It’s hard to think of a more challenging environment for metals – commodity prices are low, global demand for steel looks likely to grow by just 0.7% in 2016 and growth is slowing in China.
China not only accounts for more than 40% of global demand for most key metals , it is, of course, a key steel-maker in its own right, and cheap Chinese supplies are keeping prices low elsewhere. Capacity in the global steel industry has more than doubled since the early 2000s and supply is still outstripping demand. Steel-makers are addressing the twin challenges of excess capacity and low prices by cutting debt, reducing costs, and improving efficiency. 84% of the sector’s CEOs plan cost-cutting in the next year, compared with 69% overall. That’s higher than most other industries, with the exception of energy and continues the trend we’ve seen over the last several years.
This year 46% of metals CEOs are very concerned about energy costs and 46% about commodity prices, compared with global averages of 19% and 21% respectively. While high levels of concern about energy costs may seem surprising with oil prices down dramatically, it’s important to remember that the competitiveness of some regions may be dramatically impacted by volatility in this area. Metals CEOs’ high level concern may also reflect uncertainty around how carbon taxes may impact price levels in the future.
Metals companies are also extremely concerned about access to affordable capital (32% versus 17% overall), interest rate rises (30% versus 19%), and the increasing tax burden, (51% versus 31% overall). The latter is the highest of any industry. The metals industry and the steel industry in particular, are very capital intensive and despite low utilisation, new plants and new capacity continue to be built. Ongoing capex is required to keep competive in terms of the higher quality and yield and cost improvements that these new plants bring. Due to its cyclical nature and given the current lull in prices, the industry is struggling to appeal to investors. Many companies are finding it increasingly difficult to attract capital and if they do find it, to get it at acceptable interest rates.
In the face of this challenging environment, it’s perhaps no surprise that metals CEOs are less optimistic than CEOs in general about the outlook for growth: just 16% in the sector believe global growth will improve over the next year, compared to 27% overall. Likewise, only 22% are very confident about their own company’s revenue growth next year, compared to an overall average of 35%. Again, that continues the trend we saw last year, with metals CEOs once again the least confident of any industry over the short-term. Looking forward three years, the picture looks brighter.
The sector doesn’t just face short-term challenges, but long term political, social and environmental change.
Looking at the global megatrends which are most likely to transform stakeholder expectations of business, CEOs in general rated the top three as technological change (77%), demographic change (61%), and shifts in global economic power (68%). Metals CEOs had a slightly different emphasis, with shifts in global economic power highest at 84%, followed by technological change (76%), and demographic change (46%). Demographic change is certainly having a significant ongoing impact on the industry, as the growing middle class in countries like India and China start to buy cars for the first time. Likewise steel, in particular, is a major component both for construction, and for infrastructure from railways and bridges to flood defences and wind turbines.
What’s interesting here is that climate change and resource scarcity figured on neither list. This is somewhat surprising for all CEOs, but far more so for metals: steel-making, for example, is a highly energy-intensive industry, and one which is under intense scrutiny for its environmental performance. Further, metals companies are taking action in this area; 54% plan significant changes to the way they manage the social and environmental risks of their operations, compared to an average of 31%.
CEOs have set their radar on a wide range of stakeholders.
Customers remain the top priority, with 92% of metals CEOs indicating they have a high or very high impact on their business strategy. For the metals sector, supply chain partners come in second (cited by 81% compared to just 48% of global CEOs). That’s higher than industry competitors and peers (76%) or governments and regulators (59%) and reflects their response to customer demands. Metals companies are having to ensure their supply chain partners, whether distributors or value added processors, are integrated into their own supply solutions. For example, many steel mills now work with their end customer to understand the role of downstream supply chain partners such as service centers when setting prices and service level metrics (e.g. just in time delivery).
The views of these and other stakeholders aren’t just evolving, they are diverging, as CEOs have told us.
So what do your customers, employees and investors want?
The vast majority of metals CEOs (78%) feel their customers are most interested in cost, convenience and function. Less than a fifth (19%) of CEOs believe that their customers are seeking relationships with organisations that addresses wider stakeholder needs today. This doubles to 38% when CEOs consider what their customers will prioritise in five years’ time, though.
On the talent side, 57% of metals CEOs believe that top talent wants to work with organisations that share their social values and this will rise to 68% in 5 years. On the investor side 35% of metals CEOs believe their investors seek ethical investments and they anticipate that will rise to 43% in 5 years. Given the high levels of concern across the sector around access to capital, this could well be a decisive difference.
In this increasingly complex world, are leaders altering their organisation’s purpose in order to reflect greater expectations of business?
In our overall research we found that almost 1 in 4 (24%) had changed their purpose within the last three years to reflect a broader stakeholder expectations, and an additional 45% felt that their organisation’s purpose already reflected a broad set of stakeholder expectations.
Looking at metals CEOs, slightly more of them – 51% - believe their organisation’s purpose already takes wider stakeholders into account. That’s a great start, but fewer (11%) have refreshed their purpose in the last three years. And around one fifth of metals CEOs (22%) say they aren’t considering connecting their organisation’s purpose to the broader impact they have on society.
Turning to technology, 89% of metals CEOs plan to make changes in their management of R&D and innovation in response to changing stakeholder expectations, compared to 76% of CEOs overall. The strength of this number may reflect the potential to contribute to the sustainability agenda by developing new high-strength lightweight steels which can cut carbon emissions by reducing the weight in cars, and improve the energy efficiency of everything from fridges to skyscrapers. Steel, likewise, can be infinitely recycled.
Cyber threats are still a lower priority for metals CEOs
Only 43% of metals CEOs are concerned that cyber threats may have an impact on growth, though, compared to 61% of the sample overall. This may be because metals hasn’t traditionally been a target for hackers, who have focused on consumer-facing brands and businesses holding financial records, like banks. But as PwC’s recent Global State of Information Security® Survey 2016 has shown, no industry is now immune from hacking. As recent high-profile cyber attacks have proved, hackers aren’t looking for credit card details any more, they’re after confidential or commercially sensitive information, or the sort of data which companies rely on to run their day-to-day operations.
But people issues are high on the agenda
Health & Safety continue to be a high priority for the metals industry, with considerable and ongoing investment in accident prevention and risk management. Safety often takes a priority in companies’ earnings presentation. Time worked since last date of last reportable injury or incidences of injuries per 1,000 hours worked are often highlighted. This is reflected in the survey, with 95% of respondents saying they will make some degree of change in workplace rights and well-being in response to changing expectations (versus 90% overall).
Just a third of metals CEOs (32%) expect headcounts to increase this year. That’s significantly less than in most other industries. Nonetheless, metals CEOs remain profoundly concerned about talent – 70% worry about the availability of key skills, nearly as many as across the overall sample. They believe a skilled, educated and adaptable workforce should be the top priority for governments, along with a stable tax system. And they’re ready to roll up their sleeves and help make it happen. When we asked which societal outcomes business should help deliver, a skilled, educated and adaptable workforce stood out strongly, with 78% saying it should be a priority, well above other factors like infrastructure (43%).
When it comes to talent management, metals CEOs have slightly different priorities than their peers as a whole: the top three changes being made to talent strategies by CEOs as a whole relate to the pipeline of leaders (49%), workplace culture and beahviour (41%), and effective performance management (38%), whereas for metals the ranking is effective performance management (57%), the pipeline of leaders (41%), and their reputation as a socially and environmentally responsible employer (38%).
The metals sector has a real opportunity to tell its story in a more strategic and proactive way
The metals sector is making a significant difference in tackling climate change, and contributing to the sustainability agenda, both by improving its own environmental performance and developing more energy-efficient products for both industry and consumers. As PwC’s report, Pressing on the accelerator: Taking metals innovation to the next level says, improvements in raw materials aren’t visible to the public, so the metals manufacturers don’t get the credit they deserve. No-one is saying this is easy, but it isn’t going to happen unless the companies themselves invest time and effort in communications.
Nearly two thirds (65%) of the sector’s CEOs think their business should be doing more to communicate their strategy to wider stakeholders, with 62% saying the same about their organisational values, and 46% citing their impact on local communities. But only 41% said the same about their track record on innovation, which suggests that this element of their corporate story isn’t yet getting the prominence it deserves. Conversely, 65% felt they needed to measure the value and impact of their innovation activities, and this is a good first step, as communications need to be based on rigorous evidence, to avoid accusations of ‘spin’.