COMPREHENDING THE STEEL INDUSTRY

January 4, 2019

The fee price squeeze (sometimes referred to as the purchase price cost squeeze) is a pretty well-known phenomenon to the majority of steel industry strategic planners. It is a concept that ’s been around for quite some time. It refers back to the long-term trend of falling steel industry product costs, as evidenced by the falling finished product prices that are seen over time. In this sense - notwithstanding the falling revenue per tonne - it should be remembered that this squeeze does benefit the industry to keep the price competitiveness of steel against other construction materials such as 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 even a hot rolled coil, or even a bar or rod product - falls normally (in nominal terms) from year upon year. This assumption naturally ignores short-term fluctuations in steel prices (e.g. as a result of price cycle; or as a result of changing raw material costs from year to year), mainly because it describes a long-term trend. Falling prices with time for finished steel goods are at complete variance using the rising prices evident for a lot of consumer products. These falling prices for steel are however a result of significant changes in technology (mostly) that influence steel making production costs. The technological developments include:



alterations in melt shop steel making production processes. An incredibly notable change through the last 25 years or so may be the switch from open-hearth furnace to basic oxygen furnace and electric-furnace steel making. Open hearth steel making is not just very energy inefficient. It is also painstaking 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 - and also other benefits for example improved steel metallurgy, improved environmental performance etc. A great illustration of a historic step-change in steel making technology creating a major impact on production costs.

the switch from ingot casting to continuous casting. Here - in addition to significant improvements in productivity - the primary benefit of acquisition of continuous slab, billet or bloom casting would have been a yield improvement of ~7.5%, meaning a smaller amount wastage of steel

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

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

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

Falling prices. The mention of term price within the phrase cost price squeeze arises due to assumption that - as costs fall - and so the cost benefits are given to consumers as lower steel prices; and that is that behaviour which as time passes helps you to maintain the cost competitiveness of steel against other recycleables. The long-term fall in costs is thus evidenced with a long-term squeeze on prices.

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