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Economies of scale in global iron-making

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  • Crompton, Paul
  • Lesourd, Jean-Baptiste

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 furnace, 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 69 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 Mt 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. Therefore, low-cost producers are also often producers with low raw material costs and production levels below the estimated breakeven scale of operation. Labor costs, although significant, are comparatively less important as a driver towards low costs.

Suggested Citation

  • Crompton, Paul & Lesourd, Jean-Baptiste, 2008. "Economies of scale in global iron-making," Resources Policy, Elsevier, vol. 33(2), pages 74-82, June.
  • Handle: RePEc:eee:jrpoli:v:33:y:2008:i:2:p:74-82
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    Cited by:

    1. Lin, Boqiang & Wu, Ya & Zhang, Li, 2011. "Estimates of the potential for energy conservation in the Chinese steel industry," Energy Policy, Elsevier, vol. 39(6), pages 3680-3689, June.
    2. Ousman Gajigo & Mouma Ben Dhaou, 2015. "Working Paper 222 - Economies of Scale in Gold Mining," Working Paper Series 2161, African Development Bank.
    3. Zhang, Dingsheng & Cheng, Wenli & Ng, Yew-Kwang, 2013. "Increasing returns, land use controls and housing prices in China," Economic Modelling, Elsevier, vol. 31(C), pages 789-795.
    4. repec:eee:rensus:v:79:y:2017:i:c:p:1303-1313 is not listed on IDEAS
    5. Atif Ansar & Bent Flyvbjerg & Alexander Budzier & Daniel Lunn, 2016. "Big is Fragile: An Attempt at Theorizing Scale," Papers 1603.01416, arXiv.org, revised Jun 2017.

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