Components of the cost of production, Strategic Management

Components of the cost of production

Any sustained rise in input prices usually lead to an increase in productprices through the cascading effect. The major components of the costs of production of finished steel are:
• Raw materials - Raw material costs forms roughly about 62% of the total cost of production. This only emphasizes on how important sharpmovements in raw material prices mean for the steel industry. Thebasic raw materials that are used in producing steel are iron ore, coaland limestone. India is fortunate to be endowed with one of the largestiron ore deposits in the world. Limestone is also available in sufficientquantities and as such do not pose much of a problem. India alsopossesses one of the biggest coal deposits (approximately 197 bntonnes) in the world. However, Indian coal is mostly unfit for cokeproduction because of its high ash content of 25-40%. Coal fit for cokeproduction comprises less than 15% of total reserves. As such, Indiansteel giants have to resort to importing coking coal from foreign

Power costs - The steel industry is an energy intensive industry with Power and fuel contributing as much as 10.1% of total production costs. It has been estimated that the global steel industry account fornearly 4% of the total energy consumption in the world. Most steelmajors like SAIL, TSL and JSW have captive power plants but smallerplayers have to depend on outside supply. As such, erratic supply formsa major obstacle for growth of these producers.

• Interest payments - Steel is a capital-intensive industry and as such many companies resort to outside borrowings, mostly in form of long-term loans. Interest payments always used to form on averagebetween 7 - 9% of the total costs but have recently come down to aslow as 3.2%. Interest coverage ratio has also shot up to nearly 10 afterhovering above the zero levels for a number of years. Also, it is important to note that the recent good turn in the sector has enabledmany companies to pay off their long-term debts early and, in general interest payments have come down industry-wide.

Taxes and duties - Excise duties, sales tax, other direct and indirect taxes further push up costs in the steel sector. Total taxes contribute more than 16% of total costs. Here, the government can play an active role and provide structured concessions for new and old capacities.

• Other expenses - Wage bills, depreciation costs and distribution expenses are among the other major cost components.

Posted Date: 3/25/2013 4:13:28 AM | Location : United States







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