A system modelling perspective on scale effects in the steel industry

Large-scale integrated steel works are claimed to yield significant economies of scale in operating costs. While this may be true, larger plant configurations are inherently less responsive to demand changes and, in the case of large blast furnaces, result in a significant proportion of output being lost on the occasion of production pauses for essential refractory maintenance. A system dynamics model is presented which shows that, for a typical integrated steelworks, the market response to lack of steel availability can more than offset any economies of scale in production costs. In addition, larger units with correspondingly higher fixed costs are financially less able to withstand cyclic downturns in demand. As a result, works employing smaller blast furnaces may be more profitable than those containing larger furnaces.