IDEAS home Printed from https://ideas.repec.org/a/bbz/fcpbbr/v10y2013i1p102-126.html
   My bibliography  Save this article

Evaluating product exchange options in integrated steel mills

Author

Listed:
  • Luiz de Magalhães Ozorio

    (IBMEC-RJ)

  • Carlos de Lamare Bastian-Pinto

    (IBMEC-RJ)

  • Tara Keshar Nanda Baidya

    (UNIGRANRIO)

  • Luiz Eduardo Teixeira Brandão

    (PUC-RJ)

Abstract

There are two basic ways to produce steel on a large scale: using iron ore and coal in blast furnaces or employing ferrous scrap in electric arc furnaces. The first requires a larger initial investment but is more competitive in terms of scale gains. The disadvantage is the need for uninterrupted operation, reducing the flexibility to adjust production. To mitigate this problem, it is common to invest in steel rolling assets, generating the possibility of diversifying production and valuable product exchange options. In this work, employing Monte Carlo simulation, we calculate the value of a product exchange option in a steel mill composed of a blast furnace with a hot roller. The results show that this option can generate a significant increase on the NPV of blast furnace steel making projects, and also reveals the importance of choosing the type of stochastic process for the steel in determining the option’s value.

Suggested Citation

  • Luiz de Magalhães Ozorio & Carlos de Lamare Bastian-Pinto & Tara Keshar Nanda Baidya & Luiz Eduardo Teixeira Brandão, 2013. "Evaluating product exchange options in integrated steel mills," Brazilian Business Review, Fucape Business School, vol. 10(1), pages 102-126, January.
    • Handle: RePEc:bbz:fcpbbr:v:10:y:2013:i:1:p:102-126
    as

    Download full text from publisher

    File URL: http://bbronline.com.br/index.php/bbr/article/download/235/355
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bastian-Pinto, Carlos & Brando, Luiz & Hahn, Warren J., 2009. "Flexibility as a source of value in the production of alternative fuels: The ethanol case," Energy Economics, Elsevier, vol. 31(3), pages 411-422, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bertolini, Marina & D'Alpaos, Chiara & Moretto, Michele, 2018. "Do Smart Grids boost investments in domestic PV plants? Evidence from the Italian electricity market," Energy, Elsevier, vol. 149(C), pages 890-902.
    2. Andreas Welling, 2017. "Green Finance: Recent developments, characteristics and important actors," FEMM Working Papers 170002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    3. Laude, Audrey & Jonen, Christian, 2013. "Biomass and CCS: The influence of technical change," Energy Policy, Elsevier, vol. 60(C), pages 916-924.
    4. Ozorio, Luiz de Magalhães & Bastian-Pinto, Carlos de Lamare & Baidya, Tara Keshar Nanda & Brandão, Luiz Eduardo Teixeira, 2013. "Investment decision in integrated steel plants under uncertainty," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 55-64.
    5. Gauder, Martin & Graeff-Hönninger, S. & Claupein, W., 2011. "The impact of a growing bioethanol industry on food production in Brazil," Applied Energy, Elsevier, vol. 88(3), pages 672-679, March.
    6. Carlos de Lamare Bastian-Pinto & Alexandre Paula Silva Ramos & Luiz de Magalhães Ozorio & Luiz Eduardo Teixeira Brandão, 2015. "Uncertainty and Flexibility in the Brazilian Beef Livestock Sector: the Value of the Confinement Option," Brazilian Business Review, Fucape Business School, vol. 12(6), pages 100-120, November.
    7. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    8. Taylor-de-Lima, Reynaldo L.N. & Gerbasi da Silva, Arthur José & Legey, Luiz F.L. & Szklo, Alexandre, 2018. "Evaluation of economic feasibility under uncertainty of a thermochemical route for ethanol production in Brazil," Energy, Elsevier, vol. 150(C), pages 363-376.
    9. Bogdan Rębiasz & Bartłomiej Gaweł & Iwona Skalna, 2017. "Valuing managerial flexibility. An application of real-option theory to steel industry investments," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 27(2), pages 91-111.
    10. Work, J. & Qiu, F. & Luckert, M.K., 2016. "Examining hardwood pulp and ethanol prices for improved poplar plantations in Canada," Forest Policy and Economics, Elsevier, vol. 70(C), pages 9-15.
    11. Carlos Patricio Samanez & L鯠da Rocha Ferreira & Carolina Caldas do Nascimento & Let de Almeida Costa & Claudio R. S. Bisso, 2014. "Evaluating the economy embedded in the Brazilian ethanol--gasoline flex-fuel car: a Real Options approach," Applied Economics, Taylor & Francis Journals, vol. 46(14), pages 1565-1581, May.
    12. de Barros, Marisa Maia & Szklo, Alexandre, 2015. "Petroleum refining flexibility and cost to address the risk of ethanol supply disruptions: The case of Brazil," Renewable Energy, Elsevier, vol. 77(C), pages 20-31.
    13. Naielly Lopes Marques & Carlos de Lamare Bastian-Pinto & Luiz Eduardo Teixeira Brandão, 2021. "A Tutorial for Modeling Real Options Lattices from Project Cash Flows," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 25(1), pages 200093-2000.
    14. Ricardo Hausmann & Rodrigo Wagner, 2009. "Certification Strategies, Industrial Development and a Global Market for Biofuels," CID Working Papers 192, Center for International Development at Harvard University.
    15. Ghoddusi, Hamed, 2017. "Blending under uncertainty: Real options analysis of ethanol plants and biofuels mandates," Energy Economics, Elsevier, vol. 61(C), pages 110-120.
    16. Jung Ho Park & Kwangsoo Shin, 2018. "R&D Project Valuation Considering Changes of Economic Environment: A Case of a Pharmaceutical R&D Project," Sustainability, MDPI, vol. 10(4), pages 1-15, March.
    17. Kobari, L. & Jaimungal, S. & Lawryshyn, Y., 2014. "A real options model to evaluate the effect of environmental policies on the oil sands rate of expansion," Energy Economics, Elsevier, vol. 45(C), pages 155-165.
    18. Peter Wells & Thaisa Faro, 2011. "Eco‐efficiency, self‐sufficiency and sustainability in transport: The limits for Brazilian sugarcane ethanol policy," Natural Resources Forum, Blackwell Publishing, vol. 35(1), pages 21-31, February.
    19. Kamila Klimek & Magdalena Kapłan & Serhiy Syrotyuk & Nikolay Bakach & Nikolay Kapustin & Ryszard Konieczny & Jakub Dobrzyński & Kinga Borek & Dorota Anders & Barbara Dybek & Agnieszka Karwacka & Grzeg, 2021. "Investment Model of Agricultural Biogas Plants for Individual Farms in Poland," Energies, MDPI, vol. 14(21), pages 1-30, November.
    20. de Oliveira, Denis Luis & Brandao, Luiz E. & Igrejas, Rafael & Gomes, Leonardo Lima, 2014. "Switching outputs in a bioenergy cogeneration project: A real options approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 36(C), pages 74-82.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bbz:fcpbbr:v:10:y:2013:i:1:p:102-126. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sarah Lasso (email available below). General contact details of provider: https://edirc.repec.org/data/fucapbr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.