Economies of scale in global iron-making

Paul Crompton, J-B. Lesourd

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

In this paper, we investigate the presence of economies of scale in the global iron-making industry for integrated steel plants, iron making being the first stage in the steel-making process. Iron making depends on basic commodities, such as iron ore, coke and various forms of energy, required in the operation of the blast furnace, which can be classified as essential inputs and used in fixed proportions to produce iron. A generalized Leontief cost function is estimated using panel data for 69 integrated plants, such a specification being appropriate for technologies with essential inputs that are used in fixed proportions in production. A significant scale effect is observed due to the existence of fixed costs and a linear dependence of the cost function on production. Under a simple linear cost function, a rough estimate of the breakeven scale of plant, where costs equal revenue, is 4.5 Mt per year. Competitiveness, as measured by the ratio of plant average cost per tonne to best practice cost per tonne, can be shown to be positively related to the scale of production as well as the cost of essential inputs. Therefore, low-cost producers are also often producers with low raw material costs and production levels below the estimated breakeven scale of operation. Labor costs, although significant, are comparatively less important as a driver towards low costs.
Original languageEnglish
Pages (from-to)74-82
JournalResources Policy
Volume33
Issue number2
DOIs
Publication statusPublished - 2008

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economy of scale
iron
economy
costs
cost
producer
Iron
Economies of scale
Costs
steel
labor costs
scale effect
panel data
raw materials
iron ore
best practice
competitiveness
commodity
revenue
Cost function

Cite this

Crompton, Paul ; Lesourd, J-B. / Economies of scale in global iron-making. In: Resources Policy. 2008 ; Vol. 33, No. 2. pp. 74-82.
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Economies of scale in global iron-making. / Crompton, Paul; Lesourd, J-B.

In: Resources Policy, Vol. 33, No. 2, 2008, p. 74-82.

Research output: Contribution to journalArticle

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AB - In this paper, we investigate the presence of economies of scale in the global iron-making industry for integrated steel plants, iron making being the first stage in the steel-making process. Iron making depends on basic commodities, such as iron ore, coke and various forms of energy, required in the operation of the blast furnace, which can be classified as essential inputs and used in fixed proportions to produce iron. A generalized Leontief cost function is estimated using panel data for 69 integrated plants, such a specification being appropriate for technologies with essential inputs that are used in fixed proportions in production. A significant scale effect is observed due to the existence of fixed costs and a linear dependence of the cost function on production. Under a simple linear cost function, a rough estimate of the breakeven scale of plant, where costs equal revenue, is 4.5 Mt per year. Competitiveness, as measured by the ratio of plant average cost per tonne to best practice cost per tonne, can be shown to be positively related to the scale of production as well as the cost of essential inputs. Therefore, low-cost producers are also often producers with low raw material costs and production levels below the estimated breakeven scale of operation. Labor costs, although significant, are comparatively less important as a driver towards low costs.

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