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2013 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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2013 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Foreword
All things considered, 2013 will likely be remembered as a year of foundational change for the metals sector. Restructuring and cost cutting will likely continue in the slow growth markets of Europe; investment should continue to pick up in the high growth markets in Asia, Latin America and Africa; and consolidation will inevitably continue, particularly in China where significant room still remains for the industry to modernize. As this Global Metals Outlook clearly demonstrates, metals companies are keenly exploring new opportunities for cost cutting. In some markets particularly those where overcapacity is perceived to be more structural in nature there will likely be a further restructuring of assets. At the same time, continued restrictions on available capital and a temporary drop in resource prices around the world have also catalyzed metals organizations to focus their attention on the optimization of their existing assets rather than the acquisition of new ones. The supply chain has also come sharply into focus for metals companies. Over the past year, I have noted a move by many organizations to reduce downstream costs and capture some of the value lost to intermediaries by rethinking their distribution and customer service offerings. On the upstream side, there will likely be an uptick in the pace of partnering and joint ventures as metals organizations look to secure the cost benefits of vertical integration without outlaying massive amounts of capital or shouldering too much risk. This Global Metals Outlook examines the current trends and emerging business opportunities for the metals sector going forward. The findings, based on the responses of almost 60 industry players, paint a picture of an industry in transition where the winners of the future will likely be the ones making radical changes to their business models today. To discuss these or any other issues currently facing your metals organization I encourage you to contact your local KPMG member firm or one of the contacts listed at the back of this publication.
Eric Damotte
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2013 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Contents
Low growth expectations drive 2 cost reduction Focus on enhancing supply chain visibility Shifting markets create new opportunities Conclusion How KPMG can help 15 8 12 14
2013 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
2% 2%
Over 3% growth
2-3% growth
No growth
0.1-0.9% reduction
1-2% reduction
Over 2% reduction
All manufacturers
Metals companies
Q: What is your outlook for the global economy over the next 12 to 24 months? Source: Economist Intelligence Survey, Nov. 2012
sector but more than a third indicated that labor cuts may also be needed over the next 2 years. For the most part, however, planned cost-control measures in the metals sector seem focused on creating more streamlined operations with a greater concentration on core products and operations. More than a third of metals respondents said they would exit unprofitable or non-core product lines while slightly more indicated similar intentions for unprofitable or non-core business units. More importantly,
perhaps, is the fact that 41 percent of metals respondents also indicated an intention to share functions or even facilities with other organizations. While the industry is currently experiencing somewhat of a low-cycle made all the more difficult by uncertain demand, shifting market dynamics, and tight financing environments there are clear indications that todays consolidation and cost-reduction exercises will lead to a stronger and more resilient sector in the future, noted Eric Damotte, KPMGs Global Head of Metals.
39%
27% 24%
All manufacturers
Metals companies
Q: What are the priority areas of cost-control that you will pursue over the next 12 to 24 months? Multiple responses were allowed. Source: Economist Intelligence Survey, Nov. 2012
KPMG Insight
120 100 80 60 40 20 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 >$1bn 2012 13YTD <$100m $101m - $500m $501m - $1bn
# of deals
http://www.reuters.com/article/2012/03/02/nippon-steel-pres-idUST9E8CN00220120302
Strategic fund raising: given the limited cash availability and difficult public market conditions, steel companies may look to partner with strategic and financial partners to develop large projects Industry restructuring: as we saw with the Outokumpu-Inoxum deal,2 steel companies may divest a business or joint venture it with a competitor to enhance the equity story Share swaps and strategic alliances: several steel companies may enter into minority share ownerships in other steel companies for strategic reasons Vertical integration: while funding constraints will likely dampen the pace, some steel companies may look to continue the vertical integration started during the 2004-08 period
Government intervention: governments in resource-rich countries will likely continue to force iron ore and coking companies to go downstream rather than exporting, which would create joint venture opportunities for steel companies operating in those markets Geographic diversification: select steel companies will likely consider expanding into higher growth regions of the world, including South East Asia. In other metals, such as copper and aluminum smelting and refining, companies may continue to search for investments in raw materials to better manage price volatility and achieve security of supply in the face of growing resource nationalism.
493 222
553
535
1980 Top 20
31%
217
1990 Other
28%
314
2000
616
37%
2012
-40%
http://www.businessweek.com/news/2012-02-01/outokumpu-to-buy-thyssenkrupp-inoxum-unit-in-3-5-billion-deal.html
KPMG Insight
Operational Trends
With the impact of the global economy, and the volatility in commodities, metals and mining companies continue to look at ways to improve operations along a number of different work streams, with the focus on value improvement and cost optimization. traditional sources, and the societal desire for newer energy sources, metals and mining companies have followed suit in reevaluating their energy policies. Considerations go beyond cost and availability to include the companys social license to operate, stability of existing and future energy sources, as well as potential regulatory initiatives in various countries. Each of these factors impacts the traditional practices, and can result in net benefits if managed effectively. Ultimately, these factors, as well as others, are challenging the traditional production efficiency views within operations, and leading to alternative approaches to manage the operations with a holistic approach that focuses on long-term value, rather than a particular production number or efficiencies derived from cost accounting measurements.
One of the key focus areas where companies have shifted their focus is to evaluate the asset management processes at their operations. Leading companies have shifted from looking at maximum utilization (focused on production results) to looking at production in light of current and long-term costs. Bringing into consideration scheduling, repairs, maintenance, etc. asset lives are viewed as key for managing margins as well as achieving desired production results. An additional consideration is the focus on energy within the sector. With prices of energy commodities shifting with the supplies of
Focus on enhancing
Metals organizations struggle to enhance their supply chain visibility
As metals organizations tighten their supply chains to reduce costs and eliminate stockpiles, there has been a growing focus on improving supply chain operations and efficiency. Yet while many (41 percent) say that ensuring supplier performance in terms of risk, reliability, and quality is their top supply chain challenge, few seem to have achieved the level of visibility required to truly improve operations (an operational priority for almost 60 percent of metals respondents).
49%
24% 7%
No visibility Little to no Tier 1 supplier visibility Some visibility Limited Tier 1 supplier visibility, but not Tier 2 and beyond Enhanced visibility Tier 1 supplier visibility and some Tier 2 supplier visibility
15%
Complete visibility Tier 1, 2, and beyond suppliers visibility
Q: How much visibility of supply and capacity information do you have across your suppliers and logistics partners? Source: Economist Intelligence Survey, Nov. 2012
Given that 64 percent of metals respondents said that email, fax, and mail are still the most prevalent method for sharing information within the sector (versus just 44 percent across all industries), it is hardly surprising that metals organizations struggle to enhance their supply chain visibility. Only 15 percent said they use collaborative supply chain software, while a slightly larger number reported using web-based partner portals (20 percent) and traditional B2B/EDI networks (37 percent).
Unfortunately, the current lack of visibility is impacting metals organizations ability to respond and recover to sudden supply chain disruptions. So while slightly more than a third of metals respondents indicated that they could assess the impact of an unplanned supply chain disruption in less than a week, an almost equal number said it would take up to 2 weeks. Astonishingly, 15 percent of metals organizations admitted that they had no capacity for assessing the impact of an unplanned disruption at all.
Clearly, metals organizations will need to make supply chain visibility and collaboration a top priority if they want to offer their customers a secure supply of product while eliminating unwanted down-time at facilities, added Eric Damotte. This will require
metals organizations to both invest in technology and renew their focus on supplier relationship management techniques if they hope to create a more collaborative, transparent, and responsive supply chain.
1 month or longer
All manufacturers
Metals companies
Q: How quickly can your organization assess the impact of an unplanned supply chain disruption (e.g., natural disaster, supplier facility shut down, civil unrest, etc.)? Source: Economist Intelligence Survey, Nov. 2012
10
KPMG Insight
Frank Kang
Managing Director, Advisory KPMG in the US
11
Shifting markets
create new opportunities
China is a top destination for the production of goods that require significant IP
The slowdown in economic activity in the mature markets particularly the Eurozone coupled with new trends in customer demands is creating new challenges and opportunities for todays metals organizations. Much of todays economic turmoil is reflected in the metals sector growth expectations: approximately one-third of respondents expect China and Japan to account for the majority of their sales growth over the next 2 years. And while the US continues to be the top market for growth expectations, it is worth noting the rise of the emerging markets; India already ties the UK as the fourth most likely growth market, and outpaces some of the more mature markets like Germany where only
9 percent of respondents said they expected to see the majority of their sales growth. At the same time, our survey shows that the emerging markets are growing in importance as a source of raw materials. Almost a quarter said they would increase their sourcing from China, while one in ten said they would increase sourcing from India. And while this likely reflects growth in local demand more than international demand, it does indicate a continuing shift in the market towards Asia nd other high growth economies. Interestingly, almost 30 percent said they would grow their supply chain in Japan, suggesting that the sourcing of manufactured supply elements is also shifting east.
Q: Which countries do you expect to account for the majority of your sales growth in the next 12 to 24 months? Source: Economist Intelligence Survey, Nov. 2012
12
43%
Greater than 4%
Other manufacturers last 2 years Other manufacturers next 2 years
Q: In your best estimate, what percent of revenue did your company spend in the last 2 years on R&D/Innovation? What percent of revenue does it plan to spend over the next 2 years? "Don't know" responses were not shown for de minimis reasons. Source: Economist Intelligence Survey, Nov. 2012
Given that China makes up almost 45 percent of all global metals demand, it is not surprising that many metals organizations expect to conduct much of their manufacturing processes in China. What is surprising perhaps is that China ranked above the UK and Germany and only slightly below India as a top destination for the production of those goods that require significant IP . With some market analysts suggesting that China may now be struggling with a slowing economy and overcapacity in the metals sector, there is an expectation that Chinas share of the global manufacturing process may slowly level out and eventually decline as the countrys relative economic balance shifts from manufacturing to services. At the same time, organizations around the world are starting to demand evermore sophisticated products such as lightweight materials, environmentally friendly manufacturing processes, and lower-cost products. And while our survey shows that the sector has historically been underinvesting in both breakthrough research and the
enhancement of existing product lines as compared to other manufacturers, our surveys metals respondents suggest that spending will increase in the next 2 years: whereas only 15 percent of respondents report spending greater than 4 percent of revenue on R&D in the last 2 years, that number is expected to rise to 39 percent of respondents over the next 2 years. However, this still reflects slightly lower levels of investment than that found in the manufacturing sector overall where 43 percent say they will spend more than 4 percent of revenue on R&D over the next 2 years. Shifting market demands and evolving customer expectations are placing renewed pressure onto metals organizations to rethink their core markets and R&D strategies in order to meet future demand in growth markets and product lines, added Eric Damotte. In many cases, metals organizations will find that the most cost-effective and lowest-risk approach to new market entry lies in creating partnerships or joint ventures with existing market players.
13
Conclusion
Clearly, this is a time of significant change and opportunity for the metals sector. Some will take advantage of the cost-reduction opportunities and the shift to new markets and products to create a competitive advantage and, in doing so, create a position of strength in an otherwise turbulent market. But getting there will not be easy. Based on both the survey data and the experience of KPMGs metals sector executives, metals organizations must move quickly to achieve four key objectives: Create a cost advantage: Metals executives will likely need to shift their focus away from short-term cost-cutting exercises to instead focus on creating a sustainable cost culture that manages costs in both low and high cycles. Improve visibility into the supply chain: Shifting market demands and continuing cost pressures should force metals organizations to improve their supply chain operations through greater collaboration and integration within the supply network. Focus on new markets and products: As demand shifts to the emerging markets and new products gain popularity, metals executives will likely want to vigilantly watch the market trends and adjust their market strategy accordingly. Create new partnerships and collaborations: Whether entering into new markets, developing new products, or sharing core functions across multiple organizations, the development and maintenance of strong partnerships will be critical. Looking ahead, it seems clear that strength will likely slowly return to global metals markets over the next few years. And while it will be maintained and led in the short-term by the emerging markets, there are strong signs that Europe and the Americas will see increased demand once the mature economies emerge from their extended slowdown. Metals organizations would be well advised to use that time to become more effective, responsive, and collaborative.
14
15
kpmg.com/socialmedia
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Designed by Evalueserve. Publication name: Global Metals Outlook Publication number: 130367 . Publication date: June 2013