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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 (particularly domestic market size) will define the size of your steel plant

  • Do not forget to factor in 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. Because of transport costs especially, 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 output) from downstream facility capacity (finished products)

  • Recognise that plant ramp-up will take 2-3 years. Assume capacity utilisation of no more than 90% or 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 for your home market. 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

† MCI 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.

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