Strategic cost management for steel companies

Building competitive edge through cost reduction


ManufacturingChina has been the largest steel producer with nearly 47% share of crude steel production in 2009. However, Chinese steel producers are facing tremendous cost pressures due to a wide range of internal and external factors including mounting material costs, declining profitability, a changing competitive landscape, increasing M&A challenges, demand instability, the move towards a low-carbon economy and rising environmental costs as well as more stringent corporate governance and regulatory requirements.

Under such background, Deloitte China and the China Steel Industry Development Research Institute (CSDRI) jointly released this report and pointed out that managing for lower costs, higher efficiency and stronger profitability should be the focus of the efforts required by most Chinese steel producers in the long run.

The research, based on an analysis of financial data, covers nine largest Chinese steel producers among the world’s top 20, and eight overseas steel producers. From the perspective of strategic cost management, the researchers analysed pre-tax profit margin, cost ratio, periodic expense ratio, operating cost ratio and return on total assets etc. to share insights into the way costs are rationalised and profits are managed by the major steel producers in China.

According to Deloitte’s experience in strategic cost management and its understanding of the steel industry, the Chinese steel producers, in developing a well-structured cost and profit management program, should consider readjusting their business models, strengthening control and acquisition / consolidation efforts, improving the synergistic benefits of procurement and production operations, controlling expenses and cash income/expenditure, and building an integrated, refined cost management system and IT infrastructure. It is found that significant cost-saving benefits can be realised through readjustments to the five areas mentioned above.