Understanding The Steel Industry

January 4, 2019 by Duffy Singleton

The fee price squeeze (sometimes called the value cost squeeze) is a pretty well-known phenomenon to many steel industry strategic planners. It is just a proven fact that has been in existence for countless years. It means long-term trend of falling steel industry product costs, as evidenced from the falling end product prices that are seen with time. On this sense - notwithstanding the falling revenue per tonne - it should be remembered that this squeeze does conserve the industry by maintaining the value competitiveness of steel against other construction materials including wood, cement etc.

Falling costs. The central assumption behind the squeeze could be that the cost per tonne of an steel product - whether a steel plate or perhaps a hot rolled coil, or possibly a bar or rod product - falls normally (in nominal terms) from year to year. This assumption naturally ignores short-term fluctuations in steel prices (e.g. due to the price cycle; or as a consequence of changing raw material costs from year upon year), since it describes a long-term trend. Falling prices after a while for finished steel merchandise is at complete variance with all the rising prices evident for many consumer products. These falling prices for steel are however brought on by significant changes in technology (mostly) that influence steel making production costs. The technological developments include:

alterations in melt shop steel making production processes. A very notable change over the last 25 years or so has been the switch from open-hearth furnace to basic oxygen furnace and electric-furnace steel making. Open hearth steel making isn’t just very energy inefficient. It’s also a slow steel making process (with long tap-to-tap times) with relatively low labour productivity. The switch from open hearth furnace to basic oxygen process or electric arc furnace steel making allowed significant steel making cost improvements - along with other benefits including improved steel metallurgy, improved environmental performance etc. This is a good demonstration of a historic step-change in steel making technology using a major affect production costs.

the switch from ingot casting to continuous casting. Here - aside from significant improvements in productivity - the primary good thing about purchase of continuous slab, billet or bloom casting was a yield improvement of ~7.5%, meaning significantly less wastage of steel

rolling mill performance improvements regarding energy-efficiency (e.g. hot charging), reduced breakouts, improved process control etc causing reduced mill conversion costs

less set-up waste through computerization, allowing better scheduling and batch size optimization

lower inventory costs with adoption of latest production planning and control techniques, etc.
This list above is supposed to be indicative rather than exhaustive - nevertheless it illustrates that technology-driven improvements have allowed steel making unit production costs to fall as time passes for several different reasons. In the years ahead, the implicit expectation is that costs is constantly fall as new technological developments [e.g. involving robotics, or near net shape casting] allow.

Falling prices. The reference to the term price within the phrase price range squeeze arises due to the assumption that - as costs fall - therefore the cost benefits are passed on to consumers as lower steel prices; and it is this behaviour which over time really helps to take care of the cost competitiveness of steel against other raw materials. The long-term fall in costs is thus evidenced by a long-term squeeze on prices.

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