Understanding the Steel Industry
The fee price squeeze (sometimes termed as the value cost squeeze) is a reasonably well-known phenomenon to the majority steel industry strategic planners. This is a reality that has existed for many years. It refers to the long-term trend of falling steel industry product costs, as evidenced from the falling finished product prices which might be seen after a while. Within this sense - notwithstanding the falling revenue per tonne - it needs to be remembered that the squeeze does help the industry by preserve the cost competitiveness of steel against other construction materials like wood, cement etc.
Falling costs. The central assumption behind the squeeze is that the cost per tonne of an steel product - whether a steel plate or even 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 due to changing raw material costs from year upon year), because it describes a long-term trend. Falling prices as time passes for finished steel goods are at complete variance with all the rising prices evident for many 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 incredibly notable change through 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 isn't only very energy inefficient. It is 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 - as well as other benefits such as improved steel metallurgy, improved environmental performance etc. This is a great demonstration of a historic step-change in steel making technology developing a major influence on production costs.
the switch from ingot casting to continuous casting. Here - besides significant improvements in productivity - the principal good thing about purchase of continuous slab, billet or bloom casting was a yield improvement of ~7.5%, meaning much less wastage of steel
rolling mill performance improvements with regards to 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 contemporary production planning and control techniques, etc.
Their email list above is supposed to be indicative as an alternative to exhaustive - nonetheless it illustrates that technology-driven improvements have allowed steel making unit production costs to fall with time for many different reasons. In the years ahead, 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 within the phrase cost price squeeze arises due to assumption that - as costs fall - and so the cost benefits are forwarded to consumers in the form of lower steel prices; and that is that behaviour which with time helps to keep up with the cost competitiveness of steel against other raw materials. The long-term fall in costs is thus evidenced by way of a long-term squeeze on prices.
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