Nicholas Fullarton Blog | Comprehending the Steel Industry | Talkmarkets

Comprehending the Steel Industry

Date: Friday, January 4, 2019 1:39 AM EDT

The cost price squeeze (sometimes called the price cost squeeze) is a pretty well-known phenomenon to many steel industry strategic planners. It's a reality that has been in existence for countless years. It refers back to the long-term trend of falling steel industry product costs, as evidenced through the falling end product prices which are seen as time passes. With this sense - notwithstanding the falling revenue per tonne - it needs to be remembered that the squeeze does profit the industry by preserve the value competitiveness of steel against other construction materials for example wood, cement etc.

Falling costs. The central assumption behind the squeeze would be that the cost per tonne of a steel product - whether a steel plate or a hot rolled coil, or possibly a bar or rod product - falls normally (in nominal terms) from year upon year. This assumption of course 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 as time passes for finished steel merchandise is at complete variance using the rising prices evident for a lot of consumer products. These falling prices for steel are however due to significant alterations in technology (mostly) that influence steel making production costs. The technological developments include:
alterations in melt shop steel making production processes. An extremely notable change throughout the last Twenty five years continues to be the switch from open-hearth furnace to basic oxygen furnace and electric-furnace steel making. Open hearth steel making isn't only very energy inefficient. It is usually 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 instance of a historic step-change in steel making technology creating a major affect production costs.
the switch from ingot casting to continuous casting. Here - apart from significant improvements in productivity - the principal good thing about investment in continuous slab, billet or bloom casting would have been a yield improvement of ~7.5%, meaning a lot less 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 recent production planning and control techniques, etc.
This list above is supposed to be indicative instead of exhaustive - but it illustrates that technology-driven improvements have allowed steel making unit production costs to fall after a while for assorted different reasons. In the years ahead, the implicit expectation is the fact that costs continuously fall as new technological developments [e.g. involving robotics, or near net shape casting] allow.
Falling prices. The reference to the term price from the phrase cost price squeeze arises due to assumption that - as costs fall - hence the cost benefits are given to consumers by means of lower steel prices; and it is this behaviour which after a while helps you to maintain the cost competitiveness of steel against other unprocessed trash. The long-term fall in costs thus remains evidenced by a long-term squeeze on prices.
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