Top 10 Tips for Steel Feasibility Studies
Rules for investment appraisal
We have put together ten main rules that you may wish to consider when undertaking a steel industry feasibility study.
The top 10 tips are:
- Start with market issues [rather than from the production side]. Market size will define the size of your plant
- Do not forget to factor market growth - as well as expected trends in demand mix - into your market projections
- Orient the majority of your production to your domestic market, and only a minor part of output for exports. Steel is heavy. Your domestic sales should be much more profitable than your export sales
- Use conservative yield assumptions to assess upstream capacity needs (such as liquid steel) from downstream facility capacity (finished products)
- Recognise that plant ramp-up will take 2-3 years. Assume capacity utilisation of no more than 95% in the steady state
- Consider profitability as well as volume when thinking about a preferred facility configuration. Maybe add some downstream higher value plant? Perhaps produce additional semis for sale?
- Calculate your projected market share. Develop solid arguments to explain why your market share should be higher or lower than competitors' market shares. [These arguments may relate to pricing]
- Get assistance with financial modelling if this is something you have never done before†
- Spend time talking to customers, suppliers and competitors of the potential plant [as well as local steel associations, government bodies etc]. This will be time well spent and is likely to shed light on competitor activities, infrastructure issues, local transport problems etc [any of which can have a bearing on your own project]. Undertaking such 3rd party discussions also adds significantly to the credibility of a final feasibility report
- If your financial projections indicate an IRR of 35% or more, think again. You may need to amend certain assumptions!
The tips above should give you a good start in undertaking a steel sector feasibility study.
For further advice, call us on +44 775 149 0885
once worked with a client who insisted on using a generic in-house financial model for the feasibility appraisal. The projections from the financial model seemed unduly poor until our Consultants noticed that the value of scrap credits [from yield-losses] had been omitted from the calculations. This is an easy mistake to make of course if a generic financial model is applied to steelmaking situations.