Further Links Contact Us Search Help

Syllabus | Exams | Glossary | Resources | Careers | Teachers

Geography

Home > Geography > People & Economic Activity > Global Economic Activity > The Global Steel Industry

The Global Steel Industry

Stephen Goodley	Lynn Wood
Woonona High School	Warilla High School

Outcomes

Nature of the global steel industry

Spatial patterns on a global scale

Factors explaining nature, spatial pattern and future directions

The Australian steel industry

Revision exercises

This unit focuses on the steel industry and is divided into two sections. The first section is a global overview of the steel industry. It contains links to two other sites that provide valuable information about the nature of the steel industry. The second section is a case study of the Port Kembla steelworks as an example of an economic activity operating at the local scale.

This first section reviews the factors affecting the nature, spatial pattern and future direction of the global steel industry. This section also includes an overview of the Australian steel industry that provides a context for the Port Kembla case study.

HSC Outcomes for this Unit

H1	explains the changing nature, spatial patterns and interaction of ecosystems, urban places and economic activity
H4	analyses the changing spatial and ecological dimensions of an economic activity
H5	evaluates environmental management strategies in terms of ecological sustainability
H6	evaluates the impacts of, and responses of people to, environmental change
H10	applies maps, graphs and statistics, photographs and fieldwork to analyse and integrate data in geographical contexts
H11	applies mathematical ideas and techniques to analyse geographical data
H12	explains geographical patterns, processes and future trends through appropriate case studies and illustrative examples
H13	communicates complex geographical information, ideas and issues effectively, using appropriate written and/or oral, cartographic and graphic forms.

The nature of the global steel industry

Steel: A very useful product

Steel is one of our most important manufactured products because it has so many applications and uses. It is considered to be a very versatile metal because it can be moulded, pressed, machined, welded and woven to suit thousands of different purposes.

Iron in its pure form is soft and almost useless, so carbon is added to make it harder, but as more carbon is added, the steel becomes easier to break. Steel is iron with just enough carbon (less than 1%) and small amounts of other elements to make it hard but not brittle.

There are many different types of steel, each made to a precise recipe and for a particular purpose. The hard steel used in a razor blade for example, is different to the strong, resilient steel that is required for a spring. The addition of elements such as manganese, silicon, chromium and nickel gives steel special properties such as strength, toughness and resistance to rust. Various finishing operations such as rolling, heat treating, cooling, softening and forging add to the properties of steel.

Reference: - BHP Steel booklet, Port Kembla Steelworks. 1994.

The steel making process

Making steel is a three-step process:

• iron making: where iron ore, coke and a flux (limestone) are combined in a blast furnace to produce molten iron containing about 4% carbon
• steel making: where excess carbon is removed in a basic oxygen steel making vessel and required alloys are added. The molten steel is then cast into billets, blooms or slabs
• shaping: where steel is rolled to various sizes and shapes in a rolling mill.

There are two ways of making steel:

• an integrated steelworks which involves all three processes (iron making, steel making and shaping)
• an electric arc furnace which uses scrap steel to produce new steel but lacks the capacity to complete the initial iron making process.

For an understanding of how steel is made and a review of the issues related to steel making, refer to Australia’s Industry World website.

Steel: A global perspective

For an overview of the global steel industry refer to the World Steel website, and go to the section on “Basic Facts and Figures about the Steel Industry”.

Spatial patterns on a global scale

Distribution of steel making

It is estimated that there are 95 countries producing steel. In 1996, five countries (China, Japan, USA, Russia and Germany) accounted for 50% of world production; 24 countries accounted for 90% of world production and 43 countries accounted for 98% of world production.

The very broad global distribution of steel making is essentially because of two factors:

1. the volume of steel required to meet demand. Steel is one of the world’s most important industrial products due to the large amount needed and the many ways that it is used across the manufacturing and construction sectors
2. steel is considered to be a flagship industry that means governments around the world want a steel industry to be part of the country’s economic structure. Governments use a range of strategies to encourage the development of a local steel industry and this has served to further broaden the global distribution of steel making.

Site location for steel making

The location of a steel works depend on a range of factors:

• closeness to raw materials, i.e. mainly coal, iron ore, limestone
• labour supply, i.e. a large, skilled workforce
• transport, i.e. deep water port facilities, transport costs
• flat land, i.e. a large site is needed to operate a steel works
• energy and water supplies
• government factors, i.e. infrastructure provision, charges, subsidies
• influence of new technologies
• closeness to markets.

Factors controlling the location of steel making plants have changed over time. For example, new bulk handling technology means raw material inputs can be transported greater distances at lower costs. Historical factors are also responsible for the location of plants such as Port Kembla that have operated for many years. Over time, industrial inertia then prevents a plant being shifted to another location. The scale of steel making operations (i.e. the large size of the operation) means that it is not practical to a move an existing plant to a new location.

Today, the key factors influencing the location of new plants are closeness to market and a source of scrap metal (recycling). Most new plants make use of mini mill technology (an electric arc furnace) which use recycled and scrap steel. Mini mill plants can locate close to the market because they require much less land and recycling provides the scrap source. The cost structure for a mini mill is further improved because it then costs less to transport finished goods to market.

Factors explaining the nature, spatial pattern and future directions of the steel industry

Economic factors

Steel demand strongly reflects major economic forces and political upheavals. Steel production increases when economies are growing, i.e. more goods are being made and governments are investing in infrastructure and transport. Economic recession means a dip in steel production as investment falls.

Major historical events also affect steel production. The two world wars for example represented a peak in production. This was then immediately followed by a dip then a strong climb in production as economies recovered from the war and entered a period of prosperity and growth.

Steel is a strategic industry. Consider the products made from steel, e.g. pipes, railways, tins, concrete reinforcing, wire, screws and nails and the consumer goods, e.g. cars, electrical appliances where steel is an essential input. Every country wants its own steel industry to help give it economic independence and no country wants to rely on others for its steel supply.

Since steel is such an important product, many countries protect their local steel industry but on a global scale, this has led to excess productive capacity, lower prices and poor profitability. Add to this new electric arc furnace technology which delivers a high quality product at a lower price and the overall result for the global steel industry is rationalisation and structural change.

Companies with older technology are either uncompetitive and have to be closed or their productivity has to be increased by investing in new facilities. Both scenarios invariably lead to job losses. For example, between 1990 and 1996, annual capital investment by BHP across its steel making operations ranged from US$563 million to US$667 million per annum while over the same period, employment by BHP continued to fall from 30 000 workers in 1990 to 21 000 by 1996.

Employment factors

The steel industry is a major employer and the scale of operations means that steel firms are often a dominant influence in the community where they are located. One of the most significant trends in the steel industry has been the global decline in employment over the last 30 years.

It is generally accepted that over the period since 1974, only China and Korea (up to 1990) have experienced increased steel industry employment. Across the European Union for example, employment has fallen by over 300% from 996 000 workers in 1974 to 278 000 workers by 2000. In Australia, over the same period, steel industry employment has halved from 42 000 workers in 1974 to the present 21 000 workers.

Steel requires a highly skilled workforce and companies generally place considerable emphasis on human resource management. Steps taken include:

• extensive in-house and external training to ensure that staff have the skills to do their job well
• good management so staff remain focused on doing the job well
• occupational health and safety to protect staff from work-related injuries and sickness.

Organisational factors

The level of capital investment and large workforce means that firms in the steel industry generally wield significant economic power and influence within a country. While few countries have a state owned steel industry, most are privately owned and because of their size, most are publicly listed companies, owned by their shareholders.

A significant proportion of steel firms are multinationals operating from a number of sites both nationally and internationally. This often means there is separation between decision-making and control and the site where products are made. This can also mean large-scale profit transfers overseas.

Interestingly, no one firm dominates the global steel market because of the number of very big firms in the industry. In total, there are more than 200 steel making companies globally and each of the top 20 firms produces over 7 million tonnes of steel annually. The top three companies in 1996, for example were Nippon Steel (Japan) with 26.4 million tonnes, Posco (Korea) with 24.3 million tonnes and British Steel (UK) with 16.1 million tonnes. In 1996, BHP was ranked 17^th in the world with an annual output of 8.4 million tonnes.

Market factors

While the global market for steel is extremely large, a number of factors influence the potential market and degree of competition an individual steel maker will face:

• transport costs: steel is a heavy product and expensive long distance transport makes it considerably more difficult for export steel to compete with the product made locally.
• type and quality of steel: different customers require steel with different specifications and steel producers tend to specialise, thereby reducing competition but also limiting the size of their potential market.
• competition from alternatives: alternative products, e.g. aluminium, glass, concrete have taken some of the traditional steel market but on the other hand the steel industry is constantly seeking new applications for their product.
• international developments: changes in a large steel producing country can have a significant impact on international competition. For example, China’s net steel imports fell from 35 million tonnes in 1993 to a mere 3 million tonnes two years later due to a major increase in local production. Following the collapse of the domestic market, steel exports from Russia and the Ukraine have increased from 5 million tonnes in 1991 to a massive 34 million tonnes by 1995.

Environmental factors

Being a heavy industry, steel making has a major impact on the environment. The manufacturing process creates significant air, water and noise pollution while mining raw materials and the high-energy demands of steel making also contribute greatly to pollution of the environment.

Globally, the steel industry is acutely aware of the need to improve its environmental record and much is being done to address the issue. There is also no doubt that increased political pressure and associated legislative sanctions are playing a part.

It is estimated that in the last decade, close to US$20 000 billion or over 10% of total steel industry expenditure has been on environmental control and protection. From an environmental viewpoint, major contributions include:

• steel has become a major input in the construction of various environmental protection systems, e.g. industrial pollution filters; solar and wind power
• steel recycling means that over 40% of all steel produced comes from scrap steel
• steel uses less energy per ton to produce than many similar competitive materials.

The steel industry has focused on life cycle assessment to determine the overall environmental impact of steel production and use. These studies have quantified environmental impacts and resulted in research and development on reducing greenhouse emissions, developing new products and increasing recycling.

In terms of greenhouse targets, the world steel industry has reduced energy consumption per ton of steel by 20% in the last 15 years. This means less carbon dioxide is being released through the burning of fossil fuels to generate electricity. In comparison to power generation, much more carbon dioxide however is released into the atmosphere during the steel making process when coke is added to the blast furnace. Current research is therefore focused on reducing greenhouse emissions in the steel production process.

The steel industry is also contributing to greenhouse targets through the development of light weight automobile steel (lighter cars need less fuel) and various construction applications which result in less electricity being required for the building space.

Technological factors

Like most manufacturing this century, technological development is a key feature of the steel industry. It has become extremely difficult for older steel making plants to be competitive with newer plants built since WWII (mainly in SE Asia, e.g. Japan, Korea). Remaining competitive means older firms have to continually invest in multi-million dollar capital improvement programs or increasingly rely on government protection to survive.

Steel is not a complex manufactured product, i.e. involving a large number of components and steps, in comparison to a car or computer. The steel making process itself however is very complex and involves high quality technological solutions because of the:

• size and scale of the steel making operation
• skill required to make different types and grades of steel
• drive to lower production costs.

New technologies relate to environmental protection (see previous section), production techniques, product quality and the development of new products. Some current examples include:

Production techniques: direct reduction iron technology; electric furnace operation; use of artificial intelligence in operations

Product quality: consistency in physical properties of steel; variations in strength, hardness, and bending properties

New products: new types of steel alloys; building and construction products.

Political factors

Steel is a heavily protected industry. Governments use a variety of strategies, e.g. tariffs, subsidies, loans and import restrictions to ensure that their steel industry remains competitive domestically. In many cases, this has allowed the local steel industry to continue operations even when better quality, cheaper steel could be imported from another country.

Many years of government intervention have negatively affected competition and efficiency in the steel industry. The use of protection to support inefficient producers has led to a global steel industry which is characterised by overcapacity and poor profitability. In response, there has been a marked decline in government protection since the late 1980s though this is still occurring in countries seeking to develop new steel making capacity or preserve existing capacity. For example, most of the countries which are export destinations for Australian steel still use tariffs as an import tax on steel. Moreover, tariff rates used in these countries are higher than those generally used by Australia.

The Australian steel industry

An understanding of the Australian steel industry is necessary to provide a context for the local case study. The information that follows is drawn primarily from three Internet sources:

• The Australian Steel Industry in 2000
• The Australian Iron and Steel Industry: Parliamentary Report, 1997
• US Department of Commerce International Trade Administration, December 2000

The nature of the Australian steel industry

The steel industry is very important to the Australian economy. With an annual turnover of $8 billion or 5% of manufacturing, steel is one of Australia’s largest industrial sectors and it is among the top few export earners which greatly assists the Australian balance of payments.

The nature of the Australian steel industry has changed considerably over the last 15 years. A 1997 government report found that the steel industry had improved considerably over the previous decade from 1986. The industry had become more productive, efficient and competitive. It was producing 26% more steel, exports were 170% higher, productivity had doubled and the use of continuous casting meant yields per tonne of crude steel had increased to 90%. The industry was also globalising through investment in overseas steel facilities and it was at the forefront of new steel technology.

Over the last 4 years, the Australian steel industry has not performed as strongly and while most of the gains made during the decade up to 1997 remain, rationalisation is now a key feature of the industry. In the 12 months to the end of 2000, steel production fell by 12.5% to 7.16 million tonnes, local steel consumption was 9% lower, investment was at a historically low level, steel company profits were down and while imports fell by 8%, exports fell by 17%. A global oversupply of steel, a general decline in manufacturing due to a slowing world economy and a change in corporate direction by BHP, i.e. closure of the Newcastle plant and associated restructuring of its steel sector have combined to explain the current decline in steel industry performance.

The economics of the Australian steel industry

Australian steel producers currently operate in an environment where they have less government support than in most other countries. The policy of low protection was introduced in the late 1970s because Australian manufacturing was inefficient and uncompetitive. At the time, this poor performance meant two things. First, Australians were paying more for poorer quality goods. Second, Australian manufacturing was uncompetitive internationally, so Australia was a country which exported raw materials and imported manufactured goods.

By reducing protection, the government forced the whole manufacturing sector to become more efficient and competitive. Industry had to invest in better production techniques and be more market orientated, i.e. innovative and flexible to compete domestically and survive. Manufacturing efficiency increased due to the greater use of technology and a significant fall in manufacturing employment.

It is reasonable to claim that the policy of reduced protection has been a key part of Australia’s economic development and improved standard of living, the higher level of education and training required in the workforce and the increase in manufacturing exports. As manufacturing has become more productive, the standard of living in Australia has risen because manufactured goods are more valuable and earn more income than extracting raw materials. Today, the extension of this ideology is when the government promotes Australia as the clever country rather than just the lucky country.

The structure of the Australian steel industry

For much of this century, BHP has had a monopoly control in Australian iron and steel production. This is where only one company produces and sells a good in the marketplace. A steel plant represents a billion dollar investment and new firms were blocked from starting production, i.e. entering the market because of the high set up costs and the small size of the Australian market.

Monopoly control greatly influenced the extent of government support to BHP. In the late 1970s, BHP steel was struggling to perform adequately and the Australian government responded by negotiated the Steel Industry Plan that commenced in 1983. The government was seeking to protect a key strategic industry and protect employment in both the steel industry, i.e. the steelworks and associated support industries as well as downstream steel manufacturing. The plan helped BHP to revamp its steel making plants so they became more efficient and competitive. This involved a significant decline in steelworks employment but as outsourcing was part of the process, employment in some associated industries and downstream manufacturing actually increased. Since the end of the five-year plan in 1988, employment in steel making and related industries has declined steadily as the pressure for technology based efficiency has continued. BHP steel continues to invest heavily which has allowed it to remain competitive in terms of both quality and price.

Recently, two other steel producers - Smorgans and OneSteel: have entered the Australian market. Smorgans started in the late 1990s after a period as a major producer of steel products. One Steel started in 2000 when BHP subdivided its steel making conglomerate and created a new company. One Steel operates independently of BHP who are now seriously pursuing further restructuring by selling off the rest of its steel making operations.

BHP has now linked with the multinational Billiton corporation to create a huge global minerals conglomerate. These steps reflect a shift in corporate strategy for BHP which involves adopting a core business strategy, i.e. concentrating on mining rather than manufacturing.

The future of the Australian steel industry

In terms of international competitiveness, the outlook for the Australian steel industry is mixed. Australia is amongst the lowest cost producers of flat steel products in the world mainly because of good access to high quality raw materials that ensure lower input transport costs. On the other hand, Australia’s distance from world markets and comparatively high capital costs means there are fewer incentives for local steel producers to become more efficient.

If the steel industry is to grow, then there must be an increase in steel exports and greater investment, particularly in new technology. There is great potential for export growth in the Asian market but Australian steel must be able to compete with low cost exports from Russia and the Ukraine. For new investment to occur, it must be supported by the development of infrastructure and continued microeconomic reform in shipping, rail and electricity.

It is to be hoped that the increase in the number of major steel producers in Australia will lead to more domestic competition and greater efficiency which will in turn, lead to greater competitiveness on world markets.

Revision exercises

Some of these questions refer to other websites, some can be answered from the material presented above and some require an answer from your own knowledge.

The global steel industry

1. 1The Steel Making Process: go to the Australia’s Industry World website.
   Draw a flowchart explaining the process of steel making at an integrated steelworks plant like Port Kembla. (H11, H13)
2. Distribution of Steel Making - go to the World Steel website.
   Refer to the table: “The Major Steel Producing Countries, 1999 & 2000”.
   • Draw a bar graph for the top ten world steel producing countries showing tonnages for 2000 and then add figures for Australia to the bar graph.
   • On a world map mark in the top ten steel producing countries. (H10, H11, H13)
3. Site location - draw a mind map showing nine main locational factors; underline the two locational factors that are most relevant to newer plants. (H1, H13)
4. Economic factors: explain the relationship between steel production and economic circumstances.(H1)
5. Technology and employment: read the two sections: Employment factors and Technology factors; discuss the relationship between employment and technology in the steel industry. (H6)
6. Organisational factors: What is a transnational organisation ? How are they relevant to global steel production? (H1)
7. Environmental factors
   • Describe the relationship between steel production and global warming and the greenhouse effect.
   • List environmental management processes that have been adopted by the steel industry in recent years to reduce the environmental impact of steel production.
   • How does this help promote sustainability? (H5, H6)
8. Political factors
   • Explain how domestic protection of steel producers may lead to reduced efficiency in the industry.
   • If this is the case, why do governments protect their industries?
   • What has happened with regard to industry protection since the 1980s?

The Australian steel industry

1. Nature of the Australian steel industry: make a list of eight points that describe the nature of the Australian steel industry over the last ten years. (H1)
   Hint: include statistics you could use in an extended response answer in the HSC.
2. Economics of the Australian steel industry and structure of the Australian steel industry.
   • What were the consequences of reduced protection in the Australian economy?
   • What were the consequences of the 1983 Steel Industry Plan?
   • Outline the directions of the Australian steel industry since the end of the five-year steel industry plan in 1988 (including Smorgans, OneSteel and Billiton).
3. Future of Australian steel: suggest the likely directions for the steel industry over the next five years. (H12. H13)