UNDERSTANDING THE STEEL INDUSTRY
The charge price squeeze (sometimes known as the price cost squeeze) is quite a well-known phenomenon to the majority steel industry strategic planners. This is a reality that has been in existence for quite some time. It refers to the long-term trend of falling steel industry product costs, as evidenced through the falling end product prices which might be seen over time. With this sense - notwithstanding the falling revenue per tonne - it must be remembered that this squeeze does conserve the industry by maintaining the value competitiveness of steel against other construction materials including wood, cement etc.
Falling costs. The central assumption behind the squeeze would be that the cost per tonne of an steel product - whether a steel plate or a hot rolled coil, or a bar or rod product - falls normally (in nominal terms) from year to year. This assumption of course ignores short-term fluctuations in steel prices (e.g. due to price cycle; or due to changing raw material costs from year upon year), as it describes a long-term trend. Falling prices after a while for finished steel products are at complete variance together with the rising prices evident for a lot of consumer products. These falling prices for steel are however due to significant alterations in technology (mostly) that influence steel making production costs. The technological developments include:
adjustments to melt shop steel making production processes. An extremely notable change through the last 25 years continues to 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 sluggish 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 for example improved steel metallurgy, improved environmental performance etc. A great example 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 - in addition to significant improvements in productivity - the primary benefit of investment in continuous slab, billet or bloom casting was a yield improvement of ~7.5%, meaning much 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 meant to be indicative as an alternative to exhaustive - but it illustrates that technology-driven improvements have allowed steel making unit production costs to fall after a while 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 from the phrase price range squeeze arises due to the assumption that - as costs fall - and so the cost benefits are forwarded to consumers in the form of lower steel prices; and it is this behaviour which as time passes really helps to conserve the cost competitiveness of steel against other raw materials. The long-term fall in costs is thus evidenced by a long-term squeeze on prices.
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