Overcapacity and the lack of focus on pricing is the main problem in the European distribution sector, according to Georges Kirps, managing director of EUROMETAL.
Speaking at the 4th annual Platts Steel Supply Chain Conference in Antwerp, Kirps said distribution overcapacity was 25-30% on average in Europe.
“There are 5,000 steel distributors in Europe. We estimate that steel distribution today is bringing about 70 million metric tons/year directly to the end user. A total of 30% is controlled by mill-tied distributors, he said, adding “in the US gross margins are above 20%, but in Europe we have very low margins. Gross margins are between 10-12% for service centres. Average EBITDA for European distributors in H1 2014 is 1%.”
Pointing to a survey recently conducted by EUROMETAL, Kirps said 49% of surveyed customers said they did cost-plus pricing where the only aspect is the decision on the premium. He wants companies to better understand the value of their products, as only 23% of respondents said their pricing decisions were value based.
“Price is profit driver number one. However, many companies are far away from tapping this potential in price management. Car manufacturers continually increase prices for their base models while in steel they go down,” he said.
His outlook for capacity reduction was skeptical. “The only way it will disappear is through bankruptcies, there will be no orderly reduction in capacity as was seen in the 1980’s.”
Peter Brennan / Platts Daily Briefing 13.10.2014