Russian steel producer Severstal OAO has urged the global steel industry to cut production in order to ease problems of over capacity, according to a report in the Wall Street Journal.

The Russian steel giant’s CEO, Alexey Mordashov, warned of severe struggles ahead should the industry not curtail production and said that China’s co-operation was crucial.

With 65% of the world’s largest steel producers generating negative cashflow and the industry operating at 78% of its full production capacity, Mordashov believes that the current situation is not sustainable.

In China, where steelmakers are barely making a profit, production capacity is set to increase by up to 80Mt.
To some extent, Mordashov’s prayers have already been answered at ArcelorMittal and Tata Steel have announced production shutdowns and layoffs.

ArcelorMittal has closed down production in Belgium and France while Tata Steel has recently announced 500 redundancies in the UK.

While the global industry is currently dealing with 25% excess production capacity, that figure will ease over the next five years if, as anticipated, demand grows at a faster pace than production. A study by McKinsey & Co claims that capacity utilization will rise to 80% by 2018 and that prices will stabilize if that figure rises to 85%.

There is room, claimed Mordashov, for consolidation. He believes that mergers – created by synergies (rather than by cash acquisitions) – will provide more flexibility in terms of adjusting production capacities to meet lower demand. Severstal, he said, would happily consider such a move itself, but didn’t want to be first out of the stalls.