GENERAL NEWS / 13-01-2023
Grupo Arania's Purchasing Director, Marc Bosch, analyses the “chaotic” situation the international steel market is going through and highlights the group's strengths to overcome these obstacles.
Question. What's the current situation in the international steel market?
Answer. We're experiencing a very chaotic time, with prices rising and falling sharply in very short periods. In international prices, we have exceeded and almost doubled the historic maximum ever recorded. The previous peak occurred during the financial crisis of 2008, when the price per tonne went from 300 to around 800 euros, which was incredible in itself. Now the price has gone up to 1,460 euros per tonne in Europe and 1,260 in imports from Asia. This is the picture.
Q. What effect is the Ukraine invasion having?
A. Russia and Ukraine are very rich in raw materials, to the point that they supply European steel industries with between 25 and 30% of these raw materials. When the invasion began, these supplies stopped arriving and the steel works looked to the spot and commodity markets to cover the raw materials that wouldn't be coming from those two countries. At that time the sector went into turmoil with a wild market, very strong demand aggravated by the nervousness and uncertainty of many manufacturers, that ordered in excess to ensure their production. All of this began to affect the whole supply chain and there were three or four months of madness. We have to remember that we were coming out of a previous crisis, due to COVID, that shut down global activity, caused staff furloughs, etc. Months later, when industry started to pick up again, car manufacturers and other markets begin to place orders 200% larger than usual, with the handicap that at that time the sector as a whole was suffering an enormous drop in supply, with the international supply chains disrupted. This led to multiple and significant stockouts throughout the supply chain, and disruption to land and sea transport.
“Russia invading Ukraine has sent the sector into turmoil with a wild market”
Q. And what was the result?
A. That apparent demand by automotion and other leading sectors at industrial level, in addition to the drop and deficit of various raw materials, caused prices to increase; Asian sea freight was multiplied by 7; all costs increased, and the price of steel reached historic levels. When the prices hit their peak, manufacturers began to receive all that raw material they had purchased so wildly, almost in Asian auctions, and stocks increased to the point that ports were saturated, like in Italy, where there was so much material that the ships couldn't be unloaded. The consequence was a price drop caused by the disappearance of that apparent strong demand and by the automotion and semiconductor crises, that at the same time caused car manufacture and vehicle delivery to slow. Remember “In times of war, markets and money are fearful”.
Q. What's the current picture?
R. We've begun to suffer the consequences of all this turmoil: prices have dropped outrageously and industries are going to start to suffer this drop. 2021 was a record year for profits in all sectors; part of this due to the tailwinds of speculation with rising prices of the raw material, but with this change of cycle we're seeing a significant stock depreciation. Difficult times are coming.
Q. When facing this uncertainty, how can Grupo Arania avoid these obstacles to maintain competitiveness and save jobs?
A. Our group has always been committed to job preservation even in the previous situation of the health crisis, when the majority of companies resorted to furlough systems. We have always been characterised by diversification and being a multisector group and these in particular are two of the keys to our business. Grupo Arania works in four very different sectors: cold rolling, precision tubes, racking and shelving. They are very different groups and it's very unusual for a year to be particularly good or bad for all of them, with the exception of the last financial year due to the circumstances we have mentioned. Overall this year is going to be complicated because demand has dropped sharply, stock has depreciated, prices have dropped and we're going to have a generalised increase in costs, including consumables, salaries, energy, raw materials, etc. Despite this, we trust the group will have a good result. The sales volume in tonnes of steel could be slightly reduced but it will be compensated with improved contribution margins, similar to what is already happening on a global level: car manufacturers such as BMW that are manufacturing 17% or 20% less than other years and have declared a 68% rise in profit.
Q. Do you think this situation will lead to a restructuring of the market?
A. It's possible. I believe that this touch of competitiveness that companies need now will depend on their waistline and the flexibility they demonstrate. Right now the picture is of overall uncertainty; we're heading towards a short-term, highly changeable model, where, for example, some of our customers don't know what they're going to want to buy in the short and medium term, and, in contrast, fulfilling an order requires several months. In the case of Asia, the steelworks' delivery terms are 4 or 5 months, while in Europe they are 2 or 3; then the material has to be transformed and processed for several weeks and prepared for shipping. That is, for a sale to be completed, several months are needed, while some customers can't even predict what they'll need in 4 to 6 weeks' time. So very flexible models are needed, both from the point of view of the supply chain and in terms of organisation, for example, in designing the manufacture shifts for our direct labour.
“We're facing a short-term, highly changeable period, where being flexible throughout the organisation is one of the keys to success”
Q. You've mentioned flexibility, a multisector nature and business diversification but has the principle of “buy low, sell high” come to an end? What is the group's strategy to maintain its competitiveness?
R. Quality is fundamental. We have transformed the company based on quality. Committing to it has opened up new markets to us, many of them today strategic. For the last two years we have invested a lot in improving quality and making this evident to the customer. Years ago “buy the cheapest on the market and try to sell it at a higher price” did work. Nevertheless there were a lot of internal rejections, lack of competitiveness, complaints, etc., that made it impossible to maintain customer loyalty. Corporate Purchasing made an enormous effort in the acquisition and certification of suppliers, many in Europe and Asia, and we established very high quality standards. We're in a very specialised sector; we have focused on specialised sectors such as automotion that takes a lot of work and effort to consolidate. And once you're in, a quality fault or other problem will put you out of the game for a long time. The phrase “buy low, sell high” has been obsolete for more than 15 years. Our objective now is to buy materials that meet all the customer's requirements; to do this, we have to know what our customer needs, and one of the keys to success was the creation of the Technical Assistants for Customers. They assist the customer to determine their needs and to be able to tailor the product to them. Positioning the customer at the centre of the sales strategy is essential to provide excellent service. Today, quality is non-negotiable.
Q. What do you think are the main challenges the steel sector will face in the future?
R. Companies have to be flexible in the type of service required. To fulfil an enormous order at a certain time, significant labour flexibility is needed to be able to respond. This, along with quality and diversification, is one of the keys to successfully overcoming the uncertain situation the sector is experiencing. In terms of purchasing, we're still committed to sector diversification, but also to financial and even supplier diversification. We've sought out flexible formulas at supply chain level that make it possible to keep materials available to attend to peaks in demand and, at the same time, withstand the drops in consumption with minimal repercussion on our costs. This lets us be flexible; to react and attend to the market needs with a certain immediacy, and do so without having to wait the three or four months the orders take to arrive.
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