Nature of competition in the market and strategies of long‐term profitability

Global steel industry represents a commodity product market with increasing demand that actually strongly depends on the overall economic trends. The market is characterized by massive overcapacity and large number of steel producers which are striving to sell as much as they actually can produce. Crude steel doesn’t have enough space for differentiation and the main factor of success is cost and hence price leadership. Economy of scale plays a great role in the industry because of high fixed costs. The market by itself is squeezed by powerful buyers that significantly restrict opportunities of steel producers to generate high profit, even taking into account that entry barriers are really high and threat from substitution is in most cases moderate. Suppliers do not have high bargaining power since leading firms have long ago integrated downward. However the access to resources is one of main roots to competitive advantage by a steel producer, because free market of iron ore and coke can be considered too risky. The access to target markets also is of increasing importance because of rising logistics costs. Crude steel industry is strongly regulated in most of states. Despite the market is quite conservative and is not prone to changes (except technological innovations), it is possible to anticipate further consolidation (especially on international level) in the industry and intensifying competition. However the future to the greatest extent depends on economic conditions, especially in automobile, constructing and shipbuilding industries. In general, competition can be named really intensive in the industry.

To generate at least as high as industry average profits, steel producer has to consider following points:

· Modernization of plants and equipment to have competitive variable costs (especially electricity costs);

· Building up strong relations with customers to avoid large excess capacity; achieve economy of scale and decrease dependence on general economic situation;

· Access to main raw materials: further acquisitions of iron ore and coke mines;

· Building up strong relations with regulators;

· Development of supply management system to decrease transportation costs;

· Proper strategy of mergers and acquisitions: not just consolidation, but profitable consolidation (again transportation costs, access to resources and markets).

· Continuous search for niche markets with higher profit margin and more sustainable competitive advantages.

Sources

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[1] Here authors use the concept “buyer” also for “purchase” inside the company – so from own coal or iron suppliers.

Date: 2015-12-11; view: 932