Dream Factory – Heavy Industry

Author: Petr Smutný
Publication: British Chamber of Commerce
Date: 31.7.2006

Many industrial enterprises in the CR have undergone a process of restructuring which has resulted in big changes. That is why Jitka of the Chamber met with Petr Smutný, a director in the Business Recovery Services department at PwC, Czech Republic and discussed the ‘Boom in the Steel Sector’.

Petr Smutný is a director in the Business Recovery Services department at PwC, Czech Republic which advises on Business restructuring at strategic financial and operational levels. He managed one of the major restructurings in the CR during past six years. These are generally long-term projects including also the implementation phase. He is currently involved in the project to restructure LG.Philips Displays in Hranice na Moravě.

Jitka: What is the current situation in the steel sector in the CR?

Petr Smutný: After a crisis in the whole steel sector in the year 2000, restructuring of enterprises was a necessity. There are now three big steel companies in the CR: Třinecké železárny (with an annual production of two mil. tons of steel) , Vítkovice Steel (with an annual production of one mil. ton of steel) and Mittal Steel Ostrava (with an annual production of three mil. tons of steel). Since 2000 the price of steel has increased dramatially. The steel industry is very strong, due to the price increase and the instustrial restructuring has been completed.

J: What did the restructuring of the Nová Huť Ostrava (current Mittal Steel Ostrava) mean?

PS: Mittal Steel is the world´s largest steel company with an annual production of 60 million tons of steel. By restructuring the former Nova Hut’ business it enabled the merger of its business into the Mittal and enabled access to resources with lower costs, to new technologies and to new markets which assists company effectiveness and cost reduction. Since 2003 the whole steel sector has been very profitable.
In 2004 and 2005 the Czech producers of steel saw a doubling of prices of steel and had incredible results.

J: What is the world´s trend in the steel sector?

PS: The main trend is increased demand and shifts in production. The production and consumption of steel is growing fastest in China and India. China now produces more steel than the four largest steel producers do. China has attracted overseas steel producers who would like to invest there. At the same time China´s steel consumption has quadrupled since 1998, with the construction industry playing a significant role in demand.  Steel consumption is forecast to rise by 4-5% a year for the next few years in China and it relies on other countries a lot as the domestic steel sector is highly fragmented. In certain product areas it suffers from overcapacity and the profitability of the sector is then affected. It is a case of ensuring production is focused on the right products and consolidating the sector in China.

J: Do you worry about overproduction of steel exist?

PS: Overproduction has always existed. The current economic boom consumes the high steel production and while the global economy continues to boom consumption will remain high. What could influence the market is the situation in China and the development of the world economy.

J: The prices of steel are increasing rapidly. Do producers consider alternative materials?

PS: Yes, of course. But in most of areas where steel is used, safety concerns  do not allow the use of different materials. (Some producers of cars started using aluminium but it is  an expensive and sometimes not very practical solution – I speak from my own experience!). Steel prices are higher, but the economy must and will deal with it. It is the same as oil and energy, we did not ever expect such high prices and now we have to adjust.

J: Speaking about cars, is there any connection between automotive and steel industry?

PS: Global demand for automobiles is growing especially in emerging markets. However manufacturers are being pushed to lower prices. This is difficult in times of high steel prices and it puts pressure on steel companies to embed new technologies to meet the quality and pricing demands of the automotive sector.

J: And the outlook of the steel sector?

PS: This sector is still fragmented and is not able to have stable resources and stable contracts. There are still cyclic swings. Thanks to many circumstances currently the swing is very positive but generally the inconsistency does not lure investors. So the steel sector needs consolidation. Now there are a lot of individual producers without bargaining power with suppliers and customers. I think we will see, and of course are seeing, further consolidation in the sector.

J: Do you mean acquisitions, e.g. Mittal Steel and Arcelor?

PS: Yes, and many other transactions. The steel industry is starting to consolidate into larger entities in order to better cope with pressure from suppliers and customers. The trend of vertical integration is also expected where investors try to buy sources of raw material as well as distribution channels. This is the tendency of big investors to connect resources, production and distribution in one cycle and so be able to sign stable contracts.

J: Can the Czech steel production expect any big changes?

PS: This process will no longer concern the Government of CR as such because the main steel producers have already become part of multinational units (Mittal Steel Ostrava - Mittal or Vítkovice Steel – Evraz). Only Třinecké železárny can be of certain interest to potential investors. As such they are all subject to the international strategies of their owners and are part of the global consolidation of the steel industry that is now occuring.

J: And what is your opinion on the acquisition Mittal Steel and Arcelor?

PS: Mittal Steel´s goal is to become the global steelmaker. Taking over Arcelor is part of achieving this goal. This has now developed into a political matter and we all await the final outcome with interest.