Meeting today’s challenges, forging tomorrow’s solutions
By Ko Young-suk
The current financial crisis has hit economies hard. Steel makers around the world, facing collapsing demand and falling prices, are shifting their business priorities to focus primarily on managing operating costs, securing capital and sustaining client relationships.
In this context, some in the industry may question the relevance of managing for environmental sustainability. In our view, however, this should be at the forefront of steel makers' agendas.
Indeed, for many, managing for environmental sustainability is no longer merely an option but an imperative.
Volatile ― and, in the long-term, rising ― prices for energy and resources, together with tightening environment regulations, will affect steel makers' competitive positions.
Energy efficiency and steel makers' competitive position
The relative cost positions of global steel producers have changed dramatically in recent years (See Exhibit 1). Producers in rapidly developing economies (RDEs), in particular, have seen energy price increases hit their overall cost positions disproportionately, because their cost structures include relatively high energy usage.
For example, although Russia has its own coal and gas resources, local producers have experienced strong price increases ― up to 20 percent per year ― for both gas and electricity, owing to adjustments to world market prices. Chinese producers, similarly, have had to deal with fast-rising energy prices, amplified by difficult logistics and increased energy demand in all parts of the economy.
Western European producers, for their part, and U.S. producers, meanwhile, recently experienced smaller increases in energy prices, thanks to the local availability of coking coal.
Increasing energy prices shift the competitive advantage away from producers that are less energy efficient. Typically, those producers are located in RDEs, though a growing number of plants in RDEs are achieving state-of-the-art energy efficiency.
At the same time, rising prices increase the need for energy-efficient processes and gas-recovery techniques ― countermeasures that can offset rising prices and help control costs.
Six levers for enhancing performance
BCG has identified six levers along the steel production value chain that steel makers can use to reduce their energy consumption and environmental impact. These levers include improving the installed base and enhancing operations; upgrading industrial power plants; expanding other industries' use of steel making byproducts; enhancing the quality of input materials and logistics; adopting new technologies and alternative production concepts; improving control of environmental pollution.
Our analysis, firsthand experience in the industry and discussions with industry experts indicate that over the next five years, companies can best achieve energy savings by taking action in the first three steps.
1. Improving the installed base and enhancing operations
The largest relative deviations are generally in the steel making phase, owing to missing or nonexistent gas recovery from basic oxygen furnaces, inefficient operation modes, or inadequate automation of electric arc furnaces. If the entire current installed base of integrated steel plants and mini-mills were to adopt existing best practices, we estimate that the theoretical improvement potential would be a reduction of about 20 percent of global steel makers' annual energy consumption, meaning producing some 600 million tons less carbon dioxide annually.
2. Upgrading industrial power plants
The global electricity-generation capacity installed at steel production sites amounts to about 24 gigawatts of electrical power. More than 8 gigawatts of this capacity is installed in power plants that are more than 30 years old. Another 4 gigawatts of the installed capacity is 20 to 30 years old. This age distribution suggests considerable potential for energy savings.
Younger plants with modern steam cycles are more than 40 percent electrically efficient, and modern plants that employ combined cycles are about 55 percent electrically efficient.
3. Expanding other industries' use of steel making byproducts
The most significant byproducts of steel production, in terms of achieving energy savings in applications outside the steel industry, are metallurgical slag. This can be used as landfill, to reduce environmental impact as building material, or as a substitute for clinker in cement production. Especially, the cement industry, by adopting widespread use of such slag, could play a critically important role in reducing greenhouse gas emissions from both industries.
Design a sustainability-based business strategy
To help steel producers understand their strategic positions with respect to the challenges arising from the cost of energy, resources, and carbon dioxide abatement, it is helpful to visualize their current positions in terms of a simple evaluation scheme with two key dimensions: the urgency of the need to reduce energy intensity and the degree of potential improvement to match best-practice performance (See Exhibit 2).
Generally, companies in RDEs tend to be more vulnerable to fast-rising energy prices than those in developed economies because of differences in energy efficiencies. A scenario in which energy prices continue to rise sharply would enhance the urgency of the need to improve for companies in RDEs more than for those in more developed countries.
Conversely, of course, increasing energy prices effectively improve the competitive position of producers in highly developed economies ― at least in their home markets.
How can steel producers meet their need to improve their energy efficiency and capture the related financial benefits? Our experience shows that a sustainability-based business strategy can be built up in five steps. Once the company has reached this point, it has become a successful sustainable steel maker.
Step 1: Evaluate the status quo. A structured benchmarking of both the company's own internal functions and those of its peers can shed light on areas that offer good potential for improvement. At the same time, relevant influence factors, such as rising energy prices or intensifying environmental legislation, need to be assessed and their likely impacts well understood..
Step 2: Identify options to realize our potentials. Next, the company should identify possible technological measures or management actions that could help realize its improvement potentials. The first aspect should involve major suppliers in an economically oriented discussion on energy-efficiency and environmental-care opportunities.
Step 3: Prioritize and set up a blueprint for action. The company should also evaluate possible impacts on its future by means of a scenario-based analysis. The scenarios used should reflect varying ranges for economic factors such as energy prices, as well as possible developments in environmental legislation and in the interests of the company's key stakeholders. The major outcome of this step will be a blueprint for action: a set of prioritized measure and actions that ― depending on local conditions ― should be implemented among all production sites to meet companywide performance standards. In this context, the company should set clear and ambitious targets for reducing energy consumption and CO2 emissions.
Step 4: Implement. It is critical for the success of the sustainability-based business strategy that it not be considered less important than shout-term economic interests: it has to be a long-term priority
Step 5: Institutionalize. In the final step, the company should institutionalize the four previous steps: it should continuously seek to optimize both its energy and its environmental footprint - on the basis of growing experience and new developments.
This article is based on the special report published by the Boston Consulting Group (BCG) in July, 2009