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Investment decision in integrated steel plants under uncertainty

Author

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  • Ozorio, Luiz de Magalhães
  • Bastian-Pinto, Carlos de Lamare
  • Baidya, Tara Keshar Nanda
  • Brandão, Luiz Eduardo Teixeira

Abstract

Steel is an alloy composed of iron and carbon for which there are two main large-scale production processes: using iron ore and coal as raw materials through a method known as integrated plants with blast furnaces and using iron scrap melted in electrical furnaces, also known as mini-mills or semi-integrated plants. The production in integrated plants typically implies greater investment, but is more cost-competitive as it provides greater economies of scale. The disadvantage of this method is that the furnaces basically need to work almost continuously through their life span, thus reducing the flexibility of production adjustment to market demands. To attenuate this problem, huge investments in lamination assets are commonly made, generating the possibility of production diversification and valuable switch options. This work values an output switch option in a hypothetical integrated steel plant composed of a blast furnace and a hot laminator. Results show that this option can generate a significant increase in the NPV of blast furnace plants. Results also emphasize the importance of correctly choosing the stochastic process for the underlying uncertainty and the effect it may have on the switch option value.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:finana:v:27:y:2013:i:c:p:55-64
    DOI: 10.1016/j.irfa.2012.06.003
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    2. Min-Sung Kim & Eul-Bum Lee & In-Hye Jung & Douglas Alleman, 2018. "Risk Assessment and Mitigation Model for Overseas Steel-Plant Project Investment with Analytic Hierarchy Process—Fuzzy Inference System," Sustainability, MDPI, vol. 10(12), pages 1-17, December.
    3. Bialowolski, Piotr & Weziak-Bialowolska, Dorota, 2014. "External factors affecting investment decisions of companies," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy, vol. 8, pages 1-21.
    4. 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.
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    6. Bogdan Rębiasz, 2019. "The valuation of real options in a hybrid environment," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 29(1), pages 97-119.

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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