The steel sector would continue to battle excess global steelmaking capacity in 2013, but should see an improved operating environment from 2014, according to a report released by Ernst & Young on Monday.

The advisory firm noted in its ‘Global steel: A new world, a new strategy’ report that, despite increased demand for steel and the closure of several older steelmaking plants last year, the level of excess capacity was greater than twelve months ago, owing to the continued expansion and development of steelmaking facilities.

Capacity utilisation rates in the sector remained below 80% but were expected to rise to more sustainable levels next year.

Ernst & Young Global Mining & Metals Centre leader Mike Elliott said global steel demand was unlikely to improve sufficiently to exceed the committed new capacity and this, combined with ongoing volatility in raw material costs, would challenge the sustainability of high-cost producers.

“However, the continued closure of older, higher-cost steelmaking plants and an increase in the rate of growth of demand, should lead to improved profitability for the sector in 2014 and 2015,” he added.

Steelmakers would need to focus on strategic cost reductions and reassess their optimal capital structure to survive this year and to position themselves for future growth, Elliott noted in a statement.

“The biggest challenge for steelmakers will be to remain cost-competitive, while maintaining enterprise value,” he said.

Elliott warned that the recent trend of integrating raw minerals into supply chains with the belief that this would protect value by removing cost volatility would not necessarily improve enterprise value.

Further, thin margins and volatile pricing had created a difficult operating environment, with short-term liquidity challenges threatening credit ratings and debt covenants.

Elliott encouraged steel producers to place greater focus on capital management this year, which could include building in options, raising capital and divestment of noncore assets.