Understanding the Steel IndustryThe charge price squeeze (sometimes known as the purchase price cost squeeze) is quite a well-known phenomenon to the majority steel industry strategic planners. It's a concept that has existed for countless years. It refers to the long-term trend of falling steel industry product costs, as evidenced with the falling finished product prices which might be seen with time. On this sense - notwithstanding the falling revenue per tonne - it should be remembered how the squeeze does profit the industry by preserve the cost competitiveness of steel against other construction materials such as wood, cement etc.
Falling costs. The central assumption behind the squeeze could be that the cost per tonne of a steel product - whether a steel plate or even a hot rolled coil, or possibly a bar or rod product - falls typically (in nominal terms) from year upon year. This assumption obviously ignores short-term fluctuations in steel prices (e.g. because of the price cycle; or as a consequence of changing raw material costs from year upon year), as it describes a long-term trend. Falling prices over time for finished steel goods are at complete variance with the rising prices evident for many consumer products. These falling prices for steel are however due to significant changes in technology (mostly) that influence steel making production costs. The technological developments include:
alterations in melt shop steel making production processes. An extremely notable change across the last 25 years has become 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 is 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 - along with other benefits like improved steel metallurgy, improved environmental performance etc. This is an excellent instance of a historic step-change in steel making technology having a major effect on production costs.
the switch from ingot casting to continuous casting. Here - besides significant improvements in productivity - the principal advantage of purchase of continuous slab, billet or bloom casting was obviously a yield improvement of ~7.5%, meaning a lot less wastage of steel
rolling mill performance improvements when it comes to energy-efficiency (e.g. hot charging), reduced breakouts, improved process control etc causing 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.
This list above is meant to be indicative rather than exhaustive - however it illustrates that technology-driven improvements have allowed steel making unit production costs to fall after a while for a number of different reasons. Moving forward, the implicit expectation is 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 because of the assumption that - as costs fall - therefore the cost benefits are given to consumers in the form of lower steel prices; and it is this behaviour which over time helps to take care of the cost competitiveness of steel against other unprocessed trash. The long-term fall in costs is thus evidenced by way of a long-term squeeze on prices.
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