Understanding the Cost Price Compression of the Steel Industry

Cost price contraction (sometimes referred to as cost price contraction) is a phenomenon well known to most strategic planners in the steel industry. It is a concept that has been around for many years. It refers to the long-term trend of falling costs of products in the steel industry, as evidenced by the decline in prices of finished products observed over time. In this sense, despite the drop in revenue per ton, it should be remembered that the contraction benefits the industry by maintaining the competitiveness of the price of steel against other construction materials such as wood, cement, etc.

decreasing costs

The central assumption behind the contraction is that the cost per ton of a steel product, whether it be a hot-rolled steel plate or coil, or a bar or wire rod product, falls on average (in nominal terms) from a year to another. This assumption, of course, ignores short-term fluctuations in steel prices (for example, due to the price cycle, or due to changes in raw material costs from year to year), since it describes a long-term trend. The fall in prices of finished steel products over time is completely different from the apparent rise in prices of many consumer products. However, this fall in steel prices is due to significant changes in technology (mainly) that influence the production costs of steelmaking. Technological developments include:

• Changes in production processes from steelworks to steelworks. A very notable change in the last 25 years has been the shift from open hearth furnace to basic oxygen furnace and electric furnace steelmaking. Open hearth steelmaking is not only highly energy inefficient. It is also a slow steelmaking process (with long step times) with relatively low labor productivity. Switching from open hearth furnace to basic oxygen process or electric arc furnace steelmaking enabled significant improvements in steelmaking costs as well as other benefits such as better steel metallurgy, better environmental performance, etc. This is a good example of a historic change in steelmaking technology that has a major impact on production costs.
• the change from ingot casting to continuous casting. Here, apart from significant productivity improvements, the main benefit of investing in continuous casting of slabs, billets or billets was a yield improvement of ~7.5%, which means much less steel waste.
• improvements in rolling mill performance with respect to energy efficiency (e.g. hot charging), reduced breakage, improved process control, etc., resulting in reduced conversion costs of the train
• Less setup waste through computerization, allowing for better scheduling and batch size optimization.
• lower inventory costs with the adoption of modern production planning and control techniques, etc.

The above list is intended to be indicative rather than exhaustive, but it illustrates that technology-driven improvements have allowed steelmaking unit production costs to decline over time for a number of different reasons. Going forward, the implicit expectation is that costs will continue to fall as new technological developments unfold. [e.g. involving robotics, or near net shape casting] allow.

falling prices

The reference to the term price in the phrase cost price reduction arises from the assumption that as costs fall, cost benefits are passed on to consumers in the form of lower steel prices; and it is this behavior that over time helps keep steel cost competitive against other raw materials. Thus, the long-term fall in costs is evidenced by a long-term contraction in prices.

How important?

While the magnitude of shrinkage is not as easy to calculate, as alloy content, product width and gauge, steel finish, etc. often change significantly over time, it is accepted wisdom in the industry. is that the cost price contraction is equivalent to a loss of about 1%. per year of revenue stream (in nominal rather than real terms). Some industry experts use a much more aggressive adjustment: in particular, the European Commission requires that an annual adjustment of 2.5% be assumed to determine the viability of the steel plant, but the authors point out that this use is especially for test circumstances.