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Deloitte says radical cost restructuring vital to global metals recovery

Marginal performers to be left behind when industry turns the corner

March 12, 2009 —With plummeting commodities prices, frozen credit markets, and diminishing demand, many metals manufacturers are being forced to take drastic measures in order to survive.  According to a new report by Deloitte Touche Tohmatsu (“Deloitte”), “Turning the corner: Global metals outlook”, radical cost restructuring is vital to industry recovery and leaner businesses will emerge. The report offers perspectives on the impact of the economic downturn on the global metals industry and what to expect down the road.

“It is almost as if you can’t find customers anymore—they have become phantoms,” commented Nicholas Sowar, global steel leader with Deloitte’s Global Manufacturing Industry Group. “It’s not surprising that so many companies are taking thousands of people out of their global workforce and being forced to restructure and divest some non-core assets.”

Whether the current downturn for the metals industry is a short-term crisis or a fundamental retrenching of the market remains unclear—but has significant implications for companies as they try to respond. The closing of production facilities, the panel points out, may not be temporary.

“I think there is a basic disagreement or uncertainty over exactly what we’re in here in terms of this crisis,” says Richard McLaughlin, a steel specialist with Deloitte Consulting LLP, United States. “I’ve been doing an analysis for a client—and the business plan they are putting forward suggests that they think this is a very short-term and modest dip in overall activity. Then again, you may be looking at a permanent reduction in the production of metal-containing goods.”

But the news may not be all bad for the global metals industry. The current pull-back in production has reduced inventory, indicating there could be a strong comeback in terms of demand when the economy does pick up again. And industry consolidation may mean fewer players and decreased competition. The chance to buy bargain assets also presents an opportunity for those companies with strong balance sheets.

“For some companies, it is fairly clear to me that they are going to make some acquisitions,” says Claude Martin, global process sector leader for Deloitte’s Global Manufacturing Industry Group. “They need more critical mass. They’ve got cash. So clearly they’ll be looking for bargains.”

The panel also saw opportunity in the stimulus plans being proposed by many governments around the world. In particular, China’s large infrastructure package could potentially jump-start global demand.
“If an infrastructure spending bill in China basically affects 60 percent of its economy,” points out McLaughlin, “then that will have a huge positive impact in absorbing more raw materials and finished metals.”

Overall, to address the current downturn and prepare for an eventual turnaround, the panel viewed a need for companies to reduce fixed costs, consider restructuring, and rethink their current business model.

“Even for healthy companies,” says Martin, “take the opportunity now to drive out some of those structural costs that you’ve been burdened with.”

For a copy of the report please visit “ Turning the corner: Global metals outlook".

Notes for the editor:

About the Global Metals Outlook series
“Turning the corner: Global metals outlook” is the first of a three part outlook series being released by Deloitte’s Global Manufacturing Industry Group during March and April 2009.  The second installment will provide an overview of the various economic stimulus packages around the world and regional commentary on the impact to the metals sector.  The third and final installment will provide a perspective on global industry consolidation and serves as a prelude to the launch of a detailed global steel industry consolidation study to be released in late April at the Far East Steel Conference in Beijing, China.

About the panel

Nicholas J. Sowar is a member of Deloitte’s Global Manufacturing Industry Group executive team with specific responsibility as the Global Steel Leader and also manufacturing leader for the assurance and enterprise risk (AERS) function.

Claude Martin is a member of Deloitte’s Global Manufacturing Industry Group executive team with specific responsibility as the Global Process Sector Leader, encompassing chemicals, forest and paper, and metals sectors.  He is also the country manufacturing industry leader for the Deloitte member firm in South Africa,

Richard McLaughlin is a steel specialist with Deloitte Consulting LLP, United States, and specializes in providing corporate and competitive strategy advice to clients in the metals sector.

Deloitte Touche Tohmatsu Global Manufacturing Industry Group
The Deloitte Touche Tohmatsu Global Manufacturing Industry Group comprises more than 750 member firm partners and 12,000 industry professionals in over 45 countries. The group’s deep industry knowledge, service line expertise, and thought leadership allows them to solve complex business issues with member firm clients in every corner of the globe. Deloitte member firms attract, develop, and retain the very best professionals and instill a set of shared values centered on integrity, value to clients, and commitment to each other and strength from diversity. Deloitte member firms provide professional services to more than 81 percent of the manufacturing companies in the Fortune Global 500®. For more information about the Global Manufacturing Industry Group, please visit www.deloitte.com/manufacturing.

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity.  Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's 165,000 professionals are committed to becoming the standard of excellence.

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