The Impact of the European Business Environment on the Steel Sector - Research Paper Example

Business Introduction The European Steel industry is one of the most competitive and well established industries of the European economy. It is one of the strongest and most competitive industries of Europe, and robust growth of this sector is closely related to the growth of the European economy as a whole (Dabydeen, 2004). The steel sector in Europe represents 1.25% of the total employment in the manufacturing sector. These are few of the reasons for which the European steel sector is chosen in this paper (European Commission, 2014a). The global financial crisis has affected the steel sector of the European Union in an adverse manner and presently, the industry is under significant stress in areas relating to reduction in the demand for steel, rise of emerging countries as industrial powerhouse and rising instances of high unemployment. The purpose of this paper is to explore the impact of the European business environment on the steel sector of the country. The idea is to find the factors that are causing challenges for the industry and the ways in which these problems can be resolved. Discussion Overview The steel companies in Europe have been primarily under the control of the government in the 80’s. The situation had rapidly changed from 1988-1998 when most of the steel companies were sold to the private sector enterprises. The productivity of the companies had increased rapidly and profitably began to show improvement slowly. Only a fraction of the steel companies remained under the government and the major steel companies sold to the private sector were given full liberty to expand across the national borders. The previous decade has been largely characterized by mergers and acquisitions. European steel companies has been able to create strong profits which had lured number of steel companies from the Asian countries to export steel to Europe, particularly when production was slack in their countries. Further mergers and acquisitions had taken place from 2004 (Wubs, 2008). The following table shows some of the key companies and the output produced from them. Figure 1: Major players in the European Steel Market (Source: Lynch, 2007) Before the economic crisis of 2008, the steel companies made huge profits on account of fast growing demand for steel and established itself as one of the most reliable industries in European economy. Present Challenges The present state of challenges of the steel sector in the European steel sector comes from both internal and external environment. The internal issues arise from the slow recovery of the European economy after the financial crisis and the external issues arise from certain actions that are taken by the trading partners and the policies of the government. The European Union has always maintained very high environmental standards and has constantly committed itself to the reduction of the adverse environmental effects. The new standards that have been introduced by the government regarding carbon emission and other greener production techniques have severely jeopardized the profitability and growth of the steel industry. The government is expected to take policy measures regarding green house gas emission, use of alternative sources of energy like solar and wind power and a series of ambitious investments with the objective of reduction of carbon dioxide. The present situation has caused a divided opinion in the minds of the business leaders. Critics are of the notion that the effort of the government to create a sustainable business environment will render the steel sector inefficient, as the production costs are expected to rise strongly corroding the profits. It has been estimated that the cost that will be incurred by the steel sector from 2020 to 2030 is close to 58 billion Euros (Mittal, 2014). The producers in the European Union are facing burdens of administrative costs with the implementation of the regulation. The high cost of government regulation severely limits the capacity of the steel companies to make formidable investments in the research and development department as they will hardly have any profits after sustaining the costs of production (Powley, 2014). This implies that, there will be considerable differences between capacities of innovation and investment decisions as the larger conglomerates will be in a better position compared to the small and medium term enterprise. This will cause unfair competition and overall loss of efficiency in the market. There is a general consensus that the larger companies will consider relocation to countries which does not have heavy restrictions, and there will be a loss of value from the supply chain. This is mainly because, steel production is an upstream activity in the industrial value chain, so relocation by the steel industry will cause a loss of the competitiveness for other downstream activities which are mainly steel based industries. Those in favour of the government policy regarding environment are of the view that, energy and climate issues by the European Union are not the major problem for the players in the steel industry. It is flawed notion of the industry players that is causing the main problem. This is because the steel industry does not take into account the exemptions and the CO2 allocations that are enjoyed by them, and this in turn makes them less vulnerable to the fluctuations in the energy prices (EurActiv, 2014). Also, it is being pointed out that the main problem of the steel industry is that the problems faced by it are mainly demand-side and is completely unrelated to the energy issue of the government. It has also been argued that, implementing a green policy for the steel industry is likely to improve the recycling capacity of the industry and reduce the cost of energy requirements of the steel sector. The government policies regarding the energy policies can also raise the costs of electricity prices in entire Europe, and this is likely to raise the cost of production for the steel manufacturers. Energy costs in the European steel sector at present are considerably higher than its international competitors. This makes it difficult for the European players to compete effectively in the global economy. It has been estimated that the costs of the energy in the European sector is almost twice as that of the U.S. and also higher compared to most of the other OECD countries (European Commission, 2013b). Affordable prices of energy will be very important to ensure the competitiveness of the steel makers in the global industry. There is no denying the fact that, a major cause of the fall in the demand for the steel sector is mainly to be attributed to the shrinking demand of automobile and construction sector. The automobile sector and the construction sector has been one of the worst affected sectors of the financial crisis which had initially accounted for 40% of the demand in the steel industry. It has been estimated that the demand for steel is 27% below the demand during the pre-crisis level resulting in 40,000 job losses (European Commission, 2013a). The fall in demand of the steel sector has created a situation where there is a need to restructure and reduce the production capacity. The volatility of demand in the present scenario and the unused capacities in the steel sector are a persistent problem in the present economic scenario in Europe. Overcapacity is a problem that not only affects the European steel market per se. It is a global problem that needs to be addressed in the future (European Commission, 2013a). Apart from the external issues that are causing the problems in the steel industry in Europe, there are certain factors relating to competition within the internal markets that are posing considerable challenges to the steel industry. Though, the steel industry in the European Union is highly developed, most of its raw material needs are met by importing from outside. This means that, policies regarding international trade taken by third party countries significantly impact the profitability of the steel industry by raising the cost of procurement. The emerging countries like Brazil, India and China are posing considerable challenges for European Union steel manufacturers (European Commission, 2014a). These countries work under different legislative framework and the trade restrictions imposed by them are positioned to improve their own business while reducing the profits of the steel makers in Europe. Protectionist measures taken by the third world countries are affecting the internal market of the steel manufacturers by creating distortion both in the market for finished product as well as the procurement of raw materials. The key players in the steel industry are finding it extremely difficult to procure raw materials. A number of factors are responsible for creating the problems of obtaining raw materials like scarcity of raw materials within the internal markets, restrictions on procuring the materials from outside and fluctuations in the price of raw materials (European Commission, 2014a). Production of the steel in Europe is largely dependent on raw materials like non-ferrous materials and iron ore. Most of the raw materials are procured from the third world countries and the trade restrictions imposed by them causes fluctuations in the prices of the products. The shortage of raw materials in the steel industry is also restraining the capacity of recycling in this industry (European Commission, 2014b). Corrective Actions The government has already taken few measures to boost the demand for automobile industry by introducing a project called Cars 2020. Similarly, a project known as the sustainable construction is being undertaken to boost the demand in the construction business. The rise in demand in these sectors is expected to improve the demand for steel in the future. The government is also striving to bring down the costs of the steel production by mainly targeting to bring down the energy costs as energy accounts for 40% of the costs of production of the steel sector (European Commission, 2013b). In order to address the issues of unfair trade practices of the emerging countries, the government of Europe is pressing the issue of trade liberalization by propagating the free trade agreements between countries. The government is negotiating with the third world countries to reduce their tariff and non-tariff barriers as it is expected to improve conditions for Europe. The government is expected to resort to protectionist measures in case, the other processes fail. It can be expected that the cost of production can be significantly brought down if the cost of raw materials go down. Implementation of the free trade agreements are expected to achieve this outcome precisely. It can be expected that the removal of restrictions on the exports of raw materials can improve the current situation for the steel manufacturers (European Commission, 2013a). The strict government policies regarding environmental protection require considerable attention and negotiation between the key players of the steel industry and the government. The costs and benefits of the regulatory burden need to be considered carefully before estimating the true costs that are incurred by the steel makers. This requires an open mind of the steel manufacturers and less strict attitude of the government to reach a proper solution. Conclusion The depressed demand and the challenges of rising cost are to be dealt strongly in order to ensure the growth of the steel sector of the country. The steel sector can be considered as an engine of growth for the Europe, so challenges faced by this sector will cause considerable challenges for the European economy as a whole. It has been observed that, a major problem for the European steel makers are the fall in the global demand for steel, difficulty in procurement of raw materials, regulatory costs imposed by the government and the unfair trade practices by some of the third world nation. All these combined factors have adversely affected competiveness of the steel industry in Europe. In order to remove these hurdles, the government has come up with some measures like boosting the demand for steel by stimulating the automotive and construction sector. The government is also expected to take some measures like promotion of free trade agreements to improve the availability of raw materials and reduce the cost of production. The government policies regarding carbon emission and clean environment needs to be revised immediately otherwise, the competitiveness of the steel sector in Europe is likely to be affected in a negative manner. Reference List Dabydeen, S., 2004. UK steel industry & international trade. London: iUniverse. EurActiv, 2014. Europes steel industry at a crossroad. [online] Available at:< http://www.euractiv.com/sustainability/europes-steel-industry-crossroad-analysis-532405> [Accessed 31 October 2014]. European Commission, 2013a. High-level round table on the future of the european steel industry recommendations. [pdf] European Commission. Available at: < http://ec.europa.eu/enterprise/sectors/metals-minerals/files/high-level-roundtable-recommendations_en.pdf > [Accessed 31 October 2014]. European Commission, 2013b. Communication from the commission to the parliament, the council, the European economic and social committee and the committee of regions. [pdf] European Commission. Available at: < http://ec.europa.eu/enterprise/sectors/metals-minerals/files/high-level-roundtable-recommendations_en.pdf > [Accessed 31 October 2014]. European Commission, 2014a. Competitiveness, trade, sustainability and restructuring. 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