AME releases steel cost study

IN its first major production cost analysis on the steel industry, Sydney based AME Mineral Economics, has found the world steel industry faced with surplus capacity, continuing pressure on prices and uncertainty about energy costs.

Staff Reporter

The new report covers a sample of 65 of the larger mini-mill long products steel plants utilising electric arc furnace (EAF) technology, which now account for 34% of world crude steel production. The report covers 26 countries around the world and presents estimates of each plant’s cash costs of production to the crude steel stage. The cost analysis is based on estimated performance and input prices that applied in the first half of 2000.

AME said one of the most significant changes in the steel industry over the last twenty years has been the growth of mini-mills. These are generally lean operations based on making steel with electric arc furnaces (EAFs), rather than via the traditional capital-intensive blast furnace route.

This transformation took root in the long products sector which produces various profiles of bars, rod, rails and structural steel shapes such as beams, channels and angles. These products are derived from crude steel billets or the larger size blooms and near-net-shape cast beam blanks, according to AME.

Mini-mill/EAF technology, with its lower capital costs compared to traditional integrated plants is playing an increasingly important role in regions such as the former Soviet Union and China. They are in the process of renewing their steel industries to meet the needs and challenges of the next decade. This involves replacing or updating facilities, reconfiguring the product mix, improving quality and growing export markets as well as replacing imports. These regions currently have input price advantages, particularly in labour, with Russia enjoying low energy costs.

“The worldwide demand for steel will grow steadily by 1.7% pa on average over the next decade. Only operators with the right blend of technology, costs, geographical location, product mix, and financial strength will be able to capitalise on this growth and the failure of competitors,” according to AME.

The cost study found that crude steel cash costs varied by up to US$74/tonne across the plants sampled from around the world.

“This is a significant variation, given the international spot price for billets – the typical form of crude steel for long products – averaged less than US$200/tonne for the base period of the study,” AME said.

The report found that the biggest components of crude steel costs worldwide are feed metallics costs – scrap, pig iron, direct reduced iron (DRI) etc. These represent 57% of the cost of crude steel, followed by energy costs at 18%. Energy costs include electricity, natural gas, other fuels, and oxygen.

The remaining chief component groups, such as direct labour, each account for between 4% and 7% of the total cash cost. These vary from region to region depending on input prices, and from plant to plant depending on equipment configuration, technology, operating practices and product mix. For instance, direct labour accounts for less than 2.5% of the crude steel costs in developing regions, compared to 7% for North America.

AME said EAF operating costs have fallen by an estimated 15% to 20% in real terms over the last ten years due to rapid advances in EAF technology. AME predicts a slowing in this improvement rate but predicts a further 10% to 15% reduction over the next ten years.

“Although there were differences in the average and median costs across the broad regional groupings, there was considerable overlap in the range of costs between the regions. This implies that it is generally possible to operate a competitive low cost plant in each region. In essence, mini-mill equipment is available ‘off-the-shelf’ to any producer. Providing the capital can be raised – something that may be becoming increasingly difficult – operators in virtually any part of the world can acquire and install first class technology,” the report said.

In general, the plants with the lowest estimated cash costs were from Eastern Europe such as Russia’s most modern mini-mill, OEMK. South America and the Middle East were the next lowest cost regions, followed by Western Europe, North America and Asia.

The results suggest that the cost impact of product mix and crude steel type are commonly outweighed by the effects of raw materials, energy costs and plant efficiency.

In Western Europe, the major players in the industry have progressively been consolidating through acquisition, mergers and rationalizing operations. New crude steel capacity planned for the next two years is EAF based while there is likely to be a reduction in blast furnace capacity.

Meanwhile in North America, there has been a series of steel company failures in the wake of record levels of low priced imports and rising energy prices, although some companies have been investing in new technology and increasing capacity. Almost half of North America’s crude steel is produced by EAFs. The study shows that both regions have plants in the lowest cost quartile.

South America is seen as having strong growth potential, with investment continuing apace from both steel producers and the steel consuming automotive industry. This is particularly so in Brazil, which has seen US$10.3bn ploughed into the steel industry since privatisation in the early 1990s, with a further US$1.75bn to be invested in 2001.

A common characteristic of plants in Middle East/North Africa is the use of direct reduced iron (DRI) as metallic feed for EAF based plants to take advantage of low cost natural gas in the region. This exemplifies the relatively low capital cost path that developing nations may opt for when establishing or developing a steel industry, as opposed to the traditional approach of building blast furnaces and the associated high capital cost facilities.