Abstract
There are two basic ways to produce steel on a large scale: using iron ore and coal in blast furnaces or employing ferrous scrap in electric arc furnaces. The first requires a larger initial investment but is more competitive in terms of scale gains. The disadvantage is the need for uninterrupted operation, reducing the flexibility to adjust production. To mitigate this problem, it is common to invest in steel rolling assets, generating the possibility of diversifying production and valuable product exchange options. In this work, employing Monte Carlo simulation, we calculate the value of a product exchange option in a steel mill composed of a blast furnace with a hot roller. The results show that this option can generate a significant increase on the NPV of blast furnace steel making projects, and also reveals the importance of choosing the type of stochastic process for the steel in determining the option’s value.
Highlights
There are two basic ways to produce steel on a large scale: using iron ore and coal in blast furnaces or employing ferrous scrap in electric arc furnaces
Processes, while the second column of Table 1 (MRM) present the results obtained for the blast furnace and hot rolling mill considering that the steel prices behave as two Mean Reversion Movement (MRM)
Resulted in the reduction of the static net present value (NPV) and in the value Technology Change Option. This phenomenon results from the fact that the variance of Geometric Brownian Motion (GBM) is increasing in time, and proportional to: σ.s., while in the case of MRM, this variance tends to converge to a determined value: σ2/η (PINDYCK, 1994)
Summary
There are two basic ways to produce steel on a large scale: using iron ore and coal in blast furnaces or employing ferrous scrap in electric arc furnaces. The disadvantage is the need for uninterrupted operation, reducing the flexibility to adjust production To mitigate this problem, it is common to invest in steel rolling assets, generating the possibility of diversifying production and valuable product exchange options. Production in a blast furnace demands – almost always – greater initial investments, but, on the other hand, it is more competitive cost- wise Another advantage is that, once the structure for the functioning of a blast furnace is defined, the increase in productive capacity through the installation of new furnaces usually occurs at costs proportionally lower to the increase in production. This variability – in prices as in the quantities demanded – significantly affects revenues and, the economic results of the steel mills
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