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Economies of Scale in the Global Iron-Making Industry

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  • Paul Crompton

    ()
    (UWA Business School, The University of Western Australia)

  • Jean-Baptiste Lesourd

    (Universite de la Mediterranee, Aix-Marseille, France)

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    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 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.

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    File URL: http://www.biz.uwa.edu.au/home/research/discussionworking_papers/economics/2004?f=151013
    File Function: First version, 2004
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    Bibliographic Info

    Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 04-23.

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    Length: 18 pages
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:uwa:wpaper:04-23

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    Related research

    Keywords: Metals and metal products; primary products; scale economies; Leontief cost function.;

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    References

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    1. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    2. Lesourd, Jean-Baptiste, 1985. "Energy and resources as production factors in process industries," Energy Economics, Elsevier, Elsevier, vol. 7(3), pages 138-144, July.
    3. Jefferson, Gary H., 1990. "China's iron and steel industry : Sources of enterprise efficiency and the impact of reform," Journal of Development Economics, Elsevier, vol. 33(2), pages 329-355, October.
    4. Wu, Yanrui, 1995. "The productive efficiency of Chinese iron and steel firms A stochastic frontier analysis," Resources Policy, Elsevier, Elsevier, vol. 21(3), pages 215-222, September.
    5. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
    6. Terrell, Dek, 1996. "Incorporating Monotonicity and Concavity Conditions in Flexible Functional Forms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(2), pages 179-94, March-Apr.
    7. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (I): The Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, volume 1, number fuss1978.
    8. Park, Soo-Uk & Lesourd, Jean-Baptiste, 2000. "The efficiency of conventional fuel power plants in South Korea: A comparison of parametric and non-parametric approaches," International Journal of Production Economics, Elsevier, Elsevier, vol. 63(1), pages 59-67, January.
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