McKinsley: Absorbing raw material price volatility no longer possible via conversion margin

Thursday, 13 October 2011 17:16:38 (GMT+3)   |  
       

Speaking at the 45th annual meeting of the World Steel Association (worldsteel) held in Paris on October 13, McKinsey & Company director Sigurd Mareels said that the share of iron ore costs within the steel product cost (taking HRC as an example) increased from eight percent in 1995 to 39 percent in 2010, while the share of coking coal costs rose from 11 percent to 32 percent in the same period, as raw material costs (including scrap, coking coal and iron ore for an integrated steelmaker based in Europe) have increased by seven times between the year 2000 and the second quarter of 2011. As a result, while the revenues of the mining industry trended sideways until 2000, Mr. Mareels told attendees that beginning from 2000 the revenues of the mining industry have skyrocketed up to the present due to the awakening of the emerging markets, with an interruption during the world economic crisis back in 2008.

Stating that the steel price can be thought of as the sum of a "raw material cost" and a "conversion margin", Mr. Mareels said that, due to high and more volatile raw material costs, since the abandoning of long-term contracts steel prices have also become more volatile and so absorbing high-cost volatility is no longer possible through the conversion margin. As a result, raw material productivity and "captivity" now matters more than labor productivity, Mr. Mareels underlined.


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