The net debt of the top 30 steel companies globally is at a record high of more than US$150 billion, according to EY’s Debt in the steel sector report.
Debt in the steel sector rose significantly between 2008 and 2013 before experiencing some relief in 2014. That relief was short-lived, however, as the pressure of excess capacity, rapidly cooling demand in China and the stronger position of steel customers drove a 30% decline in steel prices in 2015.
“The steel sector continues to face headwinds,” says Anjani Agrawal, EY Global Steel Leader. “Lower prices and weaker demand over the last year has prevented steelmakers from reaping the benefits of ongoing debt restructuring and cost and efficiency measures.
“As a result, debt in the sector is now sitting at a record-high and many steelmakers are in some form of distress with some teetering on the verge of bankruptcy.”
Brazil, India and China, in particular, have accumulated more debt as a result of decreased demand, new capacity spend and excess production respectively.
Meanwhile, Russia and Japan have reduced debt due to increased exports on the back of the depreciation of their domestic currencies. Similarly, the US and Europe have improved their debt situation by decreasing capital spend.
Agrawal says: “Governments around the world are working hard to find regional solutions to support their domestic steel industry. But these solutions will only work if the companies in question have viable long-term business models. And while many steelmakers are focusing on productivity and working capital, there’s still a lot to be done.”
Alternative financing, tighter controls on costs and divesting non-strategic assets to free up capital are key tactics currently playing out in the steel sector to reduce debt and release cash.
Agrawal says: “Closures or bankruptcies in the steel sector can have serious impacts on the local markets and also on the broader local economies. The sector players need to undertake real strategic changes to survive current conditions and prepare to ride the next wave of growth.”