New manufacturing processes and technologies may allow developing countries to produce steel for smaller markets with smaller mills. The implications for world production and trade
Robert R. Miller
The global steel industry changed rapidly over the past decade. Industrial country production declined, while developing countries, as a group, showed rapid increases both in production and as a proportion of world output. Meanwhile, the emergence of new production systems—in the form of “minimills” (producing 500,000 to 1 million tons a year from scrap steel instead of iron ore)—and new technology has helped change the economics of steel production, altering patterns of international trade and opening the way for further changes in the manufacture of steel. Today, smaller mills serving modest-sized markets have become economic, making it possible for many developing countries that had hitherto steered clear of producing their own steel to enter production.
While developing countries would appear to have gained from the new technology and production systems, the steel market in industrial countries has changed too, making it more difficult for new entrants to benefit from export-led growth of the steel sector. This market is moving to just-in-time (i.e., quick response) methods to meet demand. This places a higher premium on keeping mills in close proximity to customers. Moreover, transportation of raw materials now paradoxically costs less than shipments of finished steel goods.
Even though world production of steel has been stagnant for the past ten years or so, at around 750 million tons a year, developing countries have shown rapid growth of output. Their share has increased from 7 percent of world production in 1979 to 12 percent in 1988 (see chart). Brazil, China, the Republic of Korea, and Turkey have continued to expand their production and now have plans to increase their capacity. Industrial countries, meanwhile, are experiencing a secular decline in steel production.
International trade in steel has also shown little growth in the last ten years, in part because of trade constraints, but the pattern of trade has been changing. The European Community and Japan, although still net exporters, have declined in importance. The United States, long a major net importer, has been importing less in the latter half of the 1980s, even though trade restrictions there have not been binding (see table). Brazil has helped increase total Latin American exports, although the region now is a large net exporter of steel. Similarly, Korea continued to increase its exports, but Asia is a net importer. Overall, developing countries, as a group, are expected to show an increasing growth in demand for steel, so that, despite an increase in indigenous production and expansion of exports by some developing countries, as a group they will continue to be net importers.
Technical innovations in the steel industry over the last 20 years have tended to be incremental improvements over existing processes, not fundamental changes in the method of production. Most improvements have helped save labor and capital, forcing industries in both developed and developing countries to adopt new technologies in order to stay competitive. Efficiency and quality have improved noticeably and steadily. Many modern minimills today need less than two labor hours to produce a ton of steel. Even the larger integrated mills (which start with iron ore to make iron before turning it into steel) can produce a ton of steel with about three to four hours of labor. The cost of labor per unit of steel continues to decline.
As a result, labor costs are no longer very important as a determinant of competition in this industry. Within the next five years, labor costs are expected to account for no more than 10-15 percent of the total production costs of steel in modern mills. Even now, the cost of shipping finished steel products internationally exceeds labor costs for the most efficient plants, particularly for the types of steel products that new producers generally make to enter world markets. This does not bode well for developing countries that are trying to emulate Japan, Korea, and Taiwan Province of China by exporting steel as part of their rapid development strategy.
Meanwhile, technical development continues apace, particularly affecting blast furnaces—the root of iron and steelmaking in integrated plants. These furnaces take iron ore, limestone, and coke and convert them into pig iron. Iron then moves to the basic oxygen furnace to be converted into steel before moving into refining and final processing. New blast furnaces are very expensive, at $750-950 million each, making the resulting steel uncompetitive in a market where price is determined by minimills which do not have to process ore to manufacture steel. This trend will continue, making blast furnaces less competitive as research into other methods of producing iron and steel progresses.
New production methods
One such method is direct reduction of iron ore (DRI), which transforms a mixture of iron ore and other materials, using gas or coal as a source of energy, into sponge iron (so called because it is more porous than pig iron produced by blast furnaces). This method has been in use in different parts of the world, but it has certain cost and other disadvantages that have limited its use. It demands inexpensive energy sources and seems best suited for areas that do not have much scrap steel but have rich natural gas resources, as is the case in Venezuela and Mexico. DRI is not suited for areas where scrap may be abundant but energy is more expensive. Further, DRI produces solid iron that cannot be substituted significantly for the molten iron needed to supply basic oxygen furnaces.
This situation may change. First, as more minimills come into production in industrialized nations, scrap prices will rise, making it less competitive as a ferrous input. DRI may then become an obvious alternative. Second, current research into DRI (particularly into the use of coal-based production) will lead to lower costs and higher quality. Over the next five years or so, therefore, both minimills and integrated plants are expected to begin moving to this improved technology.
There is also the possibility that steel could be produced directly from iron-bearing raw materials. This is being researched across the world. Moreover, the revolutionary thin slab continuous casting of steel, a process that allows steel to be produced with a thickness of as little as 1.5 inches (4 cm.), greatly reduces the amount of hot rolling needed to make flat products. The result is smaller finishing lines, reduced capital investment, enhanced labor productivity, and a smaller scale production system. Similar developments are occurring in cold rolling (a process through which steel is pressed into thin sheets with a finer surface finish than produced by hot rolling), where improved process controls and better process integration are occurring. Efforts are now underway to reduce slab thickness even further, perhaps to as little as 1/2 inch (1.33 cm.), a process that earlier required large investments and high volume production.
The implications of these evolving technologies for economies of scale, so important in locating production in developing countries, are not yet entirely clear. It would appear that most new technologies allow a reduction in the economic scale of production from at least four or five million tons of output annually to one or two million tons with a blast furnace and basic oxygen furnace combination. This may allow economic production for modest-sized markets, depending on the mix of demand and the costs of imports in these countries. Several markets of this size exist around the world, including Algeria, Argentina, Egypt, Hong Kong, Indonesia, Iran, Malaysia, Nigeria, Thailand, Turkey, Venezuela, and Yugoslavia. In addition, there are larger markets, such as Brazil, China, India, South Korea, Taiwan Province of China, and various Eastern European nations.
The limited evidence available suggests that capital costs for newer steel-making technologies may be a third or less of costs per ton associated with replacing blast furnaces. But, there are several negative aspects of these changes that do not favor developing country production. One, mentioned earlier, is the fact that new technologies are driving labor costs down to very low levels, even in industrial nations. Therefore, the ability of developing countries to use lower-cost labor to create a price advantage in industrial country markets may be much more constrained than in earlier times; indeed, increased transport costs to major developed country markets from distant developing countries would absorb most of the gains on the labor cost. There may be cases where transportation charges are less important because of proximity, for example, between Taiwan Province of China or Korea and Japan, or between Mexico and the United States, where exports might be feasible.
Newer steel-making technologies also are likely to be more demanding in terms of human skills. Much will depend on the qualitative demands of the particular market, the steel-making methods selected, and the types of processing needed. Certainly the more advanced techniques to be introduced within the next decade will involve sophisticated instrumentation and microelectronics, complex software routines, and exacting process controls. Even today, steel companies in the more advanced industrialized nations are finding it necessary to retrain and upgrade workforces. In some poorer countries, the lack of requisite technical skills could prove to be a difficult constraint in the adoption of newer steel technologies.
Role of natural resources
In recent years, local availability of coal, iron ore, and energy resources has made little difference in global competition in the steel industry. Korea, Japan, and Taiwan Province of China, none with relevant natural resources of their own, have succeeded impressively in becoming three of the world’s most efficient producers. Although their advantages seem to be lessening, these producers have found that diversified supplies of raw materials have been available internationally at competitive prices, often with attractive long-term contractual terms. The question now is: Will resource availability continue to be relatively unimportant as a determinant of global comparative advantage in the production of steel?
Crude steel production
Source: International Iron and Steel Institute, Steel Statistical Yearbook. Brussels, 1989
1Includes USSR, Eastern Europe, China, etc.
|Country or region||1979||1984||1989|
EC of nine for 1979 and 1984 and EC of 12 for 1989. - Indicates net Imports.
EC of nine for 1979 and 1984 and EC of 12 for 1989. - Indicates net Imports.
Of primary importance is the fact that only about 60 percent of steel production globally involves pig iron, the primary output of blast furnaces and, today, the major user of raw materials. The remaining 40 percent is produced from recycled scrap, most of it being used in electric furnaces in both minimills and integrated steelworks. Thus, the availability and price of scrap is a major factor in determining the competitiveness of the blast furnace/basic oxygen process combination. When scrap prices are low, as they have been in recent years, new blast furnaces cannot be financially justified. Low scrap prices also have discouraged the introduction of alternative forms of processing in the industry. For example, DRI has not been financially attractive, except in areas where energy costs have been low.
If scrap prices rise significantly in real terms in the near future, as seems probable, the declining trend in blast furnace production may be arrested for a time, although construction of new furnaces is unlikely to be financially viable even then. But, higher scrap prices also will make such processes as DRI and even direct steel production more attractive, stimulating greater efforts at bringing these technologies into wider commercial use. Higher scrap prices will have much greater effects on minimills than on plants that depend on blast furnaces, forcing them to seek substitute ferrous inputs. Since the newer technologies are likely to be much less capital intensive and to be available at a much reduced scale, as compared with the blast furnace/basic oxygen furnace combination, they promise to change the global industry’s structure significantly.
What opportunities exist for developing countries in light of current resource allocation? The answer is somewhat difficult, partly because the technical trends and patterns of comparative advantage have little to do with natural resource use or availability. Iron ore, for example, has become an international commodity, transported at very low cost. Only two countries, Australia and Brazil, furnish half of global supplies. Western Europe and Japan are today almost entirely dependent on foreign raw materials, yet, steel producers in these regions remain internationally competitive. Conversely, both Australia and Brazil have had difficulty establishing internationally competitive industries without governmental subsidies, despite having rich ore resources.
The fact is that few countries can claim easy access to all resources relevant to steel making. Brazil has ore, but lacks convenient energy resources; Europe has coal (subsidized today), but lacks high-grade iron ore. (One exception is India, which has both coal and high-grade ore, the latter, a significant export today. Although its industry is expanding, the country promises to remain a net importer of steel well beyond the year 2000.) As long as it remains cheaper to transport raw materials than finished products, and commodity markets stay competitive, unique access to resources provides little, if any, competitive advantage. New technologies on the horizon promise only minor changes in this picture. If DRI continues to be an energy-intensive process, countries such as Indonesia, Mexico, and Venezuela might be modestly favored because they have natural gas, probably as regional sponge iron or slab exporters. Already, however, coal-based direct reduction methods, directly competitive with prevailing DRI technologies, are being applied commercially in a few places.
The most important factor in the new technologies of relevance to developing countries is not their use of resources but rather their effects on economies of scale. Increasingly, it should be possible to design smaller, efficient production facilities to serve relatively small markets. Scale and investment requirements are falling at every stage of production, from iron and steelmaking to rolling mills and other processing. Further, labor costs are dropping while transport costs are increasing. In the future, it is likely to be more important to be near markets than to have indigenous access to raw materials.
In light of these changes, developing countries may not be able to rely on exports to industrial nations as a basis for building a competitive steel industry. Developed countries will become increasingly dependent on highly efficient and responsive plants located near major markets. Consequently, international trade in steel products—particularly trans-oceanic trade—will be a less important feature of tomorrow’s global steel market than is the case today.
Nonetheless, opportunities for developing countries will continue to exist in the steel industry. Some—such as Brazil, Indonesia, Mexico, Nigeria, and Venezuela—may become regional suppliers. Others may follow the production patterns of industrialized nations, with plants that are market-oriented and positioned to meet the needs of local buyers. Minimal market size will still be an important consideration in designing such plants but, as noted earlier, there are many countries today with markets sufficiently large to accommodate an efficient plant.
A glossary of steel production terms
Blast furnace: A large structure within which enriched iron ore, limestone, coke, and, today, powdered coal are combined at high temperature to produce molten iron (pig iron).
Pig iron: The crude, direct product of the blast furnace; a product further refined in an electric arc or basic oxygen furnace to produce steel. Pig iron is usually transferred to the steel-making vessel in molten form today.
Basic oxygen furnace (BOF): An intermediate vessel into which pig iron is placed in liquid form, often along with some solid scrap or sponge iron, to produce steel.
Sponge iron: The crude product of the direct reduction of iron, which is then refined in an electric arc furnace (or, sometimes, a BOF) to produce steel. The term “sponge” is based on its appearance as coalesced granules of nearly pure iron mixed with some waste materials.
Direct reduced iron. Produced by a process that reduces iron ore at temperatures below the melting point of iron and can use fuel (or carbon) sources other than coke.
Direct reduced steel A still-experimental process where iron ore is converted directly into molten steel, which is then further refined.