The Consolidating Steel Industry

For a long time, the steel industry was seen as static and unprofitable one. Producers were nationally based, often state owned and frequently unprofitable - between the late 1990's and 2003, more than 50 independent steel producers went into bankruptcy in the USA. The twenty-first century has seen a revolution. For example, during 2006, Mittal Steel paid $35 billion to buy European steel giant Arcelor, creating the world's largest steel company. The following year, Indian conglomerate Tata bought Anglo-Dutch steel company Corus for $13 billion. These high prices indicated considerable confidence in being able to turn the industry round.

In the last 10 years, two powerful groups have entered world steel markets. First, after a period of privatization and reorganization, large Russian producers such as Severstal and Evraz entered export markets, exporting 30 million tones of steel by 2005. At the same time, Chinese producers have been investing in new production facilities, in the period 2003-2005 increasing production capacity at a rate of 30% a year. Since the 1990's, Chinese share of world capacity has increased more than two times, to 25% in 2006, and Chinese producers have become the world's third largest exporter just behind Japan and Russia.

Steel is a nineteenth century technology, increasingly substituted for by other materials such as aluminium in cars, plastics and aluminium in packaging and ceramics and composites in many high-tech applications. Steel's own technological advances sometimes work to reduce the need: thus steel cans have become about one third thinner over the last few decades.

Key buyers for steel include the global car manufacturers, such as Ford, Toyota and Volkswagen, and leading can producers such as Crown Holdings, which makes one-third of all food cans produced in North America and Europe. Such companies buy in volume, co-coordinating purchases around the world. Car manufacturers are sophisticated users, often leading in the technological development of their materials.

The key raw material for steel producers is iron ore. The big three ore producers - CVRD, Rio Tinto and BHP Billiton - control 70% of the international market. By 2005, iron ore producers exploited surging demand by increasing prices by 72%; in 2005 they increased prices by 19%.

The industry has traditionally been very fragmented: in 2000, the world's top five producers accounted for only 14% of production. Most steel is sold on a commodity basis, by the ton. Prices are highly cyclical, as stocks do not deteriorate and tend to flood the market when demand slows. In the late twentieth century demand growth averaged a moderate 2% per annum. The start of the twenty-first century saw a boom in demand, driven particularly by Chinese growth. Between 2003 and 2005, prices of sheet steel for cars and fridges trebled to $600 a ton. Companies such as Nucor in the USA, Thyssen-Krupp in Germany as well as Mittal and Tata responded by buying up weaker players internationally. New steel giant Mittal accounted for about 10% of world production in 2007. Mittal actually reduced capacity in some of its Western production centres.

1.According to the case, in recent years which of the Porter's five forces have become more positive for steel producers, and which have become negative?Explain each of the five forces(big explanation)

It is said that steel is sold on a commodity basis, by the tonne. How can this have an impact on the business strategy of the steel producers? Towards which Porter's generic strategy, will producers be tempted to move to.