Figuring out the Steel Industry
The fee price squeeze (sometimes termed as the price cost squeeze) is a reasonably well-known phenomenon to most steel industry strategic planners. It is a concept that has existed for countless 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 as time passes. In this sense - notwithstanding the falling revenue per tonne - it must be remembered that this squeeze does conserve 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 would be that the cost per tonne of your steel product - whether a steel plate or possibly a hot rolled coil, or even a bar or rod product - falls typically (in nominal terms) from year to year. This assumption needless to say ignores short-term fluctuations in steel prices (e.g. due to price cycle; or due to 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 with all the rising prices evident for many 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 over the last Twenty five years 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. Additionally it is 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 an excellent demonstration of a historic step-change in steel making technology developing a major impact on production costs.
the switch from ingot casting to continuous casting. Here - aside from significant improvements in productivity - the main good thing about purchase of continuous slab, billet or bloom casting would be 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 producing reduced mill conversion costs
less set-up waste through computerization, allowing better scheduling and batch size optimization
lower inventory costs with adoption of latest production planning and control techniques, etc.
Their list above is meant to be indicative instead of exhaustive - nonetheless it illustrates that technology-driven improvements have allowed steel making unit production costs to fall over time for many different reasons. In the years ahead, 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 mention of term price inside the phrase price range squeeze arises because of the assumption that - as costs fall - and so the cost benefits are given to consumers available as lower steel prices; and it is this behaviour which as time passes helps to take care of the cost competitiveness of steel against other raw materials. The long-term fall in costs is therefore evidenced by way of a long-term squeeze on prices.
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