green Development Action Plan.”

Through these efforts, we have clarified our goals and directions for green development and accelerated our progress toward becoming a clean circular and sustainable green steel company. So far, we have invested RMB 16.5 billion toward achieving this goal. HBIS has closed obsolete facilities, introduced advanced technologies, and strengthened environment management. It has conducted over 430 energy-saving and emission-cutting projects. Thanks to these efforts, HBIS is among the leaders in energy saving and environmental protection indices and has been described as the “cleanest factory in the world.” HBIS’s project to apply urban recycled water as the only water source

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in iron and steel production was awarded in the Excellence in Sustainability category of the 7th Steelie Awards by worldsteel in 2016.

Stricter environmental regulations and investigation in China are now providing HBIS with an important opportunity for growth. Companies complacent about generating profits through environmentally harmful practices are gradually being edged out of the market. The phenomenon of “bad money drives out good” is disappearing as the steel industry enters a stage of positive circular development.

As a next step toward low-carbon green development, HBIS is increasing its green investment, producing “green products” through “green manufacturing”, and establishing a “green industry.” By doing so, it will contribute to the continuous and sound development of the steel industry.

From the perspective of “green manufacturing”, HBIS is working to accelerate the spread of energy-saving technologies and improve steel-making energy consumption indices to meet global standards. At the same time, it is advancing lightweighting, recycling, and resourcing in production processes and engaging in in-depth cooperation with leading global energy-saving and environmentally-friendly companies. By jointly conducting projects with these companies for the comprehensive use of energy, slag, and off-gas and the treatment of wastewater, HBIS has been relentlessly raising the cleanliness and efficiency of primary and secondary resources while maximizing the values of recycled resources.

Challenges and Responses in the Chinese Steel Industry

From the perspective of creating green products, HBIS is providing customers with high-performance, energy-saving, and less-polluting green products through forward- and backward-linked customer management.

In recent years, HBIS has built 17 research and development platforms along with global leading companies, universities, and research institutions, including the Chinese Academy of Social Sciences, Northeastern University, POSCO, Siemens, the University of Queensland in Australia, and Swerea MEFOS to create global technology development platform. Based on this platform, HBIS has expanded R&D investment from inside the company to customers and is actively adapting to the trend toward more lightweight steel materials and sustainable development. We are developing and expanding high strength, high toughness,

high corrosion resistant, and lightweight steel products. With respect to building a green industry, HBIS has emerged as a front runner of green development in the Chinese steel industry by exploring and practicing green growth methods and establishing a green brand. Through the integration of internal resources and strategic partnerships, we have succeeded in creating a range of green companies including HBIS Energy, HBIS Chemical, HBIS Sales, HBIS Mining, and HBIS-CSCES Steel Structure Company.

Based on our “green steel� brand and environmental protection technology advantages, HBIS is solidifying its basis in the three areas of energy conservation, environmental protection, and resource recycling to meet the growing demand for green products. With a strong emphasis on comprehensive services, HBIS is helping to make the industry less energy intensive and

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With a strong emphasis on comprehensive services, HBIS is helping to make the industry less energy intensive and transitioning from being urban-dependent to providing services to the city. Promoting coexistence between steel mills, cities, and society as a whole, it is generating lowcarbon green value for the steel industry.

transitioning from being urban-dependent to providing services to the city. Promoting coexistence among steel mills, cities, and society as a whole, it is generating low-carbon green value for the steel industry.

Q : The Chinese steel industry is facing a wave of smartization. How is the progress in the Chinese steel industry?

A: As the Chinese economy shifts from

high-growth to high-quality development, steel demand is progressing from massive uniform demand to diverse, individualized, and customized demand. Furthermore, over the last decade smart (intelligent) technology represented by Big Data and AI has advanced from the theoretical research stage to the industrial application one. The deep convergence of smart technology and the steel industry is increasing efficiency and reducing costs. It will also allow manufacturing to become more market-adaptable and satisfy customized demands.

In fact, major Chinese steel companies’ automation and information levels have

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reached global standards. The digitalization rate of their major operation processes stands at over 65% and the ERP rate surpasses 70%, demonstrating a sound basis for smartization. HBIS Group has recently emplaced an automation and information support system and made great strides in quality control, production-cost management, and flexible production. Some factories have been designated as national smart manufacturing pilot plants. We have set directions for improving our employees’ smart sensibilities, capacity for developing new products, and customer service. We are moving forward from traditional manufacturing to smart manufacturing.

First, we will implement smartization and robotics applications across all processes. Second, we will build simulation systems and digital twin systems to reduce the new product development cycle and enhance customer service capabilities and overall benefits. Third, we will realize the potential value in data through the application of next-generation AI and Big Data technologies and enhance system analytics and predictability to provide customers with a trustworthy basis for decision making.

Q: The intensification of global trade conflicts can have a great impact on the steel industry. What should global steel companies and worldsteel do?

A: The Chinese steel industry has consistent-

ly been focusing on satisfying domestic demand rather than encouraging massive steel

Challenges and Responses in the Chinese Steel Industry

exports. China’s steel trade policies have neither promoted exports nor fully refunded value added tax on steel exports according to international practices. Instead, China has actually imposed tariffs on steel exports to prevent massive steel outflows and maintain stability.

China was a net steel importer until 2005. Steel exports have surged in recent years, mainly attributable to the fact that Chinese steel products have gained global competitiveness and have been subject to objective rules such as economic globalization and international division of labor.

Since 2010, the share of exports in Chinese crude steel production has stabilized in the range of 7-14%. In 2017, China’s net steel export ratio (% of crude steel production) stood at only 7.7%. In the future, Chinese steel exports will demonstrate a gradual and stable trend due to the upgrading of the Chinese economic structure, phased implementation of supply-side structural reforms, and maturation of the global market

structure.

Economic globalization is an irreversible trend. The global steel market has become a buyer’s market. If any country abuses global trade rules and implements excessive protectionist measures simply in order to shelter ailing domestic industries, this will lead to chaos in the global trade order and hinder the sound and sustainable development of the global steel industry.

As the Chinese steel industry participates in global competition and exports an appropriate volume of steel products, it can satisfy demand from global downstream customers while vitalizing the international steel industry. Currently, China is accelerating the implementation of strategies for upgrading the steel industry. The Chinese steel industry hopes to join forces with its global counterparts and worldsteel to address pressing issues and challenges. It also hopes to level the playing field for negotiation and competition in the international arena and ensure a sound trade order.

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Special Report

Current Status and Future Prospects for the Japanese Steel Market

Kiyotaka Terashima Managing Director, The Japan Iron and Steel Federation (JISF)

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Current Status and Future Prospects for the Japanese Steel Market

Historical Development of the Japanese Steel Industry and the Structure of Steel Demand Post-war steel demand in Japan in terms of apparent crude steel consumption experienced three boom periods.

The first was the immediate post-war expansionary wave, which lasted until the first oil crisis in 1973. It reached a peak of about 90 Mt in 1973, and then fell sharply in fiscal years 1974 and 1975.

During the bubble economy, the second period of expansion, apparent demand peaked at 100.47 Mt in 1990. This figure was considerably

higher than the previous record set in 1973. Indeed, 1990 is the only year to date, in which apparent steel consumption exceeded 100 Mt. Domestic demand stagnated following the collapse of the bubble economy, but it began to recover once again on the back of the expansion of the global economy spearheaded by China, marking its third boom period before the impact of the Lehman Shock in the fall of 2008.

After experiencing a period of increases and decreases, economic activity has been gradually picking up since early 2016.

Domestic steel demand at present appears

Figure 1. Changes in Japanese Supply and Demand for Crude Steel (Mt) Apparent consumption

First oil shock

110

Second oil shock

Collapse of bubble economy

Consumption tax hike

Lehman Shock

Consumption tax hike

100 90

Great East Japan Earthquake

Tokyo Olympics

80 70

(3) Pre-Lehman boom (2) Bubble economy period

60 50

Great Hanshin-Awaji Earthquake Asian Currency Crisis

(1) Rapid economic growth period

40 30 20 10 0

60

65

70

75

80

85

90

95

00

05

10

15 16 (FY)

Note: Apparent consumption = Production + Imports - Exports Source: The Japan Iron and Steel Federation (JISF)

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Figure 2. Real GDP, Fixed Capital Formation and Apparent Consumption of Crude Steel in Japan (FY1995 = 100)

(1,000 tons)

Real GDP (FY1995 = 100) Total fixed capital formation (1995 = 100) Apparent consumption of crude steel (RHS)

120

120,000

100

100,000

80

80,000

(3) Pre-Lehman boom

60

60,000

(2) Bubble economy period

40

40,000

(1) Rapid economic growth period 20

20,000

0

0

60

65

70

75

80

85

90

95

00

05

10

14 (FY)

Note: Apparent Consumption = Production + Imports - Exports Source: Cabinet Office, JISF

healthy in response to economic recovery in both domestic and overseas markets.

Figure 2 shows the close correlation between crude steel apparent consumption and total fixed capital formation.

Examined in greater detail, the graph shows that in during the post-war rapid economic growth period, the rate of steel demand growth surpassed the increase in total fixed capital formation.

Industrialization and urbanization were rap-

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Asian Steel Watch

idly advancing, with one industrial investment triggering another in a process of “investment generating investment.” With steel demand also expanding rapidly, it can be said that a process of “steel generating steel” took place in the same manner.

During the bubble period, the momentum can be traced back to the growth in fixed capital formation as well. Steel demand was also expanding strongly and reached a record high in 1990.

Subsequently, total fixed capital formation

Current Status and Future Prospects for the Japanese Steel Market

Figure 3. Steel Demand by Sector in Japan (Mt)

100 90 80 70 60 50 40 30 20 10 0

68

70

Specialty steel

72

74

76

78

Metal products, etc.

80

82

84

86

Electrical machinery

88

90

92

94

Industrial machinery

96

98

00

Automobiles

02

04

06

Shipbulding

08

10

12

Construction

14

16 (FY)

Civil works

Source: JISF

flattened, but there was a third boom period in the years leading up to the global financial crisis.

The expansion in indirect exports supported the increase in demand during this period.

During the post-war rapid economic growth period, strong growth in demand was evident, but it was particularly notable in the construction sector where the effect of the demand surge was significant. In the bubble economy period as well, the demand increase in the construction sector stands out.

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Figure 4. Construction Industry Trend in Japan

Figure 5. Automotive Industry Trend in Japan

(million m2)

180

(million vehicles)

20

Residential Non-residential

Domestic production Domestic sales Exports Japanese automobile manufacturers’ overseas production

18

160

16

140

14

120

12 100 10 80 8 60

6

40

4

20

2

0

0

60

70

80

90

00

10

16 (FY)

60

70

80

90

00

10

16 (CY)

Source: JISF

Meanwhile, in the pre-Lehman boom period, demand increased mainly in sectors of the manufacturing industry such as automobiles and industrial machinery. Demand for specialty steel increased at this time. It was also characterized by strong demand for automotive parts and machinery components.

Figure 4 and 5 show the actual level of activity in the construction and automobile sectors. Both of these feature significant weightings in the overall steel demand.

Figure 4 shows data for the construction industry.

Both residential and non-residential construc-

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tion grew sharply during both the post-war rapid economic growth period and the bubble economy period.

Figure 5 shows developments in the automobile industry. Both domestic sales and exports were increasing during the rapid economic growth period, but in the bubble economy period exports declined while domestic sales were increasing.

Conversely, domestic sales decreased and exports rose during the boom leading up to the financial crisis.

Incidentally, the overseas production by Japanese automobile manufacturers that began

Current Status and Future Prospects for the Japanese Steel Market

Figure 6. Japanese Population Estimates, Housing Starts and Forecast of Automobile Sales Volume (million people)

140

(10,000) 0 - 14 65 - 74

15 - 64 75 -

180

(10,000) Housing starts

160

120

140

600

120 100

60

80

Domestic car sales volume

700

100

80

800

500 400 300

60 40

200

40 20

100

20

0

0 70 75 80 85 90 95 00 05 10 15 20 25 30 35 (CY)

0 70 75 80 85 90 95 00 05 10 15

25 30 (FY)

70 75 80 85 90 95 00 05 10 15

25 30 (FY)

Source: N ational Institute of Population and Social Security Research, Research Institute of Construction and Economy, Japan Automobile Dealers Association

in 1980 has, with the exception of the Lehman Shock period, consistently increased. It has accelerated since 2010.

Medium-Term Outlook for the Japanese Steel Industry Grim prospects for steel demand Japan is already facing a declining population. The anticipated rapid decline in the working-age population is making industry forecasts even more conservative. In fact, most of these forecasts predict shrinking market in the future.

As in the cement, chemical, shipbuilding, and

construction industries, the steel industry has suffered from excessive production capacity in the wake of the boom periods.

This occurred in Japan in the years of declining demand which followed both the post-war rapid economic expansion and the collapse of the bubble economy. Respective industries, including steel, needed to undertake a long-term restructuring process. These difficult experiences have made them conservative about future prospects.

For example, housing starts are forecast to shrink further.

Regarding automobile sales, the average age of those holding driver’s licenses in Japan is rising

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Figure 7. Examples of Japanese New Sources of Demand in Response to Decreasing Population

Acceleration in aging and shrinking population

Increase in delivery needs for vulnerable road users

Labor shortage at plants, construction sites, etc.

Decline in small-scale municipalities in rural areas

Labor shortage in the transportation industry

Expansion of medical and nursing care demand

Initiatives towards making public services more efficient

New establishment of logistics warehouses corresponding to automation requirements

Investment in labor-saving technologies such as mechanization and automation

Movements towards the building of compact cities

Improvements in efficiency of transportation (railway, truck etc.), enhancement of transportation capacity

Adoption of steel structures to contribute to labor-saving

Restructuring of regional public transport

Factors for supporting steel consumption by domestic investment activities Source: JISF

and the number of holders is decreasing. Demand is expected to be pushed down further as the aging and shrinking of the Japanese population take hold and lifestyles change.

Specifically, since public transportation facilities such as subways in metropolitan areas provide effective and reliable service, there is less need for private vehicles.

With the shift in young people’s interests and preferences, their motivation to buy new cars is steadily declining. Car-sharing and other similar habits may put further pressure on steel demand in the future.

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Current Status and Future Prospects for the Japanese Steel Market

Figure 8. Floor Area by Age of Building (Tokyo) (million m2)

30

(million m2) Office

Renewal demand

100

Residential

Renewal demand

20 50 10

0

0 -1959

1960-69

1970-79

1980-89

1990-99

2000-09

2010-15

-1959

1960-69

1970-79

1980-89

1990-99

2000-09

2010-15

Source: Tokyo Metropolitan Government

Table 1. Infrastructure Over 50-Years Old in Japan Mar. 2012

Mar. 2022

Mar. 2032

Road bridges (length > 2m)

~16%

~40%

~65%

Tunnels

~18%

~31%

~47%

River management facilities (state controlled sluice, etc.)

~24%

~40%

~62%

Sewage conduits

~2%

~7%

~23%

Port quays (>4.5m deep)

~7%

~29%

~56%

Source: Ministry of Land, Infrastructure and Transport

New steel demand to be created A declining population and aging society do not always have negative effects on steel consumption. For one thing, they will result in severe labor shortages. In reality, labor shortages are emerging as an imminent challenge in such sectors as transportation, construction, healthcare, and manufacturing.

To address these issues, further capital investment is necessary to enhance efficiency, which in turn generates a new source of steel consumption.

The other matter is a decline in small-scale

rural municipalities due to the shrinking population.

To cope with this issue, the Ministry of Land, Infrastructure, Transport and Tourism of Japan is promoting the formation of more compact cities. This new direction may also contribute to an increase in steel use.

New steel demand may also be generated from the renewal of aging buildings and infrastructure.

Figure 8 represents offices and homes in the Tokyo Metropolitan Area by age of construction.

Table 1 shows the percentage of infrastructure exceeding 50 year in age.

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Figure 9. Challenges Surrounding Japan

Aging cities and infrastructure

Population decrease

Creating new demand

Challenges surrounding Japan

Disaster response

Globalization of enterprises

A considerable number of buildings and infrastructure must be rebuilt in the near future. This is expected to require an enormous volume of steel products.

The third factor supporting steel use in the future is the response to natural disasters. The Japanese islands are prone to natural catastrophes such as earthquakes and typhoons. To cope with these frequent natural sevents, Japan is implementing “building national resilience” plans aimed at creating a safe and secure nation, regions, and society. Such exercise is also expected

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Development and stable supply of high-performance steel materials

to expand the scope of steel demand.

Future steel demand and the mission of the Japanese steel industry Japan has been described as a “challenged developed country.” The major challenges include: a declining population; ageing cities and infrastructure; natural disasters such as earthquakes and typhoons; and intensifying competition due to globalization.

Faced with this, a number of pessimistic views have been expressed about the future prospects

Current Status and Future Prospects for the Japanese Steel Market

for economic growth.

On the other hand, there are also optimistic views that envisage the demand that will be generated through the process of solving these problems. There already exists a range of areas for steel use in Japan, such as infrastructure development, construction, automobiles, energy conservation, and disaster prevention.

At the same time, these uses require a higher quality of steel, as represented by the need for lighter-weight automobiles. For further development, the Japanese steel industry should contin-

ue with its mission of providing user industries with high-performance steel products in a stable manner. To this end, we need to closely observe future demand and evolving needs and develop high-quality steel products in cooperation with steel-using industries.

The key to the future success of the Japanese steel industry lies in the efforts to constantly promote the research and development of high-value-added products and to improve service capabilities in response to the changing requirements in the steel market.

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66 The Asian Stainless Steel Market: Trends, Issues and Prospects

Dr. Park Chan-Wook

72 The Decoupling of GDP and Steel Demand: Cyclical or Structural?

Dr. Chung Cheol-Ho

Featured Articles

The Asian Stainless Steel Market: Trends, Issues and Prospects Dr. Park Chan-Wook Vice President POSCO Research Institute pcw@posri.re.kr

We find ourselves surrounded by stainless steel from the moment we start our day, from the smart watch that wakes us in the bedroom, the razor and basin valve in the bathroom, the toaster, stove, frying pan, and sink in the kitchen, the solar panels on the rooftop, to the purring cars on the road.

Stainless steel has an extraordinarily wide range of application, leading to continuously rising demand. According to the International Stainless Steel Forum (ISSF) of worldsteel, demand for stainless steel increased at a CAGR of 5.4% from 1980 to 2016 to become a 46 Mt annual market.

On the other hand, demand for aluminum and carbon steel increased at rates of 3.8% and 2.3% over the same period. Production of plastic has tripled since 1990, but that of stainless steel has quadrupled.

By product type, 83% of stainless steel is used for flat products, while the remaining 17%

Asia’s stainless steel market growing faster than the carbon steel market

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goes to long products. More than 80% of the flat products are cold-rolled steel plates. By use, 38% of stainless steel is for catering and metal products, 28% for mechanical engineering, 12% for construction, 10% for motor vehicles and related parts, and 8% for electrical machinery.

By region, the stainless steel industry clearly demonstrates the economic emergence of Asia.

The continent’s growth engines are the export-led economy and intra-regional investment in infrastructure, and the role of steel, including stainless steel, is central in both. Looking at some indicators to estimate the changes from 2000 to 2017 in Table 1, Asia’s share of global GDP increased by 7%p from 25% to 32%. However, this increase is unimpressive compared to the expansion of the steel industry. During the same period, stainless steel slab production in Asia surged by 35%p from 42% to 77% (from 6.2 Mt to 30.5 Mt). Asia’s share of total crude steel production increased by 30%p from 39% to 69%. China’s rise is even more dramatic in stainless steel than in carbon steel.

China’s share of Asian stainless steel slab produc-

The Asian Stainless Steel Market: Trends, Issues and Prospects

Table 1. Share of Asia’s GDP and Steel Production

Asia/World

China/Asia

2000

2005

2010

2015

2017

Nominal GDP

25%

22%

27%

31%

32%

Crude steel

39%

52%

64%

69%

69%

Stainless steel slab

42%

52%

67%

74%

77%

Nominal GDP

14%

22%

34%

48%

48%

Crude steel

39%

59%

70%

72%

73%

4%

26%

57%

70%

71%

Nominal GDP

15%

22%

32%

39%

40%

Crude steel

18%

25%

32%

35%

36%

Stainless steel slab

10%

17%

23%

33%

39%

Stainless steel slab (India+ ASEAN)/ Asia (excl. China) Source: IHS, CRU

tion, which stood at a mere 4% (250,000 tonnes) in 2000, skyrocketed to 71% (22 Mt) by 2017.

China’s growth is not the totality of development in Asia, however. The spreading influence India and the ASEAN nations should be taken into account as well. Their share of stainless steel slab production in Asia excluding China surged from 10% in 2000 to 39% in 2017, of crude steel production from 18% to 36%, and of GDP from 15% to 40%. The rapid growth in the stainless steel industry is clearly demonstrated in India and the ASEAN countries.

Figure 1. S tructure of Asia’s Stainless Steel Market

Based on supply and demand factors, Asia’s stainless steel industry shows five distinctive characteristics.

First, the stainless steel market has high growth potential. When estimating the growth trajectory and potential of the steel market by country, crude steel consumption per capita and

GDP per capita are often compared, as shown in Figure 2. China’s cold-rolled stainless steel consumption per capita has reached the level of Japan at 8.9 kg. The exceptionally high steel-consumption by the economies of Korea and Taiwan become clear in such a comparison.

Figure 2 boils down to two questions. Has China’s steel consumption per capita peaked?

Although it will lose growth elasticity, growth momentum should continue for a while. The oth-

Five characteristics of Asian stainless steel market

Market growth potential

Influence of China’s NPI mills

Restructuring and consolidation

Spread of regulation

Growing complexity of nickel market

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Figure 2. Asia’s Cold-Rolled Stainless Steel Consumption Potential 30

Cold-Rolled Stainless steel consumption per capita (kg)

Taiwan 26.6

25

S.Korea 20.0

20

15

Italy

10

Japan 9.0

Germany China 8.9 Vietnam 5

India 1.6

Thailand

0 0

USA

Canada

Spain Turkey Malaysia Mexico 10,000

GDP per capita (US$)

20,000

30,000

40,000

50,000

60,000

Source: IHS, CRU

er question relates to the future position of India and ASEAN countries, who are in the early stages of taking off.

Will India be able to outpace China despite its currently low 1.6 kg of per capita steel consumption? If that is to be the case, India’s CR stainless steel market must grow from the current level of 2 Mt to reach 12 Mt. What about the ASEAN market, where leadership passed from Thailand to Vietnam after 2011? Currently, per capita steel consumption stands at 5.5 kg for Vietnam, 4.4 kg for Thailand, and 0.6 kg for Indonesia. Despite these differences among countries, ASEAN shows a high potential to grow.

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Second, it should be noted that Chinese mills have significantly reduced costs by integrating slab production with a nickel pig iron (NPI) process that produces Fe-Ni with a 10% nickel metal content. An illuminating example is Tsingshan Holding Group. The company has already achieved a stainless steel capacity of 7 Mt in China, and since the second half of 2017 it has been operating with a crude stainless steel capacity of 3 Mtpy and hot-rolled coil capacity of 3 Mtpy in Sulawesi, Indonesia. Tsingshan’s investment also spreads into India. In late January, it had a ground-breaking ceremony for a cold-rolled facility with a 600,000-tonne annual capacity. It plans

The Asian Stainless Steel Market: Trends, Issues and Prospects

Tsingshan’s investment also spreads into India. In late January, it had a ground-breaking ceremony for a cold-rolled facility with a 600,000-tonne annual capacity.

to build an integrated 2 Mtpy stainless steel plant within five years. This signals that Chinese mills’ overseas strategy is shifting from export to local production.

The third characteristic is the complexity of the nickel market. An increasing number of variables should be considered: the widespread NPI process, opening of the Shanghai Futures Exchange in 2015 and intervention by speculative funds, Indonesia’s export ban on raw nickel ore and the subsequent partial resumption, Philippine environmental regulations for nickel mines, and the bolstering of nickel markets for batteries for electric vehicles (EV) by the Chinese government’s policy measures.

Electric car sales are expected to reach 35 million units by 2030, and EV batteries will be primarily nickel, cobalt, and manganese (NCM) types with an 80% nickel content. Assuming that 18 kg of nickel is used per electric vehicle, the nickel market for EVs alone will reach 630,000 tonnes. According to the Nickel Market Outlook to 2027 released by Roskill, a UK metals and minerals research institution, EVs will account for about 30% of new car sales in 2027 and nickel demand for EVs is forecast to rise to 500,000 tonnes. While 65% of the current nickel market of 2 Mt is used in stainless steel, it should become

Figure 3. A sia Cold-Rolled Stainless Steel Production

by Country

1%

2%

1%

0%

7%

China

6%

India Japan

7% 10%

South Korea

66%

Taiwan Thailand Vietnam Malaysia Indonesia

Source: CRU

difficult in the future to simply equate nickel with stainless steel.

The fourth is regulation, which entails two contradictory issues. One is protectionism, through which Asia’s stainless steel products can be exposed to trade interventions such as anti-dumping tariffs.

China’s exports of 1 Mt cold-rolled steel per year is facing import restrictions in the USA, EU, Brazil, India, Malaysia, Vietnam, and Thailand.

The other issue is environmental regulation: some obsolete NPI facilities are not free from pollutant emissions.

The final characteristic is restructuring

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Table 2. Supply and Demand of Cold-rolled Stainless Steel Sheet

Capacity

Consumption (A)

Overcapacity (B)

Overcapacity Ratio (B/A)

(1,000 tonnes)

2000

2009

2010

2017

World

12,118

22,122

23,592

33,504

Asia

5,289

13,599

14,838

24,962

China

645

6,616

7,517

15,795

World

9,562

13,684

16,982

25,848

Asia

4,000

9,091

11,158

18,465

China

1,214

5,461

6,622

12,248

World

2,556

8,438

6,610

7,656

Asia

1,289

4,507

3,680

6,496

China

– 569

1,155

895

3,547

World

27%

62%

39%

30%

Asia

32%

50%

33%

35%

–

21%

14%

29%

China Source: CRU

through consolidation. In Japan, after Nisshin Steel merged with Nippon Metal Industry in 2012 and acquired Nippon Steel & Sumitomo Metal Corporation (NSSC) in March 2017, the stainless steel industry had restructured into a single large company (NSSC), one medium company (JFE), and one small company (Nippon Yakin).

In China, Baosteel closed its stainless steel plant in Shanghai this year and plans to increase its production of 300 series stainless steel by its subsidiary Baosteel Desheng Stainless Steel and 400 series by Meishan Iron & Steel Company.

However, unlike the advanced integration in the carbon steel industry, the integration of stainless steel mills will be accelerated only when demand increases stop.

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Price competition is being intensified by overcapacity pressure.

Furthermore, the technology gap among companies is narrowing, providing customers with increased choice. This is the reality of the stainless steel industry. Under such circumstances, customer switching costs are falling and major companies are increasingly finding it difficult to attract customers. In a contradictory situation in which high growth and low profitability coexist, the stainless steel industry is trapped in a dilemma of choice.

It can neither seek growth as ROI and cost advantages are uncertain, nor give up the market due to increasing demand. What will determine the per-

The stainless steel industry trapped in a dilemma: what is to be done?

The Asian Stainless Steel Market: Trends, Issues and Prospects

Figure 4. Stainless Steel Used in Solar Panels

STS 304 /EN 1.4301 (Cover strip)

STS EN 1.4401 (Absorber)

formance of stainless steel producers? Above all, one key factor is how they can maintain cost advantage in the face of price competition triggered by overcapacity pressure. Cost competitiveness is becoming increasingly important as the price spread between nickel, which accounts for nearly 70% of raw material prices, and stainless steel products is narrowing and the conversion margin is subsequently declining. Considering production efficiency, companies in Europe and Japan have intensified their facilities to reduce overhead and inventory costs. Baosteel in China is following suit.

Tsingshan Group has reduced production costs in the NPI process and pursued global expansion, but Jiangsu Delong Nickel has adopted a strategy of quantitative growth, including new facility expansion in China. In addition, the stainless steel

STS EN 1.4301 (Collector housing)

industry requires a strategy for differentiating business models. For example, it can create new demand by developing innovative types of products and providing solutions to increase customer switching costs. Differentiated products and smart servitization programs are effective in higher-end markets. In the era of the Fourth Industrial Revolution, market development opportunities are more diverse than had been expected, including for 3D printing, infrared temperature sensors, smart watches, IoT-based home appliances with black stainless steel finishes, and cover strips, absorbers, and collector housings for solar panels.

The efforts to stake an early claim in the market and create unique business models that cannot be easily imitated are providing a source for sustainable results.

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Featured Articles

The Decoupling of GDP and Steel Demand: Cyclical or Structural?

Dr. Chung Cheol-Ho Vice President POSCO Research Institute chchung@posri.re.kr

In the 2000s, global steel demand growth consistently surpassed global GDP growth. Since 2012, however, this trend has been reversed as global steel demand growth dipped significantly below global GDP growth. In 2017, steel demand growth once again overtook GDP growth. 1 However, worldsteel forecast in April 2018 that global steel demand will grow by 1.8% in 2018 and 0.7% in 2019, both below the respective IMF global GDP growth forecasts for these years of 3.9% and 3.9%. Why has global steel demand essentially remained below global GDP growth since 2012? Will this trend persist or simply remain cyclical? These questions are of considerable importance since they provide key information for predicting the future of the steel industry.

Decoupling between GDP and steel demand 1

According to worldsteel, if an

adjustment is made to the statistical distortion of crude steel production caused by the closure of China’s illegal induction furnaces in 2017, global finishd steel consumption would decline from 4.7% to 2.4%, which is below global GDP growth (3.0% based on market exchange rates and 3.7% based on PPP exchange rates).

2

A correlation coefficient is a measure that identifies the

degree to which two variables’ movements are associated. The range of values for the correlation coefficient is -1.0 to 1.0, with a correlation of -1.0 indicating a perfect negative correlation and a correlation of 1.0 indicating a perfect positive correlation.

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In general, there is a high cor relation between GDP and steel demand. The correlation coefficient2 for the two variables during the period spanning 1990 to 2016 is 0.68. Narrowing the period to 20002016, the correlation coefficient even rises to 0.77.

By country, this high correlation between the two variables remains consistent. As Table 1 shows, the coefficient of most countries surpasses 0.6, and in only a few nations can a relatively low correlation of 0.4 be found.

For this reason, the GDP growth outlook has often been used to forecast steel demand. For example, assuming that India’s GDP growth outlook is for a compound annual growth rate (CAGR) of 7% through 2030, this 7% rate can be applied to predict India’s steel demand for 2030. Calculating global GDP growth and global steel demand between 1990 and 2016, global GDP increased by

High correlation between GDP and steel demand

The Decopling of GDP and Steel Demand: Cyclical or Structural?

Table 1. Country-wise Correlation Coefficient between GDP and Steel Demand Correlation Coefficient Estimates (1990-2016) World

World total (0.68)

Country

Korea (0.88), Mexico (0.87), Brazil (0.84), Japan (0.81), Germany (0.77) Turkey (0.76), Chile (0.74), Italy (0.73), France (0.73), Indonesia (0.71) Taiwan (0.70), India (0.70), Malaysia (0.69), UK (0.68), Thailand (0.66), South Africa (0.61), USA (0.61), Canada (0.60), UAE (0.49), China (0.43), Iran (0.42), Vietnam (0.36), Singapore (0.29), the Philippines (0.25), Egypt (0.24), Saudi Arabia (0.04)

Source: IHS, worldsteel

Figure 1. Global Steel Demand and Global GDP Growth 15

(%)

Global steel demand World GDP

10 5 0 -5 -10 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Source: IMF, worldsteel

a CAGR of 2.7% (based on IHS data; 3.6% by the IMF using PPP exchange rates) and global steel demand grew by 3.3%, showing a minimal discrepancy between the two.3 This pattern holds true for individual countries like India. From 1990 to 2016, India’s GDP growth and steel demand growth were 6.6% and 6.3%, showing how the figures are similar within a single country.

If the decoupling between GDP growth and steel demand continues, predictability using correlation coefficient between the two variables will diminish. Therefore, it is necessary to find the causes for the decoupling, if any. Furthermore, identifying the causes would be illuminating in its own right.

How can the changes in the relationship between the two variables that took place around 2012 be explained? The first approach could be examining the characteristics of GDP and steel demand and the relationships between GDP components and steel demand by period. As GDP covers a broad scope and is greater in scale than steel demand, GDP volatility is funda-

Causes of decoupling of global GDP and steel demand

3

To calculate global GDP, each country’s home-currencydenominated GDP should be converted into US dollars. The weight for each country varies depending on whether market exchange rates or purchasing power parity (PPP) exchange rates are used. As developing countries have a lower marketization level than their advanced counterparts, they receive a much higher weight in aggregations that apply PPP exchange rates compared to with market exchange rates.

Generally, developing countries have a higher economic growth rate than do advanced countries, so PPP-based global GDP growth is higher than market-based rates. The IMF releases GDP growth both by PPP and market exchange rates, but it usually suggests PPP-basis rates as an official outlook. Using marketbased rates, however, the IHS GDP forecast turns out to be lower than the IMF GDP forecast.

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These shifts in China, which accounts for about 45% of global steel demand, became a key driver for changes in global steel demand.

Simply put, China is the most important factor for explaining the decoupling between global GDP and global steel demand after 2012.

mentally lower than that of steel demand. As a measure of volatility, the standard deviation of global GDP growth for the period of 1980-2017 was 1.3%, while that of global steel demand was 4.7%. This indicates that the standard deviation of global steel demand growth is 3.7 times higher than that of global GDP growth. In other words, steel demand growth moves in the same direction as GDP growth (high correlation coefficient), but it fluctuates more widely. In that case, which GDP component among consumption, investment, and exports would better explain the fluctuations in steel demand?

Comparing the growth rates of global steel demand and GDP components such as consumption, investment, and exports (Figures 2 and 3), steel demand growth is much more volatile than is consumption growth, but it shows similar volatility with fixed asset investment, and in particular with goods export volume. Therefore, the dip in global steel demand after 2012 can be mostly

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explained by the slowdown in global investment and exports. China provides a representative example. After overcoming the global financial crisis of 2008 through massive government-led investment, China shifted its growth strategy from investment and exports to consumption as President Xi Jinping took power at the 18th Party Congress in November 2012. China’s manufacturing-based and export-led growth strategies faced their limitations when the global economy slowed after the financial crisis and excessive investment led to mounting debt and oversupply.

With this shift in growth strategy, the shares in GDP of investment and exports plunged while the share of consumption surged (Figure 4). In addition, the contributions of manufacturing and construction decreased, but that of services expanded (Figure 5). These shifts in China, which accounts for about 45% of global steel demand, became a key driver for changes in global steel demand. Simply put, China is the most import-

The Decopling of GDP and Steel Demand: Cyclical or Structural?

Figure 2. Global Steel Demand, GDP, and Consumption 20

(%)

Figure 3. Global Steel Demand, Investment, and Exports

Steel demand Real GDP Final consumption expenditure

20

15

15

10

10

5

5

0

0

-5

-5

-10

-10

-15

(%)

Steel demand Export volume of goods Fixed asset investment

-15 2000

2004

2008

2012

2016

Source: World Bank, worldsteel

2000

2004

2008

2012

2016

Source: IMF, World Bank, worldsteel

Figure 4. Share of GDP Components in China

Figure 5. Share of Value Added by Industry in China

Gross capital formation Private consumption expenditure Exports of goods and services

(% of GDP) 60% 50%

Industry Services

(% of total value added) 55% 50%

40%

45%

30% 40%

50% 10%

35%

0%

30%

1990

1996

2002

2008

2014

1990

1996

2002

2008

2014

Source: UNCTAD

Source: UNCTAD

ant factor for explaining the decoupling between global GDP and global steel demand after 2012.

However, the question remains of why the decline in global steel demand growth in the period 2014-2016 is deeper than that of investment or export volume. One cause could be the plunge in the prices of raw materials, including oil, during this period. A decline in oil or other raw materials prices has a neutral effect on the global economy overall. The positive impact on countries that are net raw materials importers offsets the negative impact on net raw materials exporting countries.

But a decline in oil or other raw materials prices

has a negative impact on global steel demand, because the plunge of oil and raw materials prices reduces outlays of infrastruture and plants, etc., especially for developing countries. Net raw materials exporting countries are also developing countries which account for a certain proportion of global steel consumption. For this reason, global steel consumption growth falls below global GDP growth. In 2017, developing countries accounted for 39.4% of global real GDP, but 74.1% of global steel demand, two times the share of GDP. In a comparison of commodity prices and global steel demand (Figure 6), changes in com-

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Figure 6. Commodity Price Index and Global Steel Demand (%)

Commodity price index (Non-fuel) Global steel demand

30

20

10

0

-10

-20 1981

1987

1993

1999

2005

2011

2017

Note: A commodity price index includes the prices of food, beverages, and industrial raw materials Source: IMF, worldsteel

modity prices well explain the fluctuations in global steel demand.

With respect to countries where steel demand plunged after 2012, those that led this decline are mainly developing countries. Table 2 compares steel demand growth by country between the periods of 2000-2012 and 2012-2016.

It indicates that China’s steel demand fell the most, followed by Brazil, Saudi Arabia, UAE, Argentina, Indonesia, and Russia. This suggests that developing countries with a high proportion of raw materials exports are prone to a decline in steel demand growth.

On the other hand, advanced countries including the USA, Japan, and Germany only show a minimal decline. In particular, the GDP growth decline in developing countries with a high steel

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Asian Steel Watch

demand decline is relatively smaller than their steel demand decline. Therefore, the significant dip in steel demand among major developing countries, particularly raw materials exporting countries, can be another major cause for the decoupling.

Will this decoupling persist or remain cyclical? To state the conclusion first, the decoupling between the global economy and global steel demand is likely to keep the status quo for a considerable time. The causes of the decoupling after 2012—weak investment, exports and raw material prices—are likely to linger for

The decoupling will likely linger

The Decopling of GDP and Steel Demand: Cyclical or Structural?

Table 2. Country-wise GDP Growth and Steel Demand Growth (CAGR) by Period ‘00-’12 (A)

Real GDP Growth ‘12-’16 (B)

A—B (%p)

‘00-’12 (C)

Steel Demand Growth ‘12-’16 (D)

C—D (%p)

China

10.2%

7.2%

3.0

14.9%

0.8%

14.1

Brazil

3.6%

– 0.9%

4.5

4.4%

– 9.0%

13.5

Saudi Arabia

4.1%

3.0%

1.0

10.3%

– 0.7%

11.0

UAE

4.2%

4.0%

0.2

12.0%

2.7%

9.3

Argentina

2.9%

0.0%

2.9

4.3%

– 3.8%

8.0

Indonesia

5.4%

5.1%

0.3

8.2%

0.3%

7.8

Russia

4.6%

– 0.2%

4.8

4.8%

– 2.8%

7.6

Thailand

4.5%

2.5%

2.0

8.2%

3.2%

4.9

India

7.2%

7.3%

– 0.1

8.4%

3.6%

4.7

Australia

3.1%

2.5%

0.6

0.8%

– 2.4%

3.2

Turkey

4.7%

5.7%

– 1.1

6.9%

4.6%

2.3

South Korea

4.2%

3.0%

1.2

2.9%

1.4%

1.6

Malaysia

4.7%

5.0%

– 0.3

3.1%

3.5%

– 0.5

United States

1.7%

2.1%

– 0.5

– 1.8%

– 1.2%

– 0.7

Japan

0.6%

1.2%

– 0.5

– 1.4%

– 0.7%

– 0.7

Mexico

1.8%

2.6%

– 0.8

3.3%

5.0%

– 1.7

Germany

1.1%

1.5%

– 0.4

– 0.3%

1.9%

– 2.3

Source: IMF, worldsteel

several structural reasons.

First, investment and exports will likely not to sustain their robust growth momentum of the past as developing countries’ manufacturing-based and export-led growth strategies face difficulty due to the weak demand in advanced countries and as trade conflicts between China and the USA will likely be extended.

Moreover, advanced countries, which had been implementing extraordinary monetary policies called quantitative easing, have shifted to tight monetary policies through interest rate increases.

Therefore, developing countries with increasing debts will suffer from mounting economic burdens and instability.

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Most forecasts predict that the ongoing modest increase in oil prices will become a persistent trend. Furthermore, aging populations and megatrends such as the sharing economy and the Fourth Industrial Revolution are also expected to bear negative effects on steel demand in the long term.

Oil and other raw materials prices could possibly rise temporarily due to the base effect of low prices and geopolitical supply disruptions, but they have a slim likelihood of surging in the long run. For instance, most forecasts predict that the ongoing modest increase in oil prices will become a persistent trend.

Furthermore, aging populations and megatrends such as the sharing economy and the Fourth Industrial Revolution are also expected to bear negative effects on steel demand in the long term. The aging populations in Korea, China, Japan, the USA, and Western Europe will drive down demand for construction and automobiles, leading to a slowdown in steel demand.

In addition, the Fourth Industrial Revolution will also work against steel demand in terms of steel intensity, including through the potential commercialization of autonomous vehicles and its impact on the automotive industry; the reduced size of shopping malls or offices due to the

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Asian Steel Watch

prospering of e-commerce enterprises such as Amazon; the rise of the sharing economy represented by Airbnb (housing-sharing services) and Uber (ride-sharing services); and the emergence of the circular economy to address environmental concerns. Further analysis should be performed to more fully examine the impact of these factors on steel demand, but their impact will likely to be negative.

How large a gap will the decoupling create? IHS Markit’s mid- to longterm global economic outlook predicts that global GDP growth will show a CAGR of 2.9% through 2035. Meanwhile, POSRI’s mid- to longrange out look presented at the Board Meeting of worldsteel in April 2017 and described in Asian Steel Watch Vol. 3 suggests that global steel

Global steel demand hovering below global GDP through 2035

The Decopling of GDP and Steel Demand: Cyclical or Structural?

Figure 7. POSRI's Global Steel Demand Forecast (Mt)

CAGR 0.9%

CAGR 1.2%

to POSRI’s. According to Accenture’s global steel demand outlook released at the OECD meeting in September 2017, global steel demand in the baseline forecast is expected to grow by a CAGR of 1.4%.

To be sure, it is questionable whether such predictions will be perfectly realized, but these forecasts indicate that major institutions believe that the decoupling between global economic growth and global steel demand will persist for a while. Dividing the long-term outlook by region, three main characteristics are evident.

First, steel demand in Northeast Asia (China, Japan, and Korea) will decline. Second, steel demand in the USA and the EU will slow to below a CAGR of 1%. Third, other emerging countries will lead global steel demand. Overall, the decline in steel demand in China, Japan, and Korea, which together accounted for 54% of global steel demand in 2017, seems to be a decisive factor causing a slowdown in global steel demand. Fur-

[‘16-’35] 1.1%

1,857

1,690

1,501

1.0% -0.2%

Other

2.3% Energy Shipbuilding Automobile

0.3%

1.2% Construction

2015

2025

2035

Source: POSCO Research Institute Note: 1) Shipbuilding sector includes other transportation, 2) Demand for other sectors is forecast using industrial production index

demand is expected to grow at a CAGR of 1.1% through 2035. The global GDP will grow almost three times the rate of global steel demand. Accenture’s global steel demand outlook is quite similar

Figure 8. Accenture's Global Steel Demand Outlook (2015-2035) (Mt, crude steel equivalent) 2500

Baseline

Incremental

Radical

2000 1873 1749

2000 1500 1500

1000

500

0 ‘88

‘90

‘92

‘94

‘96

‘98

‘00

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

‘22

‘24

‘26

‘28

‘30

‘32

‘34

Source : Accenture

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The improvement seems to continue for the time being. However, there are still concerns that the decoupling of global steel demand and global GDP will continue in the long term.

Figure 9. Global GDP and Working-Age Population Global working-age population(→) (%) (%) Global GDP(←)

8 7 6 5 4 3 2 1 0 -1 -2 -3

2.5 2.0 1.5 1.0 0.5 0.0

1961 1968 1975 1982 1989 1996 2003 2010 2017 2024 Source: World Bank, UN

Figure 10. Working-Age Population in China, Japan, and Korea 5%

Japan

Korea

China

Forecast (2018 – 2030)

4% 3% 2% 1% 0% -1% -2% 1951 Source: UN

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Asian Steel Watch

1961

1971

1981

1991

2001

2011

2021

thermore, based on IHS’s global GDP growth projections, the respective GDPs of China, Korea, and Japan are expected to grow by CAGRs of 5.2%, 2.0%, and 0.9%, respectively, through 2035, showing a significant discrepancy with steel demand growth. The major cause of the decline in steel demand in China, Korea, and Japan is closely related to changing demographic structures.

These countries are aging rather rapidly and their working-age populations are declining. Such a demographic shift is directly connected to steel demand for construction, automobiles, and home appliances. With aging populations and saturated economies, the USA and the EU have entered a stage of stagnation in industrialization and urbanization, two key drivers for steel demand.

In other emerging countries, there is considerable room for increase in steel demand due to population growth and urbanization and industrialization. However, the global working-age population growth will continue to decline and this will put downward pressure on global steel demand in the mid-to-long term.

The Decopling of GDP and Steel Demand: Cyclical or Structural?

Figure 11. Global GDP and Global Steel Demand

Figure 12. G lobal Steel Consumption Per Capita and Steel Intensity of GDP

(1980=100)

(kg per person)

350

250

300

(1,000 tonnes/USD billion) 25

200

250

Global real GDP

200 150

150

Global finished steel demand

100

20

Steel Intensity of GDP

15

100

Finished steel consumption per capita

50

50 0

5

0 1980

1986

1992

1998

2004

2010

2016

10

0 1974

1980

1986

1992

1998

2004

2010

2016

Note: The figure for 2018-2019 is estimated by forecast by worldsteel and World Bank Source: World Bank, worldsteel, IHS Global

It is difficult to precisely predict how the discrepancy will unfold in the future, but past experience can be a good reference.

The global steel industry suffered a prolonged depression in demand from the early 1980s to the early 2000s.

After the second oil shock, global steel demand stagnated, decoupling from global GDP for a number of years, and both global steel consumption per capita and steel intensity of GDP continued to decline. This means that the decoupling of global GDP and steel demand persisted until China emerged as a new growth engine for steel demand after the early 2000s.

Steel companies must grasp the prolonged structural changes in the global economy and steel demand in order to prepare for the future.

Understanding the paradigm shift is critical for formulating mid- and long-term investment and growth strategies, which will in turn determine

Prepare for a possible repeat of the low growth period

future performance and competitiveness. Fortunately, as the Chinese steel industry has been taking the lead in restructuring, global overcapacity has been reduced considerably over the last three years and steel market conditions have improved.

The improvement seems to continue for the time being. However, there are still concerns that the decoupling of global steel demand and global GDP will continue in the long term.

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MARKET TREND & A N A LY S I S

A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY Center for Economic Research and Information Analysis POSCO Research Institute asiansteel.w@posri.re.kr

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A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY

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Market Trend and Analysis

G

lobal steel demand recovered after the Global

84

demand forecasting.

Financial Crisis, but it has slowed remarkably since

The approaches, represented in this research, for

2014. Unlike in the past, where continuous growth in steel

forecasting steel demand can broadly be classified into

demand accompanied stable economic growth, steel

the econometric and intensity of use (IU) approaches.

demand and macroeconomic indicators have recently

In the first section, econometric approaches are di-

become decoupled because of high uncertainty in the

vided into the econometric demand model and vector

global economy. Consequently, it is difficult to predict

autoregression (VAR). The next section explains the IU

steel demand. The steel industry is a base industry that

approach with specific models and how Roberts (1990,

supplies materials to fields including construction, auto-

1996) deduced four decisive factors for steel demand us-

mobiles, shipbuilding, machinery, home appliances, and

ing this model. Other mathematical and hybrid approach-

energy. As steel is an intermediate good used for produc-

es have been tried—the application of both the grey

ing a finished good, it has the characteristics of "derived

model and algorithm. In addition, this research examines

demand" in which there is a demand for a good or a

the SWIP (Steel-Weighted Industrial Production) index

factor of production drived by demand for an interme-

utilized widely by worldsteel, its member countries, and

diate good. As a result, predicting the demand for steel

other steel associations. The last section explains a prag-

is more difficult and complex compared to other indus-

matic method of POSCO Research Institute (POSRI) for

tries. This article classifies and compiles the methodol-

forecasting steel demand to provide practical guidance

ogies through a comprehensive review of the literature,

to the global steel industry, taking Korea's case as an

and then finding clues to enhance the accuracy of steel

example.

Asian Steel Watch

A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY

and construction orders. For short-term prediction, error

Econometric Approaches

correction models deduced from cointegrating regression were used. Mckay et al. (2010) forecast steel demand us-

1

Econometric Demand Model

ing simultaneous equations by analyzing the variables of

An econometric demand model is the most traditional and

investment propensity, urbanization rate, automobile pen-

fundamental econometric approach for predicting steel de-

etration, and technological progress. Yin and Chen (2013)

mand using macroeconomic indicators. Steel is an interme-

examined the five determinants of steel consumption in

diate good required for producing finished products, so that

nine industries using stock-based models. This method

its demand is a "derived demand" that grows along with the

might be meaningful because it is a bottom-up approach

development of the economy and industry. Hence, steel de-

for forecasting steel demand.

mand is related to higher economic growth, which influences

The econometric demand methodologies are made

the level of activity in steel-intensive sectors such as capital

of simple numerical equations and are easy to explain in

equipment, construction, and transportation. Therefore, this

practice. Despite such advantages, their innate disadvan-

model widely uses a simple single equation or a simultane-

tages serve as stumbling blocks for prediction. This model

ous equation to forecast steel consumption, considering

requires the use of exogenous forecasts of the explanatory

that steel demand is affected by macroeconomic variables

variables. Therefore, this model can better explain past

including GDP, industrial production, trade structure, and

data, but they often fail to forecast future steel demand due

economic volatility.

to inaccurate prediction of explanatory variables. As long as explanatory variable includes the variable-specific un-

St=αÁβ1X1t_β2X2t_⋯_εt

certainty such as steel prices and foreign exchange rates, the estimate is not consistent.

where St is steel or metal consumption, Xt is real GDP, steel price, and industrial production, etc., all in year t.

2

Vector Autoregression (VAR)

The vector autoregression has also been used to forecast Labson et al. (1995) used a dynamic, non-spatial,

steel consumption. This methodology has the merit of avoid-

partial-equilibrium world trade model. Steel demand was

ing the weakness of econometric demand model that re-

estimated based on a single linear econometric equation

quires forecasts of exogenous variables since VAR assumes

using variables including steel prices, industrial production,

all variables in a model are endogenous.

and a time trend as a measure of technological change. Pei

The following are some examples of VAR being used

and Tilton (1999) applied a partial adjustment model to es-

to forecast steel demand. Chen et al. (1991) used a vec-

timate the income elasticity of metal demand in developed

tor autoregression model, which consists of real GDP, the

and developing countries and added a time trend variable

consumer price index, money supply, real investment, and

to reflect customer preferences and technological change.

steel consumption. Crompton (1999) and Crompton and

Abbott et al. (1999) extended a long-run steel demand fore-

Wu (2003) used a Bayesian vector auto regression (BVAR)

casting models for the purpose of estimating short-run pre-

model comprised of multiple variables including steel

diction. Long-term forecasting models for empirical anal-

consumption, real GDP, investment expenditure, and the

ysis used cointegrating regression through such variables

money supply. The Bayesian approach is relatively appro-

as steel consumption, manufacturing production index,

priate for predicting steel demand because it places proper

foreign exchange rate, steel price, automobile production,

restrictions on the dynamic coefficients and constant terms

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Table 1. Econometric Approaches

Labson and Crompton (1993)

Period

Demand

Variable (Xit)

Country

1946–1989

Steel, tin, copper, lead, zinc

Income (GDP or GNP), price of a particular metal, and time trend

USA, UK, Japan, OECD countries

Iron ore, steel

Steel price, industrial production, and time trend

Japan, China, North America

Labson et al. (1995)

Economic Demand Model

Vector Autoregession

Pei and Tilton (1999)

1963–1992

Aluminum, copper, lead, nickel, tin, zinc

Price of a particular metal and the price of one or more substitutes

20 countries, including USA, Germany, India, France, Indonesia

Abbott et al. (1999)

1976:1– 1988:4

Steel

Industrial economic activity, exchange rate, steel price, motor vehicle production, construction output

UK

Mckay et al. (2010)

1890–2008

Steel

Investment propensity, urbanization ratio, automobile penetration, and technological progress

14 countries, including Canada and USA

Yin and Chen (2013)

Vary by variable

Steel

GDP, urbanization rate, saturation level, lifetime of industries, steel intensity

China

Chen et al. (1991)

1952–1988

Steel

Real GDP, consumer price index, money supply, real investment, steel consumption

China

Crompton (1999)

1970–1997

Steel

Real GDP, investment expenditure, broad money supply

Southeast Asia

Crompton and Wu (2003)

1952–2000

Steel

Real GDP, consumer price level, real money supply, real investment expenditure, steel consumption

China

Huh (2011)

1975–2008

Steel

Steel consumption, real GDP, industrial output, fabricated metal product, shipbuilding, cars, home appliances, machinery

Korea

of a conventional VAR model using prior information. The

is the long-run equilibrium between metals consumption

VAR, which is a pure autoregressive model, can create

and total income. This means that countries with similar

forecasts automatically but the results might not be robust

GDPs can have much different steel demand depending

because it does not reflect the exogeneous variables. Fur-

on their industrial structures. In addition, the econometric

thermore, econometrician analyzes such a complicated

approaches have the weakness of difficulty in reflecting

model, but it is not widely used at the working level.

material substitution and technological changes when fore-

In the econometric approaches explained so far, im-

casting long-term steel demand.

portant explanatory variables are macroeconomic indicators. However, macroeconomic indicators including

86

GDP are limited in predicting steel demand because they

The Intensity of Use (IU) Approaches

include the development of service, tourism, and financial

The intensity of use (IU) approaches, which means the

industries in addition to steel-consuming industries such as

amount of metal consumed per unit of GDP, rose to promi-

construction and manufacturing. Labson et al. (1993) found

nence in the early 1970s. At that time, some OECD member

weak evidence to support cointegration relationships, that

countries observed their steel demand fall while macro-

Asian Steel Watch

A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY

economic indicators grew, econometric approaches then

and intensity of use (See Figure 1).

received criticisms. The International Iron and Steel Institute

This curve shows how the state of economic develop-

(IISI), currently worldsteel, first suggested the intensity of

ment affects the level of steel consumed per unit of GDP.

use hypothesis in 1972. Malenbaum (1973, 1975) formulated

As countries at the early stages of economic development

the hypothesis regarding intensity of use and suggested an

grow, their per capita income rises and so does their in-

inverted U-shaped relationship between per capita income

tensity of use. However, as per capita income continues to grow, industrial structures shift from construction and manufacturing to less material-intensive services, resulting in a

Figure 1. Intensity of Use Curve

decline in both steel consumption and intensity of use.

Intensity of Use

In the mid-1980s, Roberts (1985), Tilton (1986) and others further developed the IU model. They argued that changes in the material composition of products, caused largely by material substitution and technological change, ultimately affect intensity of use. Tilton (1986) proposed that intensity of use depends on two factors: the product composition of income (PCI) and the material composition of products (MCP).1 As the economy evolves, there is a shift towards less material-intensive sectors such as services, leading to a decline in GDP per Capita

the intensity of metal use.2

1 These terms were first used by John Tilton in “Beyond Intensity of Use,” Materials and Society, Vol 10, 245-250, 1986 2 Tilton, J.E., “Changing Trends in Metal Demand and the Decline of Mining and Mineral Processing in North America,” Resources Policy, Vol 15, No 1, 12-23, 1989

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Market Trend and Analysis

Intensity of Use Technique 3

Áa P

As Radetzki and Tilton (1990, pp. 25~26) show, metal demand can be expressed as

n

Dt=

it

it

i=1

where Dt is the demand for the metal, Pit is the output in physical units of the ith good, ait is the amount of the metal consumed in producing one unit of good i, n is the number of goods produced throughout the economy, all in year t.

Letting

Pit

bit= Y t

where Yt is national income or gross domestic product (GDP) in year t, and substituting for Pt in equation (1) gives

Á n

Dt=Yt

i=1

Áa b =f(PCI

Dt = aitbit or IUt= Yt

n

it it

it,

MCPit)

i=1

where IUt is the intensity of use of the metal, PCIt is the product composition of income, and MCPt is the material composition of products, all in year t.

Factors for Steel Consumption Forecast

PCI measures consumer preferences for goods of type

Roberts (1990, 1996) derived four important determinants of

P as opposed to all other goods and services available.

steel consumption using the IU model. As steel is an inter-

PCI varies over time due to shifts in the intersectoral struc-

mediate product for manufacturing finished products, steel

ture of the economy.

consumption is highly dependent on the product composition of income and the material composition of products.

PCIit=

To briefly explain the IU model, the product composition of income (PCI) is a relative proportion of expenditure on a

where PDit is the domestic production for industry i for con-

product P to consumers’ total income.

sumption and PIit is the imports for industry i, all in year t.

PCI=

3

88

PDit_PIit GDPit

expenditure on P total income

Therefore, total consumption for goods of type P is PCIit · GDPit = PDit_PIit. With a given GDP, total consumption

Tilton J.E. (Ed.), World Metal Demand: Trends and Prospect, Resources for the Future, Washington, DC, 1990

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A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY

depends on predictable PCI.

There are four determinants of steel demand: product

For the next step, the material composition of prod-

composition of income (PCI), material composition of prod-

uct (MCP) means the average quantity of steel used in

uct (MCP), income (GDP), and product net exports (PNX).

the production of one unit of a product. This is simply an

He considers that income (GDP) is an exogenous variable,

input-output ratio measuring the relative efficiency of con-

predicting the MCP and PCI of products is a key to steel

verting steel into final products. The MCP changes over

demand prediction.

time due to material substitution driven by relative price

Listed are examples of the IU approach. Roberts (1990)

changes and technological development, such as the pro-

provided the theoretical basis for making metal consump-

duction process.

tion forecasts and predicted steel demand in the United States. By dividing steel-consuming industries into machin-

MCPit=

Sit (input) = PDit_PXit (output)

ery, transportation equipment, and construction, he was able to reflect the changing proportion of these industries in GDP and steel demand for production by each steel-con-

where Sit is the steel consumed by industry i measured in

suming industry. Roberts (1996) developed a model of

physical units and PXit is the exports for industry i, mea-

metal consumption and predicted world consumption of

sured in real value terms, all in year t.

aluminum, copper, lead, and zinc. But these studies have

If all products produced in one country were consumed

the weakness of having difficulty in gathering data and ex-

within the nation, steel consumption in year t to industry i

plaining causes for technological changes only with time-

can be calculated by multiplying three components (PCI,

trend.

MCP and GDP) and total steel consumption can be calcu-

Crompton (2000) predicted crude steel consumption

lated by combining the steel consumption of all industries.

in Japan. He studied that steel-consuming industries

In other to reflect the complications of international trade,

divided into six categories—machinery, electronic ma-

the model can include the net exports of this product. Tak-

chinery, transportation equipment, other manufacturing,

ing into account all these relations, steel consumption can

construction, and assembly metal—and deployed time

be determined as follows:

series analysis to overcome the limitations of forecasts by each industry. As a result, the decline in Japanese steel

Sit=PCIitÁMCPitÁGDPit_MCPitÁPNXit

demand after the 1980s can be attributed not only to the stagnation of overall economic growth but also to the

PDit_PIit Sit Á ÁGDPit GDPit PDit_PXit Sit _ Á(PXit-PIit) PDit_PXit

Sit=

changes in the industrial structure. However, Guzman et

al. (2005) argued that other factors, such as new production technologies, material substitution, and long-term price trends, also influence intensity of use. These do not seem to be linked to per capita income, but rather to time.

where PNXit is net exports: PNXit =PXit-PIit. The aggregate quantity of steel consumed in the entire

ÁS

economy, St , in a particular country can be described by

n

St=

it

i=1

Rebiasz (2006) analyzed steel consumption in five industries in Poland and calculated it for each sector according to the product composition of income and material composition of product.

The IU approach is a useful concept that attempts to link steel consumption to the technological and structural

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Market Trend and Analysis

Figure 2. Main factors for Steel Consumption Forecasting Finished steel demand

Economic activity in steel consuming industries

Intensity of Steel Use

Stage of economic development Structure of economy • Size of economy • Business cycle • •

PCI: Consumer tastes •

PNX: Net exports

MCP

Shift in product demand

Advances in technology • •

Price-induced substitutions

Steel industry: Changes in steel properties Steel-consuming industry: Product design improvements

Source: POSRI

changes in an economy. Another specific advantage of the

90

IU approach is the disaggregated nature of the analysis in

Mathematical and Hybrid Approaches

which steel consumption is modeled for different end-use

In addition to the two approaches previously mentioned,

industries. Ghosh (2006) described a positive correlation

many researchers have recently been testing other method-

between steel demand and total income. Evans (2011) and

ologies for forecasting steel demand. This is an attempt to

Huh (2011) found a long-term equilibrium between steel de-

enhance predictability using other models. One case in point

mand and total income through an autoregressive fraction-

is the grey model. For steel demand prediction, Guo (2007)

al integrated moving average (ARFIMA) model. Under the

proposed the grey model with historic data of steel products,

intensity of steel use hypothesis, Warell and Olsson (2009)

and found it suitable for predicting demand. Evans (2014)

and Warell (2014) analyzed and verified steel demand and

deployed the grey model, which is generally used when the

GDP in 61 countries using the ordinary least sqare (OLS)

related data is vague and limited. He applied it to predict the

and a panel regression model. Crompton (2015) applied a

intensity of steel use in the UK.

fixed-effects panel model for 26 OECD countries and found

On the other hand, Ma et al . (2013) proposed an ac-

that per capita steel consumption is concave with respect

curate hybrid model base on the grey model and the

to per capita GDP. In other words, steel demand growth

PSO (particle swarm optimization) algorithm. Torbat et al.

slows as the economy develops.

(2018) predicted steel demand using a fuzzy ARIMA model

Asian Steel Watch

A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY

Table 2. The Intensity of Use (IU) Approaches Period

Demand

Steel-consuming industry or variable

Country

Roberts (1990)

1963–1983

Steel

Machinery and metal products, transportation equipment, infrastructure

USA

Valdes (1990)

1957–1987

Steel

Traditional manufacturing (assembly metals, transportation equipment, other machinery and equipment)

Australia

Roberts (1996)

1950–1993

Aluminum, copper, lead, zinc

Metal consumption, investment, personal consumption, government expenditures

World

Crompton (2000)

1980–1996

Steel

General machinery, electronic machinery, transportation equipment, other manufacturing, construction, assembly metal

Japan

Guzman et al. (2005)

1960–2000

Copper

Technological change, long-run price trend, real GDP per capita

Japan

Rebiasz (2006)

1974–2003

Steel

General machinery, electronic machinery, automobiles, transportation equipment, construction

Poland

Warell and Olsson (2009)

1970–2004

Steel

Steel consumption, real GDP per capita

61 countries

Warell (2014)

1970–2011

Steel

Steel consumption, real GDP per capita

61 countries

Crompton (2015)

1970–2012

Steel

Steel consumption, real GDP per capita, investment, industrial-sector production, urban population

26 OECD countries

which hybridizes a traditional time series model ARIMA (autoregressive integrated moving average) with PNNs

Computational Approaches

(probabilistic neural networks) used in systems to support

The forecasting methodologies for the steel demand are

decision-making. However, mathematical and hybrid ap-

significant theoretically, but cannot be widely applied in

proaches is complex for non-specialists to understand and

practice in the steel industry due to their complexity. They

utilize.

remain simply “pie in the sky” ideas, because of the difficulty

Table 3. Grey and Hybrid Approaches Period Guo (2007)

Demand

Variable (Xit)

Country

Steel

Several categories of steel products

China

Grey model Evans (2014)

1891–2012

Steel

Intensity of steel use

UK

Ma et al. (2013)

1995–2010

Iron ore

Consumption of domestic raw iron ore, imported ore

China

Torbat et al. (2018)

1979–2015

Steel

Steel consumption

Iran

Hybrid model

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91

Market Trend and Analysis

SWIP Methodology 4

A SWIP projection can be made for the use of forecasts for production growth in steel-using industries. How to calculate the SWIP index? First, identify the steel consuming sector, such as construction, mechanical engineering, automotive, domestic appliances, metal goods, shipbuilding, etc., in a country. Second, collect production data on these sectors. Third, estimate the share of each sector in the total steel use. Finally, actual calculation of the SWIP, which is the time series for production in the steel-using industries are indexed at 2000=100

SWIP=wc*C_wa*A_wd*D_we*E_ws*S where C=construction, A=automobiles, D=domestic appliances, E=electrical equipment, S=shipbuilding, and w=weights

in making non-specialists understood. Therefore, the com-

construction, machinery, and shipbuilding. When a spe-

putational approaches widely used in practice are examined

cific industry’s steel demand is relatively high, its weight

in this article.

increases in the SWIP index. The SWIP index is then able

The steel weighted industrial production (SWIP) index is

to use additional information for all steel-consuming indus-

broadly used by worldsteel, its member countries and oth-

tries.5 Therefore, the SWIP index could realistically reflect

er steel associations. According to IISI (2005), this meth-

changes in steel demand driven by the differences in the

odology can estimate real steel use by reflecting end-user

industrial structures among countries. Second, apparent

inventories rather than apparent steel use as used in other

steel use is calculated by taking total deliveries of finished

models. The SWIP methodology can also better reflect the

steel products and adding net exports because of insuffi-

steel consumption structure of an individual country. The

cient information on the inventories of end users. But, the

SWIP methodology is briefly explained in the above box.

SWIP index estimates real steel use containing inventory

The equations for SWIP index seem similar to the regres-

changes among end-users. It is highly meaningful that the

sion equation of the economic demand model. The SWIP

SWIP index works to address this issue. Finally, it is quite

index designates w (weight) ex ante through data unlike

a useful methodology since anyone can use it to intuitively

the econometric demand model which measures it ex post.

interpret progress and predict steel demand without help

The SWIP Index has several advantages. First, the SWIP index computes a weighted average of production

However, the SWIP index has a limitation in whether the

indices of steel-consuming industries such as automobiles,

estimation is credible, accurate and confidential. For exam-

4 5

International Iron and Steel Institute, Economic Studies Committee (ECON) 2005 Autumn Meeting In the case of a econometric demand model, which takes various industries as explanatory valuables, they are highly correlated and multicollinearity then

occurs. However, the SWIP index is free from this statistical issue.

92

from econometricians.

Asian Steel Watch

A COMPREHENSIVE SURVEY OF STEEL DEMAND FORECASTING METHODOLOGIES AND THEIR PRACTICAL APPLICATION FOR THE STEEL INDUSTRY

Figure 3. Steel Demand Prediction System

Macro-economic

Steel consumption

Variables

Consumption structure

Korea

Steel-using industry Automobiles

Steel demand forecast (Yearly/total consumption/by product)

Economic indicators including GDP

Construction

Foreign exchange rate

Asian Machinery

Steel demand forecast (Yearly/total consumption) ¡ Flat products ¡ Long products

Risks including raw materials price

Shipbuilding Home appliance

Forecast reflecting policy variables

DB

Steel

Steel-using industries

Economy

Big Data

National industrial structure

ple, in the automotive industry, steel consumption differs

that reflect the structural characteristics of steel-consuming

by type or grade of vehicles, so it is difficult in practice to

industries. Afterwards, the quality aspect has been factored

calculate demand for all subcategories and estimate weight

in, such as mid- to long-term shifts in the industrial structure

values.

of the economy and the fluctuating steel consumption structures of industries. To this end, other factors in addition to macroeconomic indicators have been considered: 1) chang-

A Suggestion for the Practical Application of

es in steel intensity of production in each steel consuming

Steel Demand Forecasting Methodologies

industry and 2) changes in the proportion of these industries

This article has reviewed several methodologies for forecast-

within GDP.

ing steel demand: traditional econometric and IU approach-

In Korea, various methods have been deployed to pre-

es and computational methods. At the earliest, most studies

dict mid- to long-range steel demand. To complement the

predicted steel demand using macroeconomic indicators,

weakness of top-down macro methodologies which direct-

but such methods were criticized when steel demand in

ly predict total steel demand, POSRI is concurrently ap-

some advanced countries declined despite economic de-

plying a bottom-up micro methodology to predict demand

velopment. In the 1990s, some studies found that steel de-

for 16 steel products and summing them to forecast total

mand forecasts are more suitable if using proper indicators

demand. First, to apply a micro methodology, the industry

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93

Market Trend and Analysis

Table 4. Estimated Forecast Error by Country (2004 - 2017) Period

Korea

Japan

China

India

Germany

USA

Turkey

Russia

2004–2012

4.5%

4.8%

5.3%

6.0%

6.1%

9.1%

12.3%

15.1%

2004–2017

4.6%

5.0%

7.3%

5.9%

6.1%

8.8%

8.3%

12.2%

consumption structure is analyzed for all product units. The

has the highest level. From 2004 to 2012, the average fore-

Korea Iron and Steel Association (KOSA) has been compil-

cast error rate in these 11 countries was 7.6%, but Korea’s

ing steel shipment statistics by product and industry since

rate was the lowest at 4.5%. Recently updated research by

1992, so that steel consumption can be easily identified by

POSRI found that Korea’s forecast error rate from 2004 to

these categories. Next, POSRI predicts steel used per one

2017 remained the lowest at 4.6%. This outcome indirectly

unit output for 16 products, including steel bar, wire rod,

proves that the micro methodology is highly useful.

section, hot-rolled, cold-rolled, and galvanized steel by the

The conventional macro methodologies such as econo-

industry weight which is similar to in a SWIP index or IU ap-

metric demand model and intensity of use can be useful.

proach. Finally, total demand is estimated by summing up

In addition, computational approaches that reflect long-

demand in all products. Unlike in other countries, statistics

term changes in steel-consuming industries can enhance

for Korea are based on finished products and there is no

the accuracy of prediction and improve the understanding

double-counting issue when measuring the demand.

of people in the field. However, for short-run forecasts,

After predicting steel demand in Korea for over a de-

Korea’s micro methodology should be expanded to other

cade using the two methodologies, forecast errors might

countries to improve the predictive power of steel demand

be reduced significantly. worldsteel (2014) compared steel

forecasting. This will be meaningful practice for enhancing

demand predictability in 11 countries and found that Korea

steel demand prediction.

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