Substitutes and Complements

Characteristics

Current situation

Future trend

Availability of close substitutes

There are potential substitutes for steel like aluminum in car manufacturing, or composite materials in construction. Although they have their advantages, they do not pose serious threat for steel due to reasons described above.

There is a lot of research and development in this field, so new composite materials, which could substitute steel, can appear in future.

Price-value characteristics of substitutes

Price of aluminum is higher than that of steel, but value is higher too. Aluminum cars are lighter and, as a result, more fuel-efficient. Aluminum and some composites are more durable, as they do not corrode. They are less suspected to temperature drops.

According to analysts’ reviews, price for aluminum will increase in the near future.

Availability of close complements

No complements for crude steel available.

-

Price-value characteristics of close complements

-

-

Characteristics

Current situation

Future trend

Market concentration (number of firms, concentration ratios, HHI)

Big number of firms with several leading companies - large, multinational players.

No individual producer in the industry has sufficient market share to raise competitive concerns.

The biggest producers are Arcelor Mittal (6,7%), Baosteel (2,7%), Nippon Steel (2,7%), Posco (2,6%).

Continuous consolidation process in the industry.

Since 1993 HHI has showed upward increasing trend. Thus in European market it is about 1100, in American about 900 now. From global perspective it is really small (only in a few states as Russia or South Africa it is significantly higher than 1000): steel market can be named unconcentrated

Increasing number of mergers and acquisitions and further consolidation of the market (either within national borders, as it can happen with Severstal and Evraz, or internationally).

Hence decreasing number of firms and increasing concentration ratio (it will still hardly exceeds 1000 in the global market even in long run)

Market growth

The compound annual growth rate of the market value in the period 2006–10 was 9.2% (seriously affected by downturn in prices in 2009)

The compound annual growth rate of the market volume in the period 2006–10 was 3.3%.

The compound annual growth rate of the market value in the period 2010–15 is predicted to be 19.2% (in case of no repetition of financial crisis)

The compound annual growth rate of the market volume in the period 2010–15 is predicted to be 3%.

Cost differences (among firms)

Cost leadership is the main strategy of most firms in the industry. Basically costs are defined by the access to raw materials (iron ore and coke), cheap electricity, labor costs and technology. These factors in turn are stipulated by level of vertical integration and internationalization (home country). Thus between the leaders there is certain level of difference, but actually it is not significant.

Simultaneously there is difference in costs between different types of steel producers: minimills versus integrated steel producers, e.g.

That is high probable that cost leadership will remain the prevailing strategy as well as strategy of vertical and horizontal integration will still lead to cost reduction. So generally costs will decline but difference between leading companies will not be significant (otherwise the firm can be easily pushed out from the market).

Product differentiation

Limited potential for product differentiation. Mostly differentiation is related to quality (e.g. American steel is perceived to have better quality than Russian or Brazilian and hence is more used in automotive industry, where demand for quality is higher).

Now firms seek also to occupy special niches, however that is mostly linked to specific requirements of customers but not differentiation of crude steel.

There will be further attempts to differentiate product. Despite the differentiation can be actually increased, change will not be really significant.

At the same time as time goes by firms will search for new niches to follow differentiation strategy (but not in terms of primary or crude steel differentiation).

Price differences

Steel does not have any substantial price difference between firms: there are no luxury or specialty goods. Price is stipulated mostly by costs.

It is expected that price difference will remain insignificant.

Excess capacity

Significant excess capacity stipulated by high dependence on overall economic situation and on situation in such industries as automotive and constructing in particular.

High cyclicity leads to short-term (or cyclical) excess capacity. Simultaneously the role of structural excess capacity is related to continuous subsidization of industry in several countries.

Expectations of further excess capacity are dependent to future economic situation, but for certain will remain significant since the dependence will be hardly eliminated.

Are prices and terms of trade transaction observable?

Since price and other terms in most of transactions are defined by individual contracts with customer nowadays, it is hardly possible to name them observable. Actually it is quite difficult to find even approximate price of definite contract (often it is closed information). From another point of view special trading platforms already exist (London Metal Market, e.g.), which provide everybody with an opportunity to follow a kind of market price (futures contracts actually).

Since crude or primary steel is homogeneous, special trading platforms can be developed and it is possible to expect prices and trade terms to become more transparent. However most of transactions at least at mid-run will be closed to outsiders and hence prices and terms of trade will remain for a high extent not observable.

Can firm adjust prices quickly?

Leading steel producers are represented by huge high-integrated multinational companies where price is mostly defined by costs. Therefore price adjustment is quite slow process. Besides, price most frequently is negotiated for a certain period on individual basis and hence remain constant (or quasi constant – depending on some market-related factors) in short-run.

It is possible to suppose that in long-run pricing will be less dependent on costs. However there will be only slow changes, and taking into account the size and complexity of firms, firms will not be able to adjust price really quickly.

Type of competition (price, quantity, simultaneous, sequential)

Since fixed costs are mostly paid before sales will take place, and since steel producers have capacity to fulfill bigger amount of orders that they actually can get, it is possible to speak mostly about Bertrand price competition. Even despite firms in the industry are trying to commit themselves to a certain amount of output and no firm can’t serve the whole market alone, steel producers are trying to avoid excess capacity and operate at full capacity, what leads to fierce price competition.

Since prices are not really observable in the industry, and it takes long time to adjust price, and taking into account above-mentioned factors, simultaneous price competition is more probable to occur on the steel market.

Since the situation with fixed costs, excess capacity, and availability of information, probability of quick price adjustment will with high probability remain the same, it is possible to claim that in the future type will be price and simultaneous price competition.

Leadership pricing?

Price (and costs) leadership is the main strategy in the global steel industry and low costs are the main competitive criteria. Thus leading competitor actually stipulates the way of determining the price, and other players have to adjust the price if it is possible (despite prices are defined mostly on simultaneous basis).

The situation when the market leader defines the price in the market will with high probability remain the same, since all determining factors will not change.

Tacit collusion (actual and potential)

Occurrence of tacit collusion is high probable in the global steel industry what is stipulated by several factors: prices are difficult to observe and compare; price is the main criteria of choice by customers; within national borders there are mostly only few players. In reality it happens frequently in all countries of the world.

From the global perspective, tacit collusion is related to governmental subsidizing: when several players from one or few countries (as it was in case of Severstal and Evraz) agree on export prices to a definite country. Sometimes it gets the form of dumping (e.g. Chinese, Brazilian steel export to the USA in the 1990^th).

Since main motivators to tacit collusion still exists, potential for tacit collusion will lead to new actual agreements either among players from one country (also export price collusion), or between multinational players. Further consolidation in the global steel market will also contribute to this process. However, at the same time as antitrust and antidumping regulation develops, the chances for actual tacit collusions will be decreased.

Antitrust litigations

In the history of global steel industry there were a number of legal cases related to steel producers’ collusions and dumping prices by a few players. Leading steel countries as the USA, Australia, China, Russia, Brazil, Japan, etc. elaborated to this purpose own antitrust acts with definite measures (as fines or antidumping customs). Despite some cases led to failure of definite international player to operate on certain markets there is no steel common global legislation (except perhaps WTO regulation of subsidization).

It is logical to suppose that new legal cases related to tacit collusions will appear and that legislation will be further developed. Here essential factors are internationalizing of steel producers, increasing number of mergers and acquisitions, eventually development of international regulatory boards.