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A Steely Attempt at Survival

An employee wears protective clothing beside a blast furnace cast house at ThyssenKrupp AG's steel plant in Duisburg, Germany, on Wednesday, July 20, 2016. Chief Executive Officer Heinrich Hiesinger has been moving to change Thyssenkrupp, known for its focus on steelmaking, into an industrial group specializing in everything from elevators to auto parts and submarine building. Photographer: Krisztian Bocsi/Bloomberg
Europe's steel industry is facing huge challenges.
  • Why it matters

    Why it matters

    Overcapacity, weak demand and low-cost Chinese imports could trigger an overhaul of Europe’s steel industry, affecting ThyssenKrupp, Salzgitter, Voestalpine and others.

  • Facts

    Facts

    • Germany is home to Europe’s third-largest steel maker, ThyssenKrupp, and the largest steel producing region is located in and around Duisburg in the country’s west.
    • ThyssenKrupp has considered to merge its steel division with the European operations of Indian steel firm Tata Steel, according to sources earlier this year.
    • In the German steel sector alone, close to 200,000 jobs have disappeared in the last 35 years.
  • Audio

    Audio

  • Pdf

René Kannegiesser pushed his safety goggles back up his nose and wiped the dust off his face with his hand. There were sparks flying behind him as molten steel hissed and popped in the blast furnace of the ThyssenKrupp steelworks in Duisburg, a city in Germany’s western industrial region.

The 23-year-old had just finished sealing off a three meter-deep hole in the blast furnace with porcelain. “The taphole’s sealed again,” Mr. Kannegiesser said, tipping back the thick face shield that protected him from his hellishly hot workplace. In two hours, once the furnace has been refilled with red-hot pig iron, he’ll have to repeat the whole process over again.

The blast furnaces in the Duisburg mill – Europe’s largest – are fired round the clock, producing 33,000 tons of pig iron every day. They’re manned by 13,000 workers, and if Mr. Kannegießer had anything to say about it, that’s how things would stay. But that’s unlikely. The European steel industry is in crisis mode and a number of steelworks across the Continent face the prospect of being shuttered.

In the German steel sector alone, close to 200,000 jobs have disappeared in the last 35 years.

The problem with steel from Duisburg – or anywhere else in Europe, for that matter – is the cost. “There isn’t a single steel mill in Europe that earns more than its capital costs,” said Heinrich Hiesinger, the chief executive of ThyssenKrupp, Europe’s third-largest steel maker after Luxembourg-listed ArcelorMittal and Austria’s Voestalpine.

Like many in the steel sector, Mr. Hiesinger’s company is fighting battles on two fronts. On the one side, there are steel manufacturers from Asia flooding the market with cheap steel. On the other, there are ThyssenKrupp’s European competitors: Salzgitter from Germany, Ilva from Italy, Voestalpine and ArcelorMittal. They all face the same unfavorable market conditions as ThyssenKrupp, yet none of them have stopped producing more steel than they can sell.

Overcapacity, low demand globally and rising production costs in Europe – not to mention a good deal of misjudgment – have plunged steelmakers on the Continent into a perpetual state of damage control.

According to the Organization for Economic Cooperation and Development (OECD), global overcapacity of steel hit 660 million tons in 2015 – and all that excess metal is weighing on businesses’ bottom lines. In the German steel sector alone, close to 200,000 jobs have disappeared in the last 35 years.

By 2030, steel production in Europe is expected to fall below 100 million tons, down from the current level of 210 million, according to Wolfgang Eder, the chairman of the World Steel Association who also heads the Austrian steel concern Voestalpine. “Of course there are going to be plant closures. But such adjustments can be done in a socially responsible way,” Mr. Eder said.

Putting an even finer point on things, Hans Jürgen Kerkhoff, the president of the German Steel Federation, proclaimed 2016 a “fateful year for the steel industry.”

No one is betting on a resurgence in Europe. Everyone seems resigned to China and Russia dominating the sector in the the future. For now, the most pressing question becomes: What are ThyssenKrupp and other major players going to do about it? And which one of them will be the first to cut their losses and pull up out of the vicious cycle of ever-cheaper steel?

 

04 p05 The Biggest Steel Producers-01

 

For years, the steel sector was a source of strength and pride. In 1893, for instance, the first signs of intercontinental power shifts became evident when the German Reich first overtook Great Britain – the motherland of industrialization – in steel production. Decades later, the European Union was forged through cooperation between the German and French coal and steel sectors.

But that rich history hasn’t protected the European steel industry from fierce competition from countries like India and China, where technological advances have made the mass-production of steel easy and cheap. As steel plants have closed their doors in Germany, the amount of steel produced around the world has jumped from 595 million tons in 1970 to 1.6 billion tons in 2015.

And while the supply of steel has skyrocketed, the inverse has been true for the commodity’s price.

That has left executives at traditional steel manufacturers looking for other ways to earn money, to the chagrin of steelworkers. Mr. Hiesinger from ThyssenKrupp, for instance, wants to merge the company’s steel division with the European branch of the Indian concern Tata, the world’s No. 5 producer of steel. Such a consolidation, however, would put thousands of jobs at risk.

ThyssenKrupp’s profits from steel were 40 percent lower in the first half of the 2015-16 financial year than they were in the same period a year earlier, but steel’s significance as a historical anchor for the German economy still carries a lot of weight with its employees.

On a recent morning in August, some 7,000 people had gathered at ThyssenKrupp’s Duisburg plant to make it clear to executives like Mr. Hiesinger that they weren’t going to let the company get out of the steel business without a fight. In the crowd, people waved banners with the words, “No future without steel,” and, “Stop steel exit.” They were facing the stage where Detlef Wetzel was speaking, the former head of Germany’s powerful IG Metall trade union who also sits on ThyssenKrupp’s advisory board. “We’ve lost confidence in our executive board,” Mr. Wetzel told onlookers. “The battle for steel has only just begun.”

“It's important for China to recognize that there are forces in Europe which are prepared to see 2 million Chinese people put on the street if it means saving 10,000 jobs in Europe.”

Markus Kerber, Director general, Federation of German Industries

One way or the other, Mr. Hiesinger has made clear to the head of the concern’s steel division, Andreas Goss, that costs must be slashed. Mr. Goss has until May 2017 to decide how to reduce spending by around €1 billion, or $1.1 billion. For Mr. Goss, it’s a familiar predicament. For years, he’s been pushing wage cuts onto his workers and reducing their hours. Further austerity is expected.

Many steelworkers are still counting on politicians to come to the rescue. They have found an ally in European Commission President Jean-Claude Juncker, whose father was laid off from his job at a steel factory in Luxembourg. “I know how painful adjustment processes can be,” Mr. Juncker said.

Advocates of the steel sector point to two areas they hope Mr. Juncker and his people will take action: Stemming the flood of cheap steel from China and slashing high bureaucracy and energy costs.

As competition from Asia grows, the rising cost of the E.U.’s emissions permits are providing an additional burden for European steelmakers. Those permits are expected to cost the German steel industry around €1 billion a year from 2021 to 2030, according to Mr. Kerkhoff from the German Steel Federation. A study from Eurofer, the European Steel Association, reckoned the additional costs for the steel industry would amount to €27.1 billion.

“A bad deal on emissions trading reform would be the second nail in the coffin for the sector as long as we fail to assert ourselves against cheap imports from China,” said one manager of a German steel manufacturer.

But rapidly rising imports of cheap steel from China definitely seem to be the bigger problem at the moment. According to SteelBenchmarker, a global steel benchmark pricing system, a ton of Chinese “hot rolled band” costs $351, while the same commodity from Europe goes for $480.

The seriousness of the issue was perhaps best articulated by Markus Kerber, the director general of the Federation of German Industries (BDI) during a recent visit to Shanghai. “The Chinese side underestimated just how explosive steel is politically,” Mr. Kerber said. “It’s important for China to recognize that there are forces in Europe which are prepared to see 2 million Chinese people put on the street if it means saving 10,000 jobs in Europe.”

The E.U. Commission, for its part, has imposed punitive tariffs against China for price dumping and threatened to block recognition of China as a market economy by the World Trade Organization (WTO). Yet for all of the Commission’s posturing, the Chinese remain unfazed. Beijing is confident it will be able to achieve the status it desires by appealing directly to the WTO. In spite of the anti-dumping measures of the E.U. and the United States, Chinese exports grew 9 percent in the first half of the year, according to ArcelorMittal’s finance head, Aditya Mittal.

 

steel resized ThyssenKrupp CEO Heinrich Hiesinger standing on escalator source Volker Hartmann DAPD 29120109
ThyssenKrupp’s CEO Heinrich Hiesinger. Source: Volker Hartmann / DAPD

 

Meanwhile, the pressure on European producers doesn’t seem likely to let up anytime soon. As people like Mr. Hiesinger look for a way to make their stakes in the steel sector profitable again with minimal damage to its workforce, another company in the picturesque city of Linz, Austria, is trying a different approach altogether. In the towering factory halls of Voestalpine, robotic arms hoist massive steel coils as effortlessly as if they were wads of cotton. But for all the hustle and bustle, the factory floors are conspicuously void of one thing: people.

“We have at least 50 percent fewer blue-collar workers now than we did in the 70s. And that number will continue to decline. Our work is increasingly done in front of computer screens. It’s getting more exciting, but also more challenging,” said Voestalpine’s Mr. Eder.

The chief executive, who’s been running Voestalpine since 2004, knows a thing or two about layoffs. Back in 1985, when the company was virtually bankrupt, the then-state-owned enterprise responded with an unprecedented wave of job cuts. More than half of the 30,000 employees were laid off within three years.

Nowadays, to produce about 500,000 tons of steel wire, the company only needs four people per shift to supervise the machines. Voestalpine is the world’s biggest producer of rails for trains and a leader in the automotive sector, next to ThyssenKrupp and ArcelorMittal.

“We don’t produce more steel, but we produce more things with steel,” Mr. Eder said.

Around the turn of the millennium, the company had already begun to set off in a direction that was unusual for the industry. At a time when steelmakers around the world were looking for other companies to merge with in order to save on costs, Voestalpine made a conscious decision not to expand.

Instead, Voestalpine used its existing contacts with car makers, machine builders and railway operators to adapt its products to customers’ specifications. Today, steel only accounts for a third of the company’s sales. Much of that has been replaced by titanium, for instance, which Voestalpine uses in the construction of aircraft components. With that in mind, it was only a matter of time before Mr. Eder proclaimed: “We are no longer a steel company.”

Back in Germany, ThyssenKrupp’s biggest domestic competitor, Salzgitter, has also largely gotten out of the steel business. Of the €8.6 billion in sales Salzgitter made in 2015, only 33 percent came from its steel division. The company has realized it can make considerably more money through storage and the production of beverage filling systems.

The direction that Mr. Hiesinger hopes to take his company was also on display at a recent summer party at ThyssenKrupp’s headquarters in Essen, Germany. Amid the scent of grilled sausages, employees were invited to take two powerful sports cars – one was a Tesla, the other a VW – out for a spin. The point wasn’t to show off the cars’ robust steel frames, but rather their electro-mechanical steering systems, which were made by ThyssenKrupp.

With a number of investors urging him to see the writing on the wall, Mr. Hiesinger hopes that one day his company will be known for these kinds of feats of engineering rather than blast furnaces.

The same cannot be said for all of his employees.

Last April, 45,000 steelworkers took to the streets to demonstrate for the preservation of their jobs. It was just a taste of what was to come, the unionists said at the time. For the head of ThyssenKrupp’s works council, Wilhelm Segerath, one thing is clear: Steel must always be a part of the company’s portfolio. “ThyssenKrupp without steel is like a living room without a sofa.”

 

This article originally appeared in WirtschaftsWoche, a sister publication of Handelsblatt. Angela Hennersdorf, Andreas Macho, Alexander Busch, Lea Deuber, Yvonne Esterhazy, Hans Jakob Ginsburg, Silke Wettach and Florian Willershausen contributed to this article. To contact the authors: angela.hennersdorf@wiwo.de and andreas.macho@wiwo.de 

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