Understanding the Steel Industry

Posted by KiaanWong, 7 months ago

The charge price squeeze (sometimes termed as the purchase price cost squeeze) is a reasonably well-known phenomenon to many steel industry strategic planners. This is a concept that has existed for many years. It means the long-term trend of falling steel industry product costs, as evidenced by the falling end product prices which might be seen over time. Within this sense - notwithstanding the falling revenue per tonne - it ought to be remembered the squeeze does help the industry by maintaining the purchase price competitiveness of steel against other construction materials for example wood, cement etc.

Falling costs. The central assumption behind the squeeze is the cost per tonne of the steel product - whether a steel plate or possibly a hot rolled coil, or a bar or rod product - falls typically (in nominal terms) from year to year. This assumption naturally ignores short-term fluctuations in steel prices (e.g. because of the price cycle; or due to changing raw material costs from year to year), as it describes a long-term trend. Falling prices with time for finished steel merchandise is at complete variance using the rising prices evident for most consumer products. These falling prices for steel are however caused by significant adjustments to technology (mostly) that influence steel making production costs. The technological developments include:
changes in melt shop steel making production processes. A really notable change over the last 25 years has become 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 sluggish 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 - as well as other benefits like improved steel metallurgy, improved environmental performance etc. This is an excellent instance 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 - aside from significant improvements in productivity - the key advantage of investment in 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 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 meant to be indicative as an alternative to exhaustive - nevertheless it illustrates that technology-driven improvements have allowed steel making unit production costs to fall with time for several different reasons. Going forward, the implicit expectation is always that costs will continue to fall as new technological developments [e.g. involving robotics, or near net shape casting] allow.
Falling prices. The mention of term price from the phrase cost price squeeze arises because of the assumption that - as costs fall - and so the cost benefits are given to consumers in the form of lower steel prices; and that is that behaviour which after a while helps you to maintain the cost competitiveness of steel against other garbage. The long-term fall in costs is thus evidenced by the long-term squeeze on prices.
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