UNDERSTANDING THE STEEL INDUSTRY

January 2019 ยท 3 minute read

The charge price squeeze (sometimes known as the price cost squeeze) is quite a well-known phenomenon to the majority of steel industry strategic planners. It is just a indisputable fact that has existed for quite some time. It refers back to the long-term trend of falling steel industry product costs, as evidenced with the falling end product prices which are seen after a while. In this sense - notwithstanding the falling revenue per tonne - it must be remembered the squeeze does help the industry to keep the cost competitiveness of steel against other construction materials such as wood, cement etc.

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



modifications in melt shop steel making production processes. A very notable change across the last 25 years has been 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’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 - and various benefits including improved steel metallurgy, improved environmental performance etc. This is a good example of a historic step-change in steel making technology using a major effect on production costs.

the switch from ingot casting to continuous casting. Here - apart from significant improvements in productivity - the principal advantage of investment in continuous slab, billet or bloom casting was a yield improvement of ~7.5%, meaning a smaller amount wastage of steel

rolling mill performance improvements with regards to energy-efficiency (e.g. hot charging), reduced breakouts, improved process control etc leading to 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.
This list above is designed to be indicative as opposed to exhaustive - however it illustrates that technology-driven improvements have allowed steel making unit production costs to fall over time for many different reasons. Going forward, the implicit expectation is costs continually fall as new technological developments [e.g. involving robotics, or near net shape casting] allow.

Falling prices. The reference to the term price inside the phrase cost price squeeze arises due to the assumption that - as costs fall - therefore the cost benefits are passed on to consumers in the form of lower steel prices; and that is that behaviour which as time passes allows you take care of the cost competitiveness of steel against other recycleables. The long-term fall in costs is thus evidenced by the long-term squeeze on prices.

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