Economies of Scale in the Global Iron-Making Industry

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 furnaces, 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 sixty nine 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 million tonnes 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 (in particular, ore and other basic commodities). Thus, low-cost producers are also often producers with low raw material costs, with production levels below the estimated breakeven scale of operation. Labour costs, although significant, are comparatively less important as a driver towards low costs.