Understanding the Steel Industry

The price price squeeze (sometimes termed as the value cost squeeze) is quite a well-known phenomenon to the majority of steel industry strategic planners. This is a reality that has been in existence for quite some time. It means the long-term trend of falling steel industry product costs, as evidenced from the falling finished product prices that are seen after a while. With this sense - notwithstanding the falling revenue per tonne - it ought to be remembered that the squeeze does conserve the industry to keep the value 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 your steel product - whether a steel plate or possibly a hot rolled coil, or a bar or rod product - falls normally (in nominal terms) from year to year. This assumption naturally ignores short-term fluctuations in steel prices (e.g. due to the price cycle; or as a result of changing raw material costs from year to year), since it describes a long-term trend. Falling prices with time for finished steel goods are at complete variance with all the rising prices evident for several consumer products. These falling prices for steel are however brought on by significant changes in technology (mostly) that influence steel making production costs. The technological developments include:

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alterations in melt shop steel making production processes. An incredibly notable change throughout the last 25 years or so may be the switch from open-hearth furnace to basic oxygen furnace and electric-furnace steel making. Open hearth steel making is not only very energy inefficient. It's also painstaking 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 - and also other benefits including improved steel metallurgy, improved environmental performance etc. This is a great demonstration of a historic step-change in steel making technology creating a major affect production costs.

the switch from ingot casting to continuous casting. Here - aside from significant improvements in productivity - the primary benefit of purchase of continuous slab, billet or bloom casting was obviously 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 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 latest production planning and control techniques, etc.
The list above is meant to be indicative instead of exhaustive - nevertheless it illustrates that technology-driven improvements have allowed steel making unit production costs to fall after a while for assorted different reasons. Moving forward, the implicit expectation is that costs continuously 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 - therefore the cost benefits are passed on to consumers in the form of lower steel prices; and it is this behaviour which as time passes really helps to take care of the cost competitiveness of steel against other raw materials. The long-term fall in costs thus remains evidenced by a long-term squeeze on prices.

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