SteelOnTheNet Insights Podcast

Introduction

Welcome to SteelOnTheNet Podcasts. I'm Dr Andrzej M Kotas, and today is November 24th, 2025.

Today we're examining steel industry profit improvement programmes. Let me turn to first question immediately. What exactly is a profit improvement programme?

Well, at its simplest a profit improvement programme or PIP is a short to medium term plan for improving company profitability. This is usually done:

… both through revenue improvements

… and through cost reduction measures.

It is a plan prepared by a team of experts who have a combination of skills. These skills include metal-sector market and technical expertise in the main, but also business and industry understanding so that, working with management, we can convert ideas into improved bottom line performance.

Foundation Knowledge: Understanding your cost structure is fundamental to profit improvement. Our Steel Production Costs Essentials provides detailed breakdowns of raw materials, energy, labour costs, and regional variations across BOF and EAF routes.

At its simplest, the profit improvement programme is a short written plan – it can be 10 pages or less. It is a plan that is jointly worked on, by consultants and local managements, alike. And although every steel company is different, the typical PIP will address matters such as:

• the production assets
• revenue improvements – as identified from improved product mix (that's emphasis on more value added), from more efficient distribution, from better product pricing (including new surcharges, sometimes) and quite often, from improved customer selection;
• and also, cost improvements. These improvements are normally established through better yield performance, from improved productivity, through changes in purchasing practices and behaviours, from adoption of new technology, and from better utilities consumption, better use of know-how, better commercial understanding etc…

Let's examine each of these areas in turn, starting with your production assets.

Production Assets

Let's start with the production assets. And to illustrate this, let's assume that you are producer of steel slab. The obvious question is – why not go downstream – that is, make HRC or CRC or coated products. In the steel sector, value added per tonne increases quite significantly the further downstream we go. At the same time, capital investment costs per tonne tend to fall as we move from upstream assets downstream. Much profitability can therefore often be gained by adding additional processing plant – in this example a hot strip mill, and cold rolling mill, and maybe even some coating lines.

Now, I appreciate that not every company can afford major capital investments. But the principle remains valid at any scale. If you're producing billets, consider adding a wire rod mill. If you're making hot rolled coil, perhaps galvanising lines could transform your market position. The key is understanding where the value multipliers exist in your particular product chain.

Decisions on plant investment do however take time. Any such investment will normally need a feasibility study to be performed, to look at market, technical and financial aspects of the investment. You need to understand: Is there market demand for the downstream product? Do you have the technical capability? Can you secure the financing? And critically – what's your payback period?

But asset optimisation isn't just about adding new facilities. Sometimes it's about getting more from what you already have. I've seen plants running at 70% capacity when market conditions would support 85%. Why? Often it's maintenance schedules that haven't been optimised, or bottlenecks that haven't been properly identified and addressed. A thorough asset utilisation review can reveal significant profit potential without spending a single dollar on new equipment.

Once you've optimised your production assets, the next question becomes: how do you maximise the revenue from what you're producing? This brings us to revenue improvements and routes to market.

Revenue Improvements

But let's assume that you have optimised your assets. What else can be done to maximise the revenue stream?

First, let's look at home versus export markets. Select home markets where possible. Why? Steel is heavy – transport costs eat into margins quickly. When you're shipping internationally, you're often forced to be a price taker, competing with producers who may have lower cost bases or different subsidy structures.

However, within your home market, look carefully at steel dimensions and specifications. Are there any monopoly areas – that is, sizes or grades that only you can make? Perhaps you're the only producer in your region who can roll certain heavy sections, or you have unique coating capabilities. These niche positions allow for premium pricing. I've seen companies add 15-20% to their margins simply by identifying and focusing on products where they face limited direct competition.

Now, let's talk about routes to market, because how you distribute your steel can be just as important as what you produce. Steel companies typically have three main distribution channels: direct sales to end users, sales through steel service centers and distributors, or working with traders and agents.

Direct sales to major end users – automotive companies, construction firms, appliance manufacturers – typically offer better margins because you're eliminating the middleman. However, they require technical service support, just-in-time delivery capabilities, and the ability to handle large volume commitments.

Steel service centres and distributors provide market access without the overhead of managing hundreds of small customer relationships. They handle inventory risk, provide cutting and processing services, and manage local logistics. The trade-off is lower net prices, but you gain volume certainty and reduced working capital requirements.

Then there are traders – agents who facilitate product placement, often to distant markets. While traders can help move excess inventory or access markets you couldn't reach directly, they often command very poor prices that barely cover production costs. I've seen companies become dependent on trader relationships that were meant to be temporary solutions. Firms should review this practice periodically – what started as an emergency outlet can become a profit drain if it's never questioned.

The most successful companies use a hybrid approach – direct sales for strategic customers, distributor relationships for market coverage, and traders only when absolutely necessary. The key is understanding the true profitability of each channel, including all the hidden costs.

Product mix is crucial. Not all tonnes are equal. A tonne of commodity hot rolled coil might generate $50 in margin, while a tonne of specialised coated product could generate $200 or more. Review your order book carefully. Are you spending valuable production time on low-margin products simply because that's what you've always done?

I have once or twice also come across bar mills that traditionally make rebar; but where a switch from rebar to merchant bar production allowed the operator to benefit from a 20% price premium, for relatively little extra production cost. Sometimes the equipment you already have can produce higher-value products with minimal modification – you just need to recognise the opportunity and have the courage to shift your market focus.

Sometimes saying no to unprofitable business is the best decision you can make.

Pricing discipline is another area where many steel companies leave money on the table. I've worked with firms that hadn't reviewed their surcharge structures in years. Raw material costs fluctuate – your surcharges should reflect this. Energy surcharges, alloy surcharges, small order surcharges – these aren't just administrative details, they're essential tools for ensuring you're paid fairly for the value you deliver.

And let's talk about customer selection. Not all customers are equally valuable. Some pay promptly, order in efficient quantities, and provide accurate forecasts. Others are perpetually late, order in awkward small lots, and constantly demand rush service. The latter might show good revenue on paper, but when you calculate the true cost to serve, they're often destroying value. A rigorous customer profitability analysis can be revelatory.

So we've looked at assets and revenues. Now let's turn to the third major area – cost improvements. This is often the most fertile ground for profit enhancement.

Cost Improvements

This is a fertile area. On the technical side, you can benchmark your performance against others, for example for operating hours, yield, man-hours-per-tonne, electricity use, gas use and so forth. Look at KPIs. Plant visits are very useful in this respect.

Let me give you some context on why benchmarking matters so much. I've visited steel plants on five continents, and the performance variation is extraordinary. Two plants with similar equipment can have yield differences of 5-10 percentage points. When you're producing hundreds of thousands of tonnes per year, that difference represents millions of dollars in lost revenue. The beauty of benchmarking is that it tells you what's actually achievable – not theoretical limits, but real performance that other operators are delivering every day.

You can also lower input costs through investment. For example, investment in solar power, which can often lead to reduction in electricity unit costs of 30% or more. Now, I know what some of you are thinking – solar requires significant capital outlay. True. But in many regions, the payback period is now under five years, and the technology has matured considerably. I've seen mini-mills that have essentially insulated themselves from grid electricity price volatility through strategic renewable energy investments.

Technology improvements can also help with energy savings. If you roll billets, you can prevent heat loss by billet stacking. Or by using longer production runs. These might sound like small adjustments, but heat management is fundamental to steel production economics. Every time you reheat steel, you're spending money. Keeping steel hot through efficient production scheduling can reduce your energy consumption by 10-15%.

Different practices can make an enormous difference. We were once at a plant where management was using 99.9% oxygen instead of 99.5% in the BOF. This operation was literally burning money. The metallurgical benefit of that extra 0.4% purity was negligible, but the cost difference was substantial. When we calculated the annual impact, it was running into hundreds of thousands of dollars – money that could have gone straight to the bottom line.

Plant visits can help to shed light on such matters. At a different plant, we observed 'over-coking' in the sinter plant. This was obvious from the excessive temperature seen at all levels of the sinter strand. Further discussion indicated that the average coke breeze rate was approximately 95kg per tonne of sinter; when good European practice was to use 45 to 50kg of coke breeze per tonne of sinter.

Now, why would a plant use double the coke breeze it needs? Often it's because practices get established, and nobody questions them. Perhaps years ago there was a sinter quality issue, and someone increased the coke rate to fix it. The problem got solved, but the higher rate remained. Without regular benchmarking and critical review, these inefficiencies become embedded in your cost structure.

Another example was a specialty steel business where sales managers were incentivised on the basis of revenues. This had the result that material was often sold below production cost, so that bonuses could be achieved. In consequence, somewhere near 20% of the order book was making zero net profit on a full cost basis. Introduction of a new, different but generous bonus scheme some months later resulted in a marked improvement in the bottom line; to the approval of both sales managers and shareholders.

This illustrates a critical point – cost improvement isn't always about production efficiency. Sometimes it's about aligning incentives properly throughout your organisation. If your sales team is rewarded for volume regardless of profitability, you'll get volume regardless of profitability. If your production team is measured only on output, you might sacrifice yield. Every incentive structure sends a message about what the company truly values.

Purchasing practices deserve particular attention. I've seen companies that negotiate hard on raw material prices but then accept unfavourable payment terms or delivery schedules that tie up working capital. I've seen others that stick with traditional suppliers out of habit, even when the market has shifted. A comprehensive purchasing review should look at not just unit prices, but total cost of ownership, supply reliability, and strategic relationships.

Now, given the breadth and complexity of all these potential improvements – from asset optimisation through revenue enhancement to cost reduction – you might be wondering: how do companies actually identify and capture these opportunities? This is where external expertise can play a crucial role.

Use of Experts

A short podcast such as this cannot do justice to this topic. Another approach worth mentioning however is the use of external experts. Such experts will often have familiarity with several plants such as yours. In a short visit of 1-2 days, they should be able to identify the low hanging fruit.

This is where the real value emerges. When you work in the same plant day after day, certain practices become invisible – they're just "how we've always done things." An external expert brings fresh eyes and comparative knowledge from other operations. They've seen what works elsewhere and can quickly spot opportunities you might miss.

The external perspective is invaluable because it challenges assumptions. Why do you use that much energy? Why accept those payment terms? Why tolerate that yield loss? Questions that internal teams might never ask become obvious to someone who's benchmarked dozens of similar operations.

And critically, external experts can facilitate difficult conversations. Sometimes management knows changes are needed but faces internal resistance. An independent voice carrying data from industry benchmarks can break through organisational inertia in ways that internal advocates cannot.

So let me now draw these threads together with some key takeaways.

Conclusion: Key Takeaways

Let me leave you with some key takeaways about profit improvement programmes, because these insights apply regardless of your company's size or circumstances.

First, profit improvement doesn't always require expensive capital investment. Yes, major asset additions can transform your value proposition – going downstream, adding coating lines, installing renewable energy. But some of the most impactful improvements I've witnessed cost virtually nothing.

• Changing a bonus structure.
• Adjusting oxygen purity in the BOF.
• Optimising production scheduling to reduce reheating.
• Eliminating unprofitable customers.

These changes deliver immediate bottom-line impact with minimal capital outlay.

Second, the low-hanging fruit is often hiding in plain sight. That excessive coke breeze consumption. That 99.9% oxygen specification. That 20% of your order book making zero profit. These aren't complex technical mysteries – they're visible inefficiencies that have simply never been questioned. A systematic review will find them.

Third, benchmarking is your friend. You cannot improve what you don't measure, and you don't know what's achievable until you see what others are doing. Whether it's yield, energy consumption, productivity, or customer profitability – compare yourself to best practice. The performance gap represents your improvement opportunity.

Fourth, fresh external perspective delivers disproportionate value. A one or two-day plant visit by someone who's seen dozens of similar operations can identify opportunities that internal teams miss. This isn't because your people aren't capable – it's because familiarity breeds blind spots. External experts ask the uncomfortable questions and bring comparative data that breaks through organisational inertia.

And finally, profit improvement is a continuous journey, not a one-time event. Markets shift. Technologies evolve. Competitors adapt. The profit improvement programme you implement today will need refreshing in two or three years. The most successful companies I've worked with treat profitability enhancement as an ongoing discipline, not a crisis response.

Whether you're facing immediate competitive pressure or simply seeking to optimise performance, the profit improvement programme framework provides a structured approach to enhancing your bottom line. Production assets, revenue optimisation, cost reduction – addressed systematically with both internal knowledge and external perspective, these levers can transform your financial performance.

This has been a SteelOnTheNet Podcast. I'm Dr Andrzej M Kotas. For full notes, visit steelonthenet.com/insights/podcasts.

Thank you for listening.