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Understanding the Steel Industry

The fee price squeeze (sometimes known as the value cost squeeze) is a reasonably well-known phenomenon to the majority steel industry strategic planners. It is just a concept that has been in existence for countless years. It means long-term trend of falling steel industry product costs, as evidenced by the falling finished product prices which can be seen after a while. Within this sense - notwithstanding the falling revenue per tonne - it should be remembered that this squeeze does conserve the industry keeping the cost competitiveness of steel against other construction materials like 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 a hot rolled coil, or perhaps a bar or rod product - falls on average (in nominal terms) from year upon year. This assumption naturally ignores short-term fluctuations in steel prices (e.g. due to price cycle; or because of changing raw material costs from year upon year), because it describes a long-term trend. Falling prices with time for finished steel merchandise is at complete variance with all the rising prices evident for several 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:

adjustments to melt shop steel making production processes. An extremely notable change across the last 25 years or so continues to 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. Additionally it is a pokey 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 for example improved steel metallurgy, improved environmental performance etc. A great instance of a historic step-change in steel making technology using a major impact on production costs.

the switch from ingot casting to continuous casting. Here - aside from significant improvements in productivity - the key advantage of acquisition of continuous slab, billet or bloom casting would have been a yield improvement of ~7.5%, meaning significantly less wastage of steel

rolling mill performance improvements when it comes 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.
Their email list above is supposed to be indicative instead of exhaustive - nonetheless it illustrates that technology-driven improvements have allowed steel making unit production costs to fall with time for a number of different reasons. Going forward, the implicit expectation is always that 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 as a result of assumption that - as costs fall - and so the cost benefits are forwarded to consumers available 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 thus remains evidenced with a long-term squeeze on prices.

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