The cost price squeeze (sometimes referred to as the price cost squeeze) is quite a well-known phenomenon to most steel industry strategic planners. It is a concept that has been around for many years. It refers to the long-term trend of falling steel industry product costs, as evidenced by the falling finished product prices that are seen over time. In this sense – notwithstanding the falling revenue per tonne – it should be remembered that the squeeze does benefit the industry by maintaining the price competitiveness of steel against other construction materials such as wood, cement etc.
The central assumption behind the squeeze is that the cost per tonne of a steel product – whether a steel plate or a hot rolled coil, or a bar or rod product – falls on average (in nominal terms) from year to year. This assumption of course ignores short-term fluctuations in steel prices (e.g. due to the price cycle; or because of changing raw material costs from year to year), as it describes a long-term trend. Falling prices over time for finished steel products are at complete variance with the rising prices evident for many consumer products. These falling prices for steel are however caused by significant changes in technology (mostly) that influence steel making production costs. The technological developments include:
- changes in melt shop steel making production processes. A very notable change across the last 25 years has been 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 a slow 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 such as improved steel metallurgy, improved environmental performance etc. This is a good example of a historic step-change in steel making technology having a major impact on production costs.
- the switch from ingot casting to continuous casting. Here – apart from significant improvements in productivity – the principal 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 with respect to energy efficiency (e.g. hot charging), reduced breakouts, improved process control etc resulting in 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.
The list above is meant to be indicative rather than exhaustive – but it illustrates that technology-driven improvements have allowed steel making unit production costs to fall over time for a number of different reasons. Going forward, the implicit expectation is that costs will continue to fall as new technological developments [e.g. involving robotics, or near net shape casting] allow.
The reference to the term price in the phrase cost price squeeze arises because of the assumption that – as costs fall – so the cost benefits are passed on to consumers in the form of lower steel prices; and it is this behaviour which over time helps to maintain the cost competitiveness of steel against other raw materials. The long-term fall in costs is therefore evidenced by a long-term squeeze on prices.
Whilst the magnitude of the squeeze is not so easy to calculate – since alloy content, product width and gauge, steel finish etc often change significantly over time – an accepted industry wisdom is that the cost price squeeze is equivalent to a loss of roughly 1% per annum from the revenue stream (in nominal rather than in real terms). Some industry experts use a much more aggressive squeeze: notably, the European Commission requires a 2.5% annual squeeze to be assumed in determining steel plant viability – but the authors note that this use is for especially testing circumstances.