Strategic Sourcing of Raw Materials in the Steelmaking Industry

Strategic Sourcing of Raw Materials in the Steelmaking Industry

Over the last years, strategic sourcing of raw materials in the steelmaking industry has become one of the key aspects to remain competitive in business. As explained in Three Steps for Sutainable Reduction, macroeconomic trends in the market have affected profitability of steelmakers:”On the demand side, financial crises and market uncertainty have slowed steel consumption with unfavorable consequences on pricing. On the supply slide, industry concentration in the mining sector and Chinese demand has boosted prices for raw materials. As a result, the spread between input costs and steel product prices has declined in absolute and relative measures.”[1].

In this submission, I would like to emphasize my discussion on steel scrap which is usually the primary source for mini-mills production. Scrap plays a strategic role for steelmaking as it helps to drive down costs because its higher iron content (compared to sponge iron which also contains iron oxide) and ferroalloy content (Ni, Cr, Mn, etc.). Moreover, scrap selection is also important as it can impact on the level of impurity elements (S, P, among others) and even generate operational hazards. For instance, loading high density scrap in excess can damage the refractory of an electric arc furnace. These are just some aspects that should be understood when determining how scrap impacts on this business.

Scrap supply is also a constant challenge for steelmakers. Although it does exist a scrap type classification (bundles, heavy, etc.), there is a wide variety of types available in the market. Multiple scrap suppliers might be available for low alloy steel scrap but this is not generally true for other types of scrap. Moreover, the volatility in price of some alloying elements such as Ni or Co (see Ref [2] for example) affects the availability of high alloy scrap. Vertical integration is a common strategy to overcome some of these problems as Nucor did with DJJ scrap company in 2008 [3]. All the aspects mentioned above makes scrap types different in terms of profitability and supply risks, encompassing the four quadrants of Kraljic’s matrix.

Finally, I would like to share a report from EY called Global Steel 2014 - planning to profit from opportunity: preparing for future demand [4]. In particular, it contains an article entitled Raw material strategy — finding opportunity in volatility which includes relevant information on this topic.

REFERENCES

[1] Accenture (September 13th, 2013), Three Steps for Sustainable Cost Reduction: Steel Companies Set their Sights on High Performance, Accenture webpage. Retrieved from: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Three-Steps-Sustainable-Cost-Reduction-Steel-companies-set-sights.pdf (Accessed 9/21/2014)

[2] Rey Mashayekhi (May 13th, 2013), Stainless scraps up; Nickel volatility stirs fears, AMM webpage. Retrieved from: http://www.amm.com/Article/3341554/Stainless-scrap-up-nickel-volatility-stirs-fears.html (Accessed 9/21/2014)

[3] Nucor News Release (February 8^th, 2008), Nucor to acquire David J. Joseph Company, Nucor webpage. Retrieved from:  http://www.nucor.com/investor/news/?rid=1106100 (Accessed 9/21/2014)

[4] Ernst&Young (n.d.), Global Steel 2014: Planning to Profit from Opportunity, EY webpage. Retrieved from:  http://www.ey.com/Publication/vwLUAssets/EY_-_Global_steel_2014/$FILE/EY-Global-steel-2014.pdf (Accessed 9/21/2014)