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~i ' ll lllll ll llllll ll ~1~11 1 11 111 1 1 111 11 1 11 11 11 11 11 11 1 affe, John W p . A1992-007 Oth 51927

· · • Articles and 5 er #: 1 0 peeches (1973). 1v 2120559

WBG Archives

nistr. t,IM.ITI~l>

United Nations Industrial Development Orpnization

ID/WO.l46/ ~J Corr. 1 1"( ,Tuly 197 3

ORTOINAi..: ltllGLIGH

Third Intnrregional Symposium on the Iron and Steel Indus·Lry

Brasilia, Brazil, 14 - 21 Octobtir 19'13

Agenda item 3

Page 6

INTERNATIONAL CO-OPERATION IN

THE PLANNJNG, FINANCING, CONSTRUCTION, AND OPERATION

OF IRON AND STEEL PLANTS!(

by

John W. P. Jaffe International Bank for Reconstruction and Development

United States of America

At the United Nations Economic Commission for Europe Seminar on "Direct Reduction of Iron Ore'' held in Romania in September 1972 inforrrat:ion was given on direct reduction projects based on the use of soltd-carbon reductants which makes j_t necessary to replace Table 3 with the new Table 3 attached.

1/ The .views and opinions expressed in this paper are those of the author and uo not necessarily reflect the views of the secretariat of UNIDO. This document has been reproduced without formal editing.

id. 73-4970

--·-......._ -- ----_.... _______ TA_B_L_E---.,3_-_-_s_ta_tus of Direct-Reduction Projects, as of Dec. 1972

J Number of lants and annual ca aoit · in tons under I In operation In start-up phase construction Planned

~-··

Process and location Gaseous reductant Hyi ---

Monterrey, Mexico 2 X 250,000 1 X 400,000 Vera Cruz, Mexico 1 X 200,000 Puebla, Mexico 1 X 250,000 Bahia, Brazil 1 X 200,000

Midrex Oregon 1 X 400;000 Georgetown, S.C. 1 X 400,000

1 X 800,000 Louisiana Contracoeur, Quebec 1 X 400,000 Hamburg, W. Gennany 1 X 400,000

Nu Iron Cuidad Guayana,

x 1 ,ooo,oocJI Venezuela 1 • 1nCO

Houston, Texas 1 Purofer

X 4oo,ooo Oberhausen, W.Germany 1 X 15'0,000

Esso FIOR Guayana, Venezuela 1 x 400,000

Solid-carbon reductant SL and SL/RN 1------·-- - · ·-

Glenbrook, N.Z~iland!! 1 X 15o,ooo I Inchon, Korea -· 1 X 150,00C>E Sudbury, On tario.V 1 X 200,000 Piratini, Brazil · 1 X 60,000

Krupp Dunswart, S. Africa 1 X 100,000

Others X 100,ooolf Lyrca, Greece 1

Witbank, S. Africa41

1 X Boo,OOOE( so,oooE! Skopje, Yugoslavia_ .5 X

Monfalcone, Italy 1 X 40,000 Kobe Kakogawa, Japan

1 x 250, oooEI 1 X 2,000,000

___ Chi~ Japan -p = Partial reduction 1/ Major start-up problems still being encountered. 1/ Operation halted in early 1973.

2/ Operation halted in November 1970. ~ Operation hal ted in 1971 •

' '

_.: ' ·.,~ i'· . . . ·."

w I

·This p3per outlines how iron n.nd titeel ~~J~t~ in developing . ~ : countries are plarinftd·, r:trr.anoed., eot'11l't;ruc: ~!d, ano opera~tl- and draws atten ... tion to the numerous opportMi ti~!ll f.or interrHJ.t.ional ooopera·ttion, which are inheront in the execution of auoh projecta.

At the outset, authoritativo foreoast~J .fot' apparent world steal ooniWiption are :reviewd and the lncreasinf~ tthare th~t t developing countries are expected to take in ths decade 19'75-198~ ie indionted. 'the aaSUJ~ti"t.ion :Li made that devulopiog oountriatJ ldll install 61 raill.ton tons of integrated •te•l-uking c~paoity in th.ia poriod. 'lbe pattern of developrcant o£ an iron and ·ateol industr3 'ls then · diacuand., tlS well a3 the .rae tors determining the introduction o£ a oountry•s first large-soale plant.

P'inancinl requirements for individual integrated plants, as well as tor all plants tu be buUt or e.xpanded in the developing world in 1975-198)1 are derived. The view ie exp:res1&d that, in a developing oount17, oapi tal require11111nts .·to establish a viable iron and steal ·oompaftV' are likely

·-· to be of the order or $)~00 per anmu11 raw steel ton, rather than $200 to $)(X) .. per annual ton o0111n.0nly' quoted in literature. 'Dda result,~ in total capital

requiriMnts tor the oons·truc tion of new or the expansion or sxiating plants : 1n 4eftlopinl oountl"l.e~ of about $25 billion,. $1$ billion of which would be

, in foreign exchange and $10 billion in local ourrano7. Possible souroes of torei(Cn e.xohange financing aN then reviavad and, finl.llly, the role ot the . teohn1oal. partner or en1ineering con8ul tant 1s dHoribed 1n somo dataU.

Introduction .. ..... This paper attempts to illustrate the tUnner in whioh the govern­

ment o! n developing country and the sponsoring oompun)' shnuld avail the.m .. aelves or · tht servlo'3tt offered b,y international. rinanoine agencies, export oradit, inatitution:s, locl1l financing ffouroes:,· exp8rienoed tA!!loboioal partner9, · equipment auppl:lara, and oonatructio11 companies . in · order ~ plan., tin.t1noe, oonatruc t, and bring intc:, conlfteroial oper.ation .an irater.rated iron and steel p:rojeat. The task of establishing a viable iron and steal cornpan.v rather than of metel7 oona1iruoting an iron and atoal wor!ts in a developing countey is challenging, and Ute reoord ohows many more pro,iects completed behind 8Cbet!ul.e and with subs.tantie.l cost overruns t.han thoso complei:A!d on tinWJ and within budget. Suoooasful. steel projects are characterized by the high de1ree of ' cooperation developed bBtwen tho participating entities, enabling eaob one to play a tull and orfcotivo part in the ilftplftrlentat~.on or the projeot •.

• Projected \·!o,rld .. Steel Oon!!Wnptlo..!!.

Ac .or-~: ... tng to tho Interna tiional Iron and Steel Institute's (IISI) 'Projection 65 1 daterl ~1arah 1972, apparent world steel consumption io ex-

. ~

peoted to inoreastl from S9 ~; mill:i.on tonal! of raM' steel oquiva.lent ii'1 1970 . to 751 million tons in 1975, 939 rr.:lll:ton ·cons in 1980.nnd 1,144 ntillion t.ons in 1985. TMse rir.ure~ represent n gi"'llth ra:tA of lt .8, 4. t~~t and b.n percw:.nt. per anl11Dl tor tbeso .fiV'l·)'l.tar period3 rotspf3ot:1wly, or an average Ntnul11 growth rate of 4.5 percent. As far as the davelop.ing countrirJ:> lJ.~ conoeru ­ed - whioh for the purpo!'la of tl.U.a exaroistS aro dc:finE;Jd as eot.l.ntrios in lAtin Aso.erioa; Aaia excluding ·china, .J&pa:n and N. Korea; A.f'rioa exoludine S. Afric&J and the Middle East - apparent steel consWnpt:Lon is projec~d to ·inoredJJe from 42.8 million tons of rav steal eqtlivalant in 19?0 to 61 . 7 million tons ira 1.~7 5 J 88.3 million tons :tn 19801 and 122. 5 milli on tons in 198). The individual apparent oonsnmpt'lon tigunJs .qre shown in Table 1 ~ 'llhich 11 baaed on Table 1J or 'Projection 85•, aupplamented bi more ·recent data prepared by the IISI. .

Year World -.1970 59S.J1 1971 S81.2S 19721/ 628.1' 197J'fl 666.19 1975 7$0.70 1980' 939.20 1985 1144.40

1/ latimate !f Poreoa.a t;

Ta.bte 1 ... ApParent Steel Oon~tiori · b;r AI!~ (Mill! on Tons) : · ·

Asia 1 excl. Atria a, axel. Developing latin China, · India,· 8. Atnc;,a, Oountriee Ame.rioa India Jaen &: N~ Korea & Hi&lle East

42.84 18.78 6.U4 8.94 8.68 4? ·.18 19.1&3 7.46 10.)0 9.~ 52.13 21.00 10.13 11.00 10.00 55.90 22.50 10.40 12.00 11,CXJ 61.70 25.00 10.20 14.40 12.10 86.30 35.00 14.40 22 • .30 16 .• 60

122.$0 46.00 20.00 31.10 2).40

Tho figuree• for the developing countries represent growth rates Of 7.6, 7 .4,and 6.8 peroen·t l'eSpeotively for these five-year periods, or an awrnge growth rate or 7 .J percont. por annUPl. It will be noted that theeo growth ra.taa aN 2.6 peroent, ldgher than those .for the wrld as. a whole, indicating t.he inoreasine sh:J.re of apparent ~Steel oonswiption whioh the developing COWl trios &r8 expected to take in tba futuro • This share 1 vhioh amounted to 7.2 percent in 1970 1 ie pro.jeoted to increase to 8.2 por­oent by 1915, 9.4 percent l>y 1980. and 10.7 peroent by 196$. Moreover, the tcrreoast oonsu.mption !igures for 1973 indicate tbnt actual conS'Wiption by dneloping oountr1e3 may wall exceed the projected tonnages. ·

'Projeoted New Prod~1otion CaR!.toi ty in Developing Countri.!!. ·

'l'rantJlating apparent steel conswiptioo st.a tis tics irJto installed··

- ~ -

1ron ·tlnd steel prod"ciog oa.pa.oity is by l\0 means atrldghtfontnm. The Com-- mission o .r the Europe a., Community Bs t.i.ma te ri in 1ll"{1 t.Jl4\ t tha ltif t"erenott be­

tween tbet»Ntioal pz•oduction potentlal anJ uotu:tl at.-t..:.dnl:lble output of otoel­wo:rkl 1n Etu-opa wu about 4 peroent in 1960, but climbed t<) 8 perce•1t- ~n l'tlrl later. With reupaot to rolling rrdllts, the di.f.fflron~e wue thoup)lt ttJ be oven lai-5:er, td.noa ewn in t.he boom yea.r o.f 1?59 the util'.lzation or theo­retioal fin1sh:l.ng capa.oity ws:1a only fn percent. Thre$ reasons were advanced £or this phenomenon z fire t., the increasing aoa.l£t of new llqtrl.ptrJant which can­not it.lwq~ be matohed. by the preoadlng ot follow:tng stn~~es of production; aeoond, government regula tiona whioh, rcr reasons o.f social hardship or regional deVPlopment, deJMnd that obsolete plants be closed only after a period following notifioat~ton of intent;,; and t.bird, retention of Solfll:' obso­lete ina talla·tions for possible reactivation tiuring perioda of peak demand. lllte'Whare in the text the Comiaaion pointed out tbnt. in 'the late 1960's tho _utilization rate vas affected by strikeo. For these and other rttasons

. the .Amer:Loan Iron and steel Institute in 1960 discontinued publication of ann'Wll eati.Dw.tes of installed u.s. steolmak:lng ottpacitq •

. , To d8termin4! the magnitude of the. rw.w prodJlotion raoilitiea that

need to bet irustolled by 19tl5 .ln order t.o aat:Ls1y the proje<rtod 1noreaoo in apparent oonanuapt:S.anJ the oonserva t1. ve asS'U.IDption is made tha. t marginal oapaoit1 J defined as · the d1ff,renoe between total rated oa.pncity and total

.... - · raw .. a·t.el prodllction in an e.verage year such an 1970, will remain constant. - It fellows that inareaaee in appurent steel oonl'umption will be matohed, by

and. large, by inorea.aes in installed capacity. 'lhe al.temative a&S1.unption · tJ1at Jtl&rBinn.l oapnoity inoretlMs iu proportion to ihstalled oapa.oity woUld lift riM to larger estim<ltes of capacity requ.i.rementa. But· since a dis­ou.saion of likely w1·iations 1n marginal on~ity is net central to the th- or th1e papar, the f'ira·t asnwnption j a us&d.

Tilble . 2 ~ which is basod on data prepared by the liSI, gives world rali•ateel produotion by n1"'Ja for the :Y'JA.l'S 1970 to 1972.

tear. __.,..

1970 1971 1972

table 2 - na~-Steel P~uction £l ArOa · - · {Rifuon fone) .

Developing World Countries

(roun&id)

595 582 629

22.22 2).16 25. 6.3

.A.td.n , exol. Afr'ic a., ttxo 1 .. latin Cllina, India, s. Africa,

AmericA Ind!a Ja.2a~ .'!: N. Korea & Middle ~;rust

1).16 1.3.95 15.50

6.20 6.10 6.86

1.62 1.88 1.97

1.16 1.23 1 • .30

. A compuriaon wi t,h TabJ.e 1 shows thli t net imports o£ steel prodUots by denloping cCNntries in the years 1970, 1971, and 1972 ·respeqtively amount­ed to 20.~ 1 24.02, tind 26.50 m.tllion tons of raw steel equiValent.

· FCJr the decade 197)-1985 app,.<:J.rent steel oortsumption in developing O()untr:l.es is projected w :lno:roase by 60.0 m:Ulion tons per year (Table 1). Cl.tven t,h.e desire of all oo~1triea to attr.dn sUbetMtial aelf-su.rrioiency in

- J --

b&eio i,nduatrj,nl inputtt, ae evidenced by the current wave ot emstruotion or new and expane2ion o.r e:detins steel-works, (&.g. in Brazil, China, India, Korea, and MQxJ.oo) w shall make the heroie asewnpt.i.on that tho davelopinc OOUtltriea will not inCl'O!l:ltl the1.r tlOt iMpOl'tS Of OteO 1 produo ts :\n th:to period. · Some qualities and sizes of stgol producta wi11 continue to be im­~orted, because their eounomio produoti~on will not be possible for ·the rela­.tivel;r emll qunntitioo involved. I.iut to an inoreaaing extent,, eammon ateel p:roduote .. espeo1ally flat-rolled produets, mad1um and light. sections and raila, rod, bar, and tuba - will be produood in developing countries, either 1ft MtiOnal Ol' 1 in some instances, regional plants. For the purpooe ot deter- · Jd.n:lna the order of rnagili tud r;f total capital requirements 1 the ino1-omental production oapaoii7 to be installed in develaping countrio~ in ·the decade 191S-8S will thua be taken ae 61 million annual raw-steel tone eq11iwlent.

Pattern of Dovel~t

-. '!'he pattem of development of an 11~on and steel industry in dtmtlOping countries ie fairly well eetabliahed. Typically, 8.lf1' country with a total lteel onrunnnption of u})llard or $0,000 . tcne per annum io likely to • .,.. 101118 dcenestio· production capacity. l.ndeed it is difficult to think or & lil181Q countr.Y which has a eignii"ioant demand tor, and imports, steel inetead or haVing set up 1 tB own indus ~ry. Exarples or countries wbioh are ourrentl¥ establishing steel induetriea are Indoneaia and Zambia; both or whioh are .at a stage 'wher-t their Jn&rket demand 1e onl,y a !ew hundred t.hou-

·-- ... · l&ftcl tone ot steel per annum.

At a time when the induetri~lised oountrieo are.movins towards -· l.&qar and larger plants, non -industrialized countries are bui.lding SJnall

· pl.ante in an attempt to eateblieh national ate6l induetr~ea. These nall planta ueu.oll.Jt comprise one or two electric arc turnaeee, continuous billet oao~ini or pencil. ~got teeming faoilitie~and oroes-count~ merc~t bar Jd.l1e. Plante of this genre may be seet1 in most parte or the world. To be efficient , hCMn·er, they require an adequate supp:cy- or steel scrap· at a reaaon&ble prioe, moderate pove1• rates, and marketa ror their output in the vicinity ot the plAn~. In developed countries these conditione appl.y in rtliotll eomewba t remote t:rom the large steel producers 1 wlleN a well daaisned llini-plant can be operat-ed an a profitable baaie. BY contrast, earap arisings in developing eountriee are uaual:Qt ineuf.fieient to supp]¥ the needs ot an arc tumaoe plant onoo initial aooumul&tiona or aorap haTe bean cot!sumed. Cora9oquently, · ec.rap .. b&sed plants in deYeloping ~ountriee ted to rel,y to a aomet:J.mee large ext,ent on imported aorap or to. l'W'l below Oap&Oi ty 1 or froq\ten t).y both • ..

Some ot the constraints inherent in operating a small acrap-baaed plant have been removed :1n the past few y-ears by the adYent or dirtJat re­du.o~ion. tlirect•reduction pls.nts can be technical]¥, · conaereialJ¥, and eoo­ncaioally Viable, :lf abundant supplies of natural p.a, oil, or eolid-c&rbon Nductante and, preferably, gflod•qualit7 iron ore are loo l~ aYailable. !be lAtter 13 not an ctuJential requirement, . as eT.ldenced by the proposals, presently under conoidera t;1on, to establish direct· reduction plant& in Saudi Arabia and Indonesia baeod on imported iron ore. Diroot-reduotion unite in

.. op$ration f.l start-up, or under CQ!latruction haft rated oapac1tiee ·t:rom 60,000 to l,CXX}OOu tone of spcnge iron per annum. This aise rani• tavore tbair

applieat,ion to dovoloping eountr:\.ea. The st8.tue of dir.•ect-reduction })rojaots as of Deotmiber 1972 11 shown 1n Table J, It abould be noted that, in tb tor­minolog;y of diteot reductj.on., the phraso"in start-~p'' is usod · with n broad :rr~eanine that soema to oO'\'er the perj od from the t1.1TKl .:~ t whJ cb thtt last ~'t.Jor pieoe of equipmeut ·is aet in ~llace w1t11 the plant t-W1B amoothlf tor s ver l dAye, ztil .) yeare elapoe, or W'ltil the plant. is closed, whichev r comes tirot.

-TABl~ 3 - Statue of Direct~neduction Projects, ao or Dec. 1972

------------------.-------------------------------------------------------Number of plants und annual capae1 ty in tons

In opera t.ion In cctart-up phase I con~~tion ( ~lanned ~ Prccese and location

Hrl Menterre,r,Mexico Vera. Oruz,Me.xioo lltlebla ,.Mex:Loo Bahia, Brasil

Midrex .. w I.

~ 101'1 t .. gotown, S.C.

· LOo.iaiana Cantracoeur,Quebeo Haabul·e, w. 01r1so.n7

Nu Iron t}iu.d.ad aua.rana ·~

Venezuela Armt-,o

Houston 1 Texas PU.rote1• · Oberhausen,w.aonu.av

2 X 1 X.

: l X ~

1 X 1 X

1 X

08.8eoua redue tan t.

2So,ooo l x. 4001.000 200,000 2SO,OOO

1 X 2001 000

400,000 'tOO,OOO

1 X 800,000

400,000 1 X 400,000

1 x 1,ooo,oool'

l X qOO,OOU .

l X l.$01000

Solid--carbon t'eduetaltt SL ancl SL/RN ~----------~------------~~------------.----------·----

J~ca,Ol•«Maoe 1 X 100,000~ Wit.bank,South Africa · 1 X 800}~ Olenbrook,N.Zaaland Inchon. KoreaY­Budbu!j,Ontar:!.o Pi ra t,j,ni t Brazil »a~erel.9,1-1W.Auatral1A Go&1lndia. ·

kNpp . . . · DuniVI.rt,South Africa

1 X J X l X

1 X 200,000

1 X 60,000

l X 1001 000

1 x 1~4oo,()()()}/ 1 x JSq,ooo

Ot;- ~t

Uit&~U:~~ 1 x 250'0001_/ ··· 1 x uo,oco

Maclraa, lncn . · ·1 X 1 000 ooo Kobe Kakoga~,Japan . 1 x 2'ooo;oo0 Chiba,Jap~1 . . 1 x 25o

1ooo!f · '

V'Part1ai redaction, tor use 1n ironmaking ?/Operation halted in Nov.l970 & Operation balted ~/Operation . lted 1n ear]T 197.3 2/oaseoue redu~tartt altema- in May 1971.

~ivee under eon~ideration. So\U"'•& I~n and Sta ·1 Engineer, December 1972, The J'ZleTi table Magnitudes of Metaliiied Iron

O.re by Jack .Robert Mlller.

·, .... ,,........ - 7 .

To . dl.t.te, gasttous d1reot-rod:uo tion pliUltS haw proved mo~ SU0088lJ ... 1.\ll than those ba&!lf) d oil tto 1id -carbon .rutiuo·Lt.:tn t,s f '1'00 ·two d1ruo t · t,duntion plant,s ourrenUy in t.H.)Ul.<'<' or !!tr.n:·t-up l .n Bra1. 1"1

-·- USJ'flA whJ.•'lh '' t.J..li ':lt9:9 tho f17L proaeaa and A9oa FJ.no:B de Piratini whi<lh utlli~ee the Sl/RN Prooeos -v1ll shed f'u:rther light on this subject. However, the commeroial Viability ot gAiktoua direot ... reduotion p1antn d.e~nds cri t:J.caJ.ly on ·tho cost and rate of -consumption o! natural gas _, whioh VtJ.cy according to locat.:i.on·and prooeos. Natural-gas supplies are n()t Always 3V£.d.labla at low cast, ainco alta~trtJ.w ueea for them (e.g. for the production of petro.~hemioal~, fertilizers, et,o.) aaa.y havo higbe r economic value. ·

The next stop in tl1e estatlistunent of a basic steal inctJ.stry in a developing oo~try ~quires oaretul analJ'tda and good judgment. neoauae of the ooat di~advantages as:-~oois.tod ;r.ith mul tiplo asmall-:scale manufaoturo,

· ~thlr in one workfl or at n sQries of rseparate locations, and because the direct reduotion/olttotrio aro fum-'lce process ro11t.e .for ma.k".l.ng steel c~not 7'tt 1i1 normal oirowflCJtanaes compete cost-wiRe ll.l.th ~e blast · rumace/BOF route for l&r~e· aoale production, the question ari~~tes, sooner rathet' ·than lllt.r in a rapidly. eXpanding aoonofi\Y·, aa to when integrated production based on oomention~ prooesa faoUities should be introdUoed. ·This decision must be the outcrowl"n oi' a comprehensive survey or tho ma.rkot and· a doter.Mination Of thl op1i1Jium OApaoi'tJ of the plant in itiJ initinl BOU SUbSeqUent expanaion •tas••·

'l'hia problem was wll tackled b7 the Rspubllc or Korea, which in 1969 appointed a dtudy ccmrrd.t·t;ee to oonduat an analysis ·or the domecst:tc· eteel industxy, detenrlino the opt-imUm scale o£ tha ini.tial et.age ot. ·an inte .. srated. ·iron and steel plant, •nake a:n estimate of construction ooat, and pre­sent propo1al1 for tt. tinanoing plan and uetl8Ures to pro~te the project. The studf oOJIIII. ttee oam out in ta.vor of construe tine a comentitnaal one lid.lUon · r•w stAel ton a per annum plant at Pohang, which vu oo.Pletttd in JUl3' 'ot thill ;rear •

.. . No general statement oan be made u t.o the appropriO.te point in ·

time when a oouratey should embark on tha oonat.ruotJ.on of a conventtona.l, intesrated plant ~ order to achieve economies or scala, not pos&Jible ·with a JIIUJ.tiplic1ty or small production unit~.. This uapends to a great extent on indivichw.l oircurnstanoee, !Uch a.o the availability or non-availability ot oold.ng coal or Oi.itural gao, nud oan be determinod only on the basio of ~oat oaloulatione e.pprC'tpr.inte to each oa~.

To illustrate th.i~ point two examples will be quoted. J4,irst1 it ie quite .possible that tl~t• hit;h·quality iron oN and low-oos·t natural gas and electric powar availtiblo to t.ha Sidel"ll'gica del Orinoco ( SlDOR') plant &t Matanzaa, Venezuela, ans.y mnke 'tho dix'eot reduotion/$lectrio rurnaoe steal­JIIld.ras route more attraetivc than the blast turnaoe/BOF route·, even at the vl\:IJiato planned oapt101ty of three nd.llion raw-steal tons per year. The OOIIIp&nJ1 which hae been conducting 3tudiea on tbis subject w:lth tha help of ooniUl tar4t for a 11\UJber. or yaRrs, w.l.ll no doubt base its expansion ·program on d1Not . 1«&duotion 1 if the hOO ,ooo tons pJr annwn lf'ior plant, which is to be. oonat.s~tod ill Ora.a.vana, px-ows to be sucoessM..

-·

The Reoond e.xA.mple is Oolotn.bia. Baoause of its rugged tern.in, inlunu tral'lspo:rtatJ.vn oouts arc o.bnormd.ly hj.gh J <J:.lpoc1.:il:Q'· for shipmant.o · Ml'\.,~tt iAll$ oordiller:.•s of t.he And.a:-J.. Tt i:J po~Ja:l.blo +..hat. tr,q,nsport:ttion ooa~ to aome. of the oeot,ora of oonsurrtption would, in f .tct, be so high as to ~anoel out any reduc t:l.ons in cperati.llS C(Juta wnJ.oh \1/ould derlve frm'' a e.inglA, integrated plant. Conaaqu<Jntly, it way t.c·.Q.Oapiro t.ha·t# the opti mum solution for Colomld..1 would bo for e~ch uw~1or Bt('1el itlo'lrkt)t to ba supplit.!d b7 a relativoly mr.~.ll, loon.J. plant. A UNIDO·aponsored study oi" the sts&l indust.17 :i.n CoJ.oJIIbi··'· ta currently being undertaken \'thich uill , :i.ntor a.lia , examine tho t.rlide -off between economiotJ o.r eo ale nnd tr.rt.naport, coats.

Both the :tntermedint..e -si~e direct reduction/aloe trio 1\u:-na.ce and lo.rge-size conventional procen~ planta are likely to be planned, :f'in:mced, conetnwtod, and operated w:i. th tha aaeistance or foreign oompaniee and inter­ne. tiooal or e.xport c~di t landinc 1lgenole6. The role of these anti t:ies in the defin:t:Uon and rucecu·tion of tho pro~1(30t will be dir3CUS:Jod later. ·

Tho tJtoel industry in certain countries may also receive an im- . petua as a result .. of the estahlishnaant, of large, export-oriented, semi­tin:labed products plants located close to extensive hieh-grade iron ore and/ or ooking ooal deposi te, as for instance in Auetrilla, Brazi.l, and SoutJ1

..... _. A!rioa, At, least one B'.tch plant ls now in nn advanced stage of pltlnning. In view o£ their export-orien·wtion, these plants lend themeal'Vf.)s readily to multi-notional ownorship. 111ey will precess t,he rat1 materials into sGJtd­tin:l.ahed produotB - alnhs, blooms~ ann possibly billa ~a - and rJhip them tC'

· rolling mills in Europo, ,Tapnn, and tho U.S. for' ru:rther processing into aalo-t\b la at~el produc to. ·

EconGJTdas of Soale and C~pi ~1 Costa

Th<Jre are frequent referonooo in i:ron and steel induot.:cy li ternt1u~ to o<.:ma·bruotion ootJ t.s of :in tee rated iron and at,ee1 plants per ton o£ install­ed raw· eteel oapaoit.r. 1 t ia ola:111Wld thut :1.n Japan large integrated pl~nts can be built tor as littl.G ns $12.) per annual ·tot:J, but thia tigUre doubtless ltbe)ul.d be revised upwards to take ncoow1 t or first, tho no1.r parity or t.he yan J 3eoond, those faei..li ties (such as ool<e-uven by-products plants, oJcy'gen pltints, maintenMoe Ghop~, otc.) which may 'ba owned by aubsicti.ary oom:paniea. und MY not tilere.fore be included in the Utli t. oapitul costs; . .e.nd third, the ooat of anti-pollutior: devic~n3 required ·tio zr~eat 'U1e inoreasingly stringent onvironmental standards in ,Japan and 1 indeed, elsewhere in the world. ·

It ahould ba nloognized at thl3 outset that in developing countries, oonvorational integr•u:ted plant.a cannot bo built for as lit.tle o.s $125 per GlUlW\1 raw oteol ton. In fact, we doubt whether the frequently quoted unit invatttJnant coat .of' $200 to $JOO per lll'lOUfU raw-steel ton aro still achiev­able in today• s oircwu.stilinoes. The prJ~1.ry reason fo.~ this is tha.t maximUm 900nomi.os oi" ooale cannot be deri wd at the probable ini tinl oapnci ty level or ew'h pl!l t e - typ:1.o.Uly betwe~n o. S and 1 million raw steel tons per tJ.nnuru, ttl t hough even smaller plants have be('n built. in .ravorable si tu.ntions.

- Examples f ~..11tegra ted ple.nte conatruotod in the past ten years or now 'Wlder const,ru.ctic.1 and th<3i.r 1.111 t,it-lJ. raw ateol oapaci ty uru: COSIPA, B:razil .. o .. ~ million tpa.; ERDEMIR, Turkey - 0, 5 million tpa; MAlAYAWATA, Malaysin - 0.12

!

! . ,

I

- 9 -·

rntll.ion tpa; FOSCo, Ko:roa .. 1.0 million tpa.,; ri.nd SlCARTSA, Mexico 1.1 ndllion tpa.

Eoonotllies Qf ~otua may be oonsidel'Od aa falling into two qui te d1Btinct t:ut~gor:le8, the firnt of which pl~!ys a much more important, role than the ~Moond. Fac1J..1.tiee of lower oa.paoit.les than tho~o now being built ~.n major steol· proriuo~.nr; eountr:te ~3 fn.ll into tho .rtr'.)t ctl .tQ,~(\ey. Since capital and operating ooata do not incNne~a in propor1.1.on · to capacity, t ho ooat per . un1 t or out.pUt produced in the larger rao:Ui ty, othe~ thingo being equal, will be lawr than that pertaining w the omaller ·ontt.

Th.e· pnper presented. by J. Yamashita at the 6th Annual Coni'ercnco of th& llSI 1n·· October 1972 on re.cent developments itr larg&-oapa.cit.y blast

. tu.rna~ea prov~4es a good exal~lple of tho relationship between capacity ·and eo-onQI\1• Since, under the fiame rllW-materia.le conditione, there 1a no J!111rke<l d:ltterenc.- .in t'llel oonl\llVption between i'urnaoes Qf' different capaci:t1as, the oQJr~p&riaon . 11 concerned only with invea~nt and running coats. Running

. ooata 'tend to ·be higher at larger capaaities, becaune t.he increased oost o.:r blast to. aohiavo a higher top presan're neoessitated .~Y . the large fUrnace ·. exoeed• the saV'.l.ngs in labor and other costs. · EY.perienoe ohown that the eoono~~V o£ blaat·!umaoe opgraJ,ions improves significantly ldth increases in inner volUN up to about 2, 500 rG3. But with larger qapACi tis a the in ore-•ntal advantage gra4ually deoreaoes, and nbow.t 4,000 mJ tends to depend · leae on tumaae oapaoiv and more on extraneous faotore such as loolltional oonatrainte. The relationships lJotween oapacit7 and eoononv tor other pr-l.n­cipal iron and eteel produoinc ranlli ties a:lJttll&rly have been studiea and leaft no doub-t, that larpr un:Lts are more eoonom~a..l in terma or tolis.l oost per ton or thro~hput than ama.ll~r ouea. . . . .

The.· t'econd catego17 covers the parallel operation of two or ·more similar 1 ma.xlrnwu-air.od faci.li t.ieo, such ao sinter plants: BOF tthops, or strip mills, where aaonomios de~i w esserltiuly trorn better produo tion ~dUling. and width utilization (in the c.ase of nat-products Ddlls) than :La possible Vi th llingle ta.o1li ties, coupled W:.th lower main~nnnoe, training, sell:i.ng; overhead, and adminiat.t'a.tive costs per unit of output. Pla.hte of this ttpe haw oapacit1es in rocnens or 5 million tono par J.Lnmua (e.g. Fuk:'lq'wna (Japan), Sparrows Point (USA), tand 'l'aranto (Italy)), have coastal ~ocatione, and are oon­neoted to do~ot:l.o oonS\llllJ')tion centers by an EJ£tioient inland transportation qatim. Hecause or their relat,ively low rates of growth or demand, when measured in te.rms. or tons rs.the1• thr"ln percenta.se l'oint.a, dttveloping countries are W1l1ke13' to oontJtruot . :greenfieJ d' projects .of Jllllt1..f11illion tons aa.pno­i t7, unl.osa . they are partly or 'Whol1,.v export-oriented, .ns would be tho easn wit,h ani-tinished products plants. PRrtioular oaro ther.'$£ore should be liWn t,o the design, ongineering, ru,d lay .. out ot a. •greenfield' plant ·w1tJ1 an initial oapaci.ty in the regiou of 1 million raw steel tons per annum to eni\lre that it CliUl be e.xpiUlded in atar.ea to a capacity of about 5 m..Ulion tone per o.nn'W'Il without incurring to<, g~at . a. penalty in thl1 form of higher oapi W . and operating oostt.i, than if the plarrli had been buU t in ·Just nne or two at,r;.gra a,

An(')thor x:-en.scn why minimum investment ooats per unit ot: output cannot b aohlovod in developing countries is that rnther more. has to be

. . "': .. __ - 10

provided by woy of :trd'.raatruct.u-raJ , n~;.•:ln~nanoe~ and tr:d.ning f ncili t . .ieD and trp~ _pnrt& j.nvontoriee +J1.1.n 1& requi rod i.n :i.ndttStt'r.i.tl.lizacl co\tntritH~,.

Thero ia also J.l trade-off between lowr coustruo·hion labol' uoc;·tn in dsvelop:l.ng aa oompal"t•d wi tJh indue L;:-lu11zo d oou.nW.·iun, on the c)ne h:tnd, twd. higher equipmeut a.nd. erect-ion coat:• on tr..e oth~r. 'lho lHtter rnouJ. t from · tahe costa of seaworthy packil'lt~ and ocean freight nnd i:.Jlo lack of heavy eraotion tackle in developing oount.l'ies. (N'ara.lJ, t..h(-lse F.U"e likaJy to in­Ol'eMe rather i:h·an deoronso ·l,ot.al CO!lStruct.ion Costa •

T&kitlg ul.J ±'actors that go·varn the HOonoln.i.er; of :l.ron and steol­making izl'to connidaration, :i.t is our judgment. that. arry eatiln.1.te o£ financing requirenv3nts .for new raw-s~e1 capacity in developing countries during the next ten years should be based on M average unit cost of the order of $400 per ·8nrru.a1 t..o11 (:i.n 1 ?7.3 dollars). The $1~00 fib'Ure a.xoludea the costs of the site and aoeooiated infrastructura..l f'acUi ties suoh ae the port, water and power suppl,-1 road and rail ao.-,osa, and m:l.ne development and equipznent, j.f any, but does incl.ude all oUJ.er fi.xetl assets, aa wll as angi118ering, pre­opentinc· oxpensea ~ start-up eottts, interent during u-.. e grnce pariod, and pa~nt work:1.ng oa.pi tnl. . "While some recently completed planta, including tholl baeed on direct, reduct.ion, are known to haw been constructed for l~sa

'·--- .than thift amount, a. greater nunibe!' hnva ooet substantial.JJr 1110:re.

Wh1.1c nn 1ndu.strin1:1.ze(l country could be expected to mtmu.fnctu·re vi:rtuall.y all the equipsoont requiNd for the astablishnw.nt of n~w steelmt:l.kinrl on.paoity, n dewlopin~ oount17 pro\wl,ly will. be able 'fjo SUptJly only a ·fmli·lll part of the plant, S'UOh as light o.verhead oraneo, stool etructUl."''a, rmd some eleot;r:l.onl. oompononts. To dtJtonn:iJlo foreign-exohunge requirements eqtrl:pment,, ensinoering and st.tperviaion n.nd iJl t,ero ot dw·ing tho grace period, tilereforo, .will be trentod as foreign oun'ency coats, while oon~:rliruc·Lion and i..PAst;aJ.ln-Uon, pre-oper.~.t:liing expenses, and pennanent working capit..'\J. ~quirementn eenerally 'Will bu t~nted. as loc".l currency ooats. This lnBt e.soumptAiotl 1mplie1J thnt th& plaljt will use indigenous iron ore, coal., and fuel ...

These aAfJUltlptiona pel'Jni t iJl10 unit cos·ti of $400 per onnual raw atoel ton to be broken down as follows :

:rable 4 - Br~2.kdown of G~1~ .• :t:..:tJ Cost of a Hepresentn.t.i:VE ... Steel Pl~

E QU.i.p~nt Engineering and supervision Interest during grace period

SUb ... totLtJ.

Looal OUrre~t?Z, Reg.uiremell~

Oonatraction and. installation J>ro --operat:J..ng fn.--penoea Pan&lncnt working capi·t-:'1.1

Sub ... tota.l TOTAL

$ per annue~ ru.w steel t..on

176 24 )2

2)2

120 20 28

168 400

% -44

(', ' 0

8 -58

JO 5 7

42 100

\ .......... ~·.

Mo I _I -

It should bo ~oognizat:\ tJu,1, those figuroo are purely indiontJ..w of. the relative mngnitUdet:4 or tllf.l element~ ·\odlich .ma.ke up tho inwsttrttnt eoat ot :i.nteare1tod a teel plunto. The noo'to ,,r individ\w.l pro joe to oan be axp8"'l1,­ed t,o vary by R wi(k.l ll\'lrgin f1a}'Ylndin!) on the typft of iron and aooeJ.naald.ng, roll, .. ng o.nd .finishing fllcili ties, si t,a condl ttons., t.he capability or the local oonstru.ction in.chtst.ry, the t~rma and ocnd.i..tio:t1S .,r tho credi ta. ext;end ... ed for tho e~atablj.slunant. of ·the r)la.ntj, the rapidity with \vhich the pl8.llt · oan be designed, constructed, 3tarted up and bro\.l.ght into conur.arcial opera­tion ·- wbioh in turn is a 1\inotion or tho engineering and training o££ort assigned to thG project - and a variety of other cirouniatnnces. The notual oost therefore can bn determined only .from dBtalled roaai'bility et.udies.

Ovarnl.l the requironents of thtJ developing ooutltrias in tho ~eada 1975•8$~ to increli.Be by 61 million tons their 8teel11Wki.ng oapaaity, using $400 as the awrsge capit:\1 cost per Wln\tA.l rav steel ton, are likely to amouut to no loss tlvln $24.4 billion, or sa;.y $25 billlon~ This is hy tmY ·standard a very considerable eWil1 'Whioh oun be raised only with the partici­pation .o.r all types of !Uianoing agonoiee - interna.tfional institutions, ~~z.t· ·oredit qortc~o, oonmoroial banke, and national develo~nt b.:1.11k8.

O?!f!ti ti~nes.~

It 18 1n the na.tux• o.r steel plunttr that thuy haVY:t to operate o.t hich lewli or ~apu.oi v utili zntion in order to be. pro£1 table. 'Ibis a~SUIOOS, of oourec, that the plo.nta will be selling thoir products ut ·renaonabl3' competitive prio s. "Whi.l.G tho concept of oompetitiwnees is well understood~ 00111J8t1t1ft prioei are inco.pable or preclsu de!inition, owing to tile oyclioal nu.ture o.r the ateol induatr:r and the rasul t.il1g variations in export prices. Iogioa.lly, t.he eall.ing prices ol a plant should be establishad with reference to ita •Jor canter of conaun1ptd.on 1 whB:ro the ax-works prices of the p:rodUot8 at the plant plus 1nlnnd rro1gh.t should not e~eed by more than .. abo'.lt 1) J>!)r­o,nt tJle a.w~nre delivered price or equivalent btporto ~.o. ·the p:rioe t .o. b •. Europtan,. Allorioo.n, or JapanetlO porta, plUlJ ocean freieht, port .han·cn~ charges, and J.nl.lad. f'reight from the port or landing to tho centDr or consump­tion~ A higlu.tr range or selling price..,, while Ma.king it easier for the plant to operate pro.fi tilbl7, woUld seriously penalize the econoJI.G" of the country,· 'Which 1tauld hn.ve to . absorb these higher costa 1n 1 ts public wrks, ang1near­inl p:roduota, and oonSU.r durabloo, and tend to make . the nnt:l.on 'a indus~ia.l out,sNt nonoaoOompetitiva by wrld standards. I£ the .feasibility ·etudy·iri'dicutea that, the plant can ba profitable only at sel.lins prices Wdoh imply a· protec­tion roqllireJftltnt at the major consumption center in excess or 1!) poroent~ ava11 ~n operating oJ.ose to it,a rated capacity, aer-lou~ oonsid8rat..i.c.1n should b1 gi~n to :reohaping or abandoning the project. ·

In establishing the so-<talled long-range ave:ragu import price~ or oppc>rtun:i.ty cost ot ateol products, an ntter.lpt JltU.st, ho'wov'e:r, b mndB to balanpe the sa~tJ likely to be incurred duriz18 Jears ot world su-rpltu~, wnen .'·e.x;pol't prices are low, against. the exorbitant prices and extended deliv­eriee p%'eve.dling in boom periods. It is apparent that m4rlGJd nuctuationa · in the itttport price o£ a. key ~put put a severe atrain· on a countey' ·e steel · oonS'WT&ing :JcJ,WJtries. and this oon3idera.t:lon may legitimately be reflected · in the detsl'lld.na. ti.Qll of the long -.range awrage impor"v prioe, which is used

- 1~ -

to teet the Q()nlp()titiwn~sa. or the project.

tina~oing Plnn

CH.v,:ln don~"stic ~elling prices 1d thin the range dofi.,erl above., -tho project om be e:,.J>Got...::d t.o face liqw.dity problonw du:;•inr; the oarJ.y years or ita operation. Wh:Lw the:' p1ru1t w111 be struggling to overcome otnrt-up p:robleme at\d mold ita lf.lb?:r. fort-e int~ an -.,rroctiw toam., debt aarviea will \')8 higheet. Tho pox"iod .f.l'f)ln DiiC\.rt-up tv . the tj.me when cash now becomes poei tiw may" axtond up to J years, undoubtodl.y the most ori tioal period 1n the lite of tbe project. In order to pass through these ~are vithout re­course to aubstantial addttion~11 borrawlng, it is essential that tJ.1.a pro­ject et.a't't out with a ccod equity baao, which should oerUdnly ba no leso than 40· percent and preterabJ.7 SO pe:t'Oent o.l total oapita.l employed at the po~t 'o£ max:l.ml.nn debt. The baJ.~tnoe of capital x-equirement3 shoUld be in tba tbm of long-term debt. Ideall7, thio debt should have a grace period ot aome five ~ara from the avs.rd o:r t-he first major equipnent suppq oon­traot. and a i;erm o:r about , 5 year&, meaning rep~nt over 1 o years.

An examination oi" To.ble 4 above indiontes that the proportion of .tonign . to looal currenc.,y costs co1Taopond:J roughly to the ~ilm.un prudent debt/eqUity ratio. 'Jl'ds is to sozre extent fortu..ttous, because equipment

..._. and ei1(Cilleer.t.ng oon·trects ao 'Well as capitalized interest payments d:ur'.l.ng - the sraoe per:l.od oan, in faot, be f'innnoed wi:th crredits extended by inter­

natiOQtJ. agenoiett and e:xport credit inst.i.tutiona. In the oane o£ equipment •

1 finnmsed with export nredi ta, tl'le stool oomplley normally w11l be expected to make a cash. pa;yment of 1 o percent, ona half .or which is due upon eignature at ~e oontraot and the other hal£ upon sbi~nt or ~1e equipment. ·

Loor.U. eurreno~ cQsts, on the o·lihftr hand, will. need . to be .largely uquitq•.tinanoed, if a 6o/40 dobt/eqtlity ratio ls not to be exoooded. Since eq,Ui 1i7 1.\mds of. the order of 40 peroent or the a oat or a 1 million tons ·per annum atoel mill, eq $160 million, are diffio\\l t, if not. impossible 1 to . rai11 in the capital Mrket.s or most developing countries, govar11119nt pa.rt.toi~

, Jl&tion 11 almost a sino qua non for a major steel projeot to get off the BNW14• 'lhie partio"ipntion can be expeoted tc have ll' positive ~nuence on

! the projtot, as it lTil1 ensure a.otiva gowrn.-rnent support in are·as such aa the pronlion or tbel noe~sstJ.rY' infrastruc·wro, the taking of legislative action v.Lth regard to thn duty-tree impol''t't'1,tion of tm pla.nt and equipment, (to avoicl ·unxaoasonabl.e ooat burdens on tho projaot) ; the grQl'lting of a ta,c holi· dq, the imposition nr import rsst,rictions on the range of products to be mmtfao'WZ'&d b7 t.ha prejeot., and the dofernent of dividends on the (govern­ment,' 1) equi 'b1 until auoh tim as the liquid:t ty position . of the oortJpa.lV

. peraita thaao to ba paid out. .

ntgpremen a.nd Soutoea of F<?_~~ Exch:.ttlJte finanoi~

""'' 1

Ra rti:ng to Table 1-t. and taldng 61 nttllion tons as the probable raw-ateel o pooity to be inst..1J~ed in devaloping nountries in the d.aoadB

· 197S-.8,, Olp ·bal. requirements m:cy- be tJxpedtad to amount to about $15 billion in. tore · n exohance and. $10 billion in loc&.1 currency. As previously atated, thfl . ma·joritq ot the t'orGicn·c::rohange, requ.irementa oan be in the form of ·

... ...... - -· 13 -

debt, I.oana to oo r the coot of imporlied plant f4nd equipmsnt, fees or foreign ongineering oonsul. · nte, and oapi talized inteNst 11r0 awllablo from 1nternation3l. i':I.Itunoing agenoioa, auoh os the L1tj$rnationa.l Dunk for llecon .... struotion and DewlopiOOnt, Inoor-Artsrica.n Dewloprrent Bank, Asian Tlawlop ... ment Bnnk, and sim.tlar inotitutinns, as well. a.s rron1 the export credit acenoiea of equipment 11W.nui'aatur'lng countrieo. ' Many of .. the agencie3 also mq be will:i.us ·to £inanco in vneyirig amounta the (}or,ts of locally p:roducGu oomponerate nf nw.jor 11\lportcd equip!'l¥)nt packages Md the congtruo·tio·~ . ti'Ox~k aolooiated With them. A combination of botJ1 lrAlltinational nnd bUa.teral oadi ta probab]¥ rep sen to tha bGst wq o! i'J.nanoit.g tha .foNign exciti~ Nquirementa of the projeot,

At, a tibl wben bilateral finano.Lng liaS relf\tiWl¥ di!tiou.lt t;o . obtain 1 equipmen ·t suppliers 'Were presented with the opportunity' :of marking 1 up· their prices in oonnid.ers.tion of the absence or er.teotiw competition.

trom suppliers hl other countries. A stu.t\1 ot the cost or tiod aid, pre• · IMrited b7 the Inter .. Amerioan Et'onomio and Social Oouncil (IA-EOOSCX!) .to' ita. AMual ~~t~.n; in .. 'rune 1969, oonoluded thatt · · · · :_-.,. ··. ,

· (a) Under eight loans made by US'~~ US ·Apnoy ror Inter ... national lliYelopment, find Inter-Amerioan Dewlop~Wnt Bank's Social Progress Truot Fund• prooUX'e~Ullt from these tied ~e1 resulted 1n a 'totnl oost or .

"~··· abCNt $6·,9 million, wh.Ue I.a-IOOSOC estimated that untied sources would have ¥ nppliad the &11ft8 goods for $$.9 ml.llion. In thaso o·asea,' tiGd. proauroment

, Nl\1lted. in an estimated 17 percent higher Qoat. · .

(b) In sewn other oaies ~4 f'inancing purol1asea .from the .U3 ;or · eqUi)Rant llnd materia.ls roftl ted in a total oo. t of $4 million, llhile · IA-mcosoo caatimated that oompetj.tlve bidding would haw made procurement a.t abOttt $.3 nd.llion . possible • Thera, tied prooureiGent raised oosta by· ·an · eatimat.d ·one-third. . . · 1 • I· ·

' ~ ' ·.

A: . more recent example taken from the Braailian steel expansion· · PI'Diraztl IJhows that ono supplier quot6d a 37 percent lowr price in inter• . na:tiional oompeti t.1. ve . bidding . than 1 t did tMb. 18artt eU'lie:r for tile ident.toal taa:l.li'tf" under tied financing. .

· Thtt aotunl oost· of suoh tied procuralfl1nt to l"eOipiant countries canj hOlR'ver, be lawer to the exten·t that the f'unds with wbioh such imports a.re 1'1nMoad Oartr:f subsidized interoot rates, i.e. rates below those at whiob Ul'ltiud tina.noir•g would haw boen available. This is unll.kolJ', however, to 'oountaraot tl1e f.u.tl erreot of higher prioeo or the. "tqptl described Rbow •.

Diddins Proctedures for Equil!!!n~

All multinai;iona.J. finanoiltg agencies require intemntionnl competi­itlW bidding tor the ·procurement of those oolQpOtlGnt pnrts or pro,}ects uhioh tha7 fina.n(Je. There oan be· no question tha-t this benefits the project in , · L\ t least tf\ 0 . Wql - by appreoinbly low ring purohase priaeA i'or the . plant

,. and . equipm.ont and b;y utending ·the range or tt.lohnology avail&ble to t.he pur­oh&ser.

"'-.. ., ... 1 ~ •

Dur1n8 the past ·tnfo or three ywars · tho pr.lnoipl ()r internn ti~mttl. OOJtf)eti ti'fft bidc!ing ulso ho.s been applied to bilateral]J" fin d oqtdpnl£mt 1teau. This development extends w benefit \.,.r aompeti t.i.on to tlle ~n · l-t9 range or equipment, not just that pot-·bion financed by 1nwrna tionn.l. agencius • Oompan:l.ea undertald.rlg pro,jec ta Md. appropriate govemaent agenc~s Ro:Lici t o:t'.t.re from the · export credit inotitutiono of steol-ntl.ll equipt'!lSnt supplying oountriee to 11-na.noa, on mu-t,ually acceptable terms D.nd condition&, all orders for equipment awarded aftar international competitive bidding to Su.ppl:r..ers 1n. their oountrT. As a refinement, the finf.\ncing terms (inoore t ra·t.e, grnoa

. · · period, eto,) can be taken into account in the bid evaluation.

An oseential pre-condition for international oompeti tiw bidding :I.e the preparation br the steel compaey and ito consul t~t~ of ten&lr docu ... menta COV'8ring tM individual. prodUction .t"aoilitiea t-~hioh do-ri.ne the oom. .. pazJ7' 8 tequiremanta in su!i'ioient de·ti.J1.l to permit comparable tenders to be obthined. B:!.d paokage:J should be neither so large as to. discourage effective intamational competitiw bidding nor so emall ae to violate the . concept or hav:Lns equipment auppliers ;iQcept undivided reeponsib:ll:tt,y .for sat:i.sfnott'!rJ pertorraanoe. Mo~over, oonsidorable ju.clg:n'klnt is required in drawing up ten­der dra1finsa ~nd apeoi£1oat1ons for internatiorttll oompettiti.on :in ordor to awid, on the' one hand, ipeoif'1i,ng equipment in ouoh det.dl that ot1o manu-

- faoturer il 1 favored. Yie-l-vis hie competitors and, on tne o·th8r, ei..V'f.nr, ~ t.t:l.e IIIOftl than a . pertormanoe specification,· uhioh wouJ.d opun · the docu· to 1t.Ldel;J diti'ei'ins tendera. · . . · · .

A qatetll dsoiened to giw :f."'ull aoopo t...; ilqtd.pment suppliora to otter proaeas tacil.i t:L s or assol1i)lies, in which they may have devele"pad epeoial. oharaotorJ.stios, without foregoing ·I"Jw need to obtain oomr){l'r'~hlo

-tAJndllre 1 ia the ·two -stage bidding pr(')oadure. 'l'his procedure is at~11gzy reoonnandad tor the procurement ol the larger and teohnion.lly' complex .raoil­it:Lea. Aa tho nli.nD suggest, bid.dil1g under this system is di..,ri~~d i•···:.,o tvc •t&se••. The first consists of the presentation by the bidd$rs of t~' ~~f~­arate enwlopon, one containing tho teohnioal proposal and ·the · other the Pri~e. On~ the onwloprjs ootrt .. 1:li.ning the teohnical proposal are: opbued. al. tb:La stage, while those containing ·tJle prioo remain unopened. · · .

Artor revi~wing thE:\ ·teohniolll proposals <'f th'" htddP-..:1 1 the r.om­pa.n;y and its consUltants request suoh olarU'ioation and modifioat,:lcns '.l.fJ

M7 be neoasDart to pla.oe the bids on a. oomparwle basis. 'ltds is usuai..ly tollowed by a series or meetings betwan the aompany 's onginest-s and re ... preaentatiwa or the bidders, at whioh the merits and donorito or tho

. various t.ecbnioa:t r..:t'Oposu.ls al"e fUlly disouased and e.xnlained. T.ho hiddera t.ben have an opportuni t1 to revise their ·beohnioal offers ·co the exi;.ent thl7 oonS:I.chtr 1 t necessa%7 and/ or desirable to make thom fUlly roopon:;iw \0 the oomp~ 'e requirements. Th~ second :=Jt,age . of bidd:tng oonaiats or the presentation by the biddors oi' a roviaad technical propooal., together vi t.b. a rovi ptioa. Insofar as the latter represents an increaso owr lllcl' above the original price, 1 t must bo bnsocl on a %'Calis tio estimate or the ooet · · t.ho modifications. At the seoond•stage bid opening, both the oZ'isinnl e • .i. ~. r ..wised ten•ier prioes a%'9 read out. ·

While the two -stage bidd.ing procedure calls for ll10re work ot the

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parl ot tho bidders and the oompartr' iJ consultants, 1 t has oo · to be gard­ecl u the moat eatioftlOtory ~~athod of hantn.i.ng the procurement or complex prod.UotJ.o11 iacili ti.Gs - such aa ooke owas, blnat 1\lmaaes, DOF shops, oontinUoue out:J.ng· mo.ohinae 1 rolling mills etc. It affords an opportuni t.y' for a tull exposition of the technical solutions offered and 8SBt1.re8 the biddera that their bide will not be diequo.l1fied for teohnioali~es. These advaratapa tar outwe:tgh the additional erfor-ti required i'rNU the cc.t~atpany and biddeN· tor the two -otrAge procedure.

1be ai.terna.tiw solution or inviting turn-ks)" proposals ror t4l eatir.e plant Ql' larp aeotions or it is not rucommand.Gd. Tu.m·kr.f or~ ra r.~oeiwd in response to an nquJ.ry cou.ohed on.ly 1n general tonu would dit.r•r to su.ch an extent as to rencler their l)roper evel.uat4.on e~mel7

, ditti~ul t. .Because or the large scope of tbs offer, d&taUe.d izlfoJ;Ution on·.au the ~omponont parts would not be SUppliad and this,. durins ·the con­atruotion a t,agEt, oould 1aad to m·t~rviertttnndinsa and claims for additional Jlltll*ltll.

To:Niln Technia,al ·Assista.!lC:!.

The need for tho staol company to engage a tim or ens:Lnaering f'OftJUl ta.nts to pre~ tender drawings and epeoifioatiuns and eubsequsn~ to evalWAte. bids htts sll"eact.y· been touched upon. In !act.; the . servi a . required b)' a OOMJVU'\1 in e dc~lopinr: r.sountry J which has been formed for· the purpo~e of oonat.ruotine 11nd opgrn.ting a. steel1torke, o.ro tar .. re.aahing &l'ld inclUde alaisto.noo in v:L-rtu.lllj' all of tbe tinjor elsmanta of the proj t;, 'b.. OOIIIpf:1H t ·

(a) To assess the present and probable gr0111ih ot the do• t,io -.rket fol.' •teel pr.oduottJ, broken down b;y pr:Lnoipal oatesories. ibid aaaess­mant &thould be LM.ded on a · aeotor..oy .. stator . ~a:1a ahd naaoroeoonoaa:Lo ptto- · jootions. · · .

. (b) To determine the optimUm prodUot Mix, oapaoity~a.nd c~4on· inl .dat. tor tJw proposed plant. · .

( o) To eval.ua.tA the qunnt.1 ty and sui t8bili tq or the local raw Mt.eriali. This atep involws exploration or any local iron ore, ooal,and lililltone depozsits and lnboratoey testing or repreecntati'Ve suples.

(d) To select the site or the plant, giving du.e regard to the · location of ·bhe rnw materitils on the one ~"\lld and the major corifJWQption. oentera on the ot~r, ~~ well a~ the required intrastru.ctural ~aoilitA.es.

(e) To. determl11a the optialm process route, tald.ag into considera­tion the oo t and quality ot the raw matorial., fUel Md eners7 inputs, and thl tetate or the art • of ant candidate processes. It ia a sata Z'Ule that;

,, uatried or pa:rtiall3' tried prooe888a should not be reoomaanded ·fer a dnelop· inl oouratrt. ·

·rr) To dsterm.1.no the capital cost or the plaz-.t on the basie ot the ohar riatioe of the eite, budget quotations from interested eq\dpaont

. .. . . .

1 . .. (1

~pplie:ra, o.nd rea.J.ilttic ast.i.Jraatos or pre-operating expen88s, engineering. Aild r~upervition t'oes, and .Lrrtorest durin6 th(~ graoG period.

(g) To tietennine the coota or production of the plant and distri-bution oi' its prodUcts. · I

(h) 'lo assosa on the ba~is of the \i'ol"k outlined above, 1fhe·tbar ·. the proj·eot ae oonoeiwd, should go ahead. ·

{1) To open 11<igo-tJ.at.ionA vi th ·fllla.ncing agencies, it the decision to ~~ ahead nth tho proj&et is taken, and to J.:i.scowr 'Whethor . and on what ·terms thoy oould participate in the project. nw nva.Uabilit7 or a .teasi­bil1t,r' stu""· wlll help the finf\nCing ngenoies· oome to a poJJ.oy decision re .. aa:rdir;ll 'tha. project. Ao stated earlier, 1ntomational, t1.nano:tng~a;pncies and t.ho credit institutions or the l11.1.jor equ1pment·suppl.Ting oo\intries oould be ~0 ~d .: t~o provide the bu.1K of the .t'oNigil-e.mhwige financing 1 ii' tbe · projeot ea.tif'fies the~r respective lending oriter:La. I£ the tizu.U"&oing terms offered b7 these institutions d:S..t'ter u~a.~riaUy trom ·bhoao as W'll1d in the· ~ou1bU1 t.)" s~, · n"w oost eeti.mD.tes and projections baaed on the terms 1.\0tUill.l-1 otteU'ed should be prepared.

. (j) · To solicit equity contributions £rom the gover~Jl18nt, local .. deftlopment be.nka, and/ or private groups. .

(k) I! it appears that adequate financing on suitable t•rme· ia aY&ilable tor the projeot1 to review and amplif)' the feasibilitT stu(br. Thia mtq' reqUire additional work in tho a-rea of raw material.e, :tu.el,and energy euppliee, les.d.i.ng to a . de.t'ini tion or the now-M&et and. procose fac:U­it181 and the wbsequent prep3ration of tender cloouraenta. At tAle stage it ia eaaential to conS\U t with experienced operators before finalizing the plant layout and !peoifieations, since . these qperators will l&~r on be

·. expeoted to'·run t.h.c plant during ite eta.rt-up pb,aee.

In world.ng out the finanoitll projections for the project, it 'Will be seen that tha 'loarnlng cu:rw ', or tJ1e ro:te at which the plant _is upeot­od to rtuah its ra~,ed capacity, ha~ a major innusnce on the oaapnJ\1 18 liqUidity poai tion during the f~rs t. two or three jears ot operation. It ahoulri· be reongu:1.~ed that this 'lea:mJ.n~ curv"e • is not predetenained1 but 11 a reneotion o.t' the effort appl.ied to the tro.ininc of man.sg8ra, super- · visors, and 'WOJ:'k .t'oroe and the aaaintc.noe provided b7 expatriate staff in· the start-up and initial operating stagea of the project. It. carl be demon­strated that the inwobrlsnt in training nnd start-up assistance yielda a ver:f high retum in terrn.s of a £astor 'learning curve • ·, whicll' in turn Naul ts in lowttr losses durine; the car]3 years of operatio" .

(1·) While the project 1 tself is being pnahod ahead, to keep in aloao tcruoh with the govemt~M)nt oopnrtmanto respon·3ible ror· proT.Lding the ~quired :J., fra truotural !'ao:l.lit1ea, such as a ·tiownahip, pori; :toads, and rli:Uroad, to onwre that these will be constructed 1n ncoordancse with the ~at.r p ojaot oohedula. Where legiolatiw aotion may be requirad, tb.'te should alGo be initinted at an ea,:rly date to permit, for instance, the duQ'~re~ aporta.tion or plant a.nd equi~nt and to prev8nt distributors

•t' ·• .Lj -

lrom building up lnrge stucks of importod steel :lJmtOai:to. tely pr-J.or. to the IJtart or ocmnotcial operlltior.s of the projeot. 11· pl .. otoction ngaJ.nct 'tJte importation of the ootrlp3J11' 'a prodUct range. is ·w bo int~roducod, this :t'1 perht.pe beat applied in the rorm of 'refet-6noe prices ' • A oyste.m based on ref.erenoe prices aan be tun-Jd to discourage imports a.t or cloae to thoir marginu.l eost o£ prc,d:Uotion while impotd.ng a dimi.nishine acru.a cf dut.i.es tor higher priced imports.

(m)' fb aasass the aapabilitieq o£ local engineerir~ companies to undertake detailt>d foundation, struotural, W1d ueolw.nienl. and eleotrioa.l

· •rv:Loes design 1 and of the local oon:Jtruotion industry to construct founda­tions and builclinss, erect tho plant and inRtall services J and ma}(e arrange­~nta for ltba tever foreign assis~nce ma.y be required in these !'iolda.

(n) Onoe b:l.dG hnve been evaluated and ouppliers •leoted, oars v.l.U haw to be exercised in negotiating te:ms of cotatract. Pqnents can 'be tither on a fixed ... prioo basis or subjeot to eaoalation, tll.ven tho rala.­t:Lwl7 short deliw17 periods for steel-mill equipment (20 iaOntJl for a BOF · lhop and 1.8 months tor a blast furn.~ce) iixed-prioo contraota are prefero.ble, as

1they o'bT.Late the need for the paperwork associated w:l.th the application

oi' eeoala\iort tormulae. Ir .progreas ~nte are stipulated during. the period o£ manu.taot~ of the equipment, these p:qmenttJ should as a pre­oauUoa be linked to the submissiQn by the ~r of inrorution 11.."hich 111.11 pentt.t the design and procurement of the foWldationa, ancillary build­ins•., eleotrical. in~tallations ~ irlcond.ng piped services, and water rooi~u­laUon qstems WitJd.n ·t.J'te plant and pr-J.noipal. items of maintenance equipnant,.

( o) To progress and expedite both the matJnfacture ot the equip­•nt and ·the preparation of dl!oign information to ~nsure not ortcy ~t. the equipnent ie delivered on t.ima but. also that the £oundatione1 buildings, and inooiL1.na eervioee Will be ready to receive it.: ,

(p) Construction managenent is uS\lf.\l.lJ" e~rcised through project enpnoers Who are put in ohax-ge o.f sect.1.ons o.f tho proJect, such a.s t.h.G blaot .t'u.mtJ.Oe or coke- ovon plant. Coordination is particu.1.o.rly importa.nt in ~ oa.se.· or steel pro,joo·t,s in view or the DIUl tiplioity or suppliers and IIU.b-eupplilrs. · This cwp~ot requires oloao attention, if constniotion delay-s ue to be avoided. · · · ·

( q) 'to est.g,blieh, during the iJaplementc:\t,ion ,eriod, tJ1e organiza­tion and mannins roquix'Gments o£ the project. Recruitment and training of the de signa. ted manasers, auperv-J..soro, and work torce'3 should be oommonced at 1.11 early data. The trainina program 'Will va.rr aa between different levels ot Mniori t1 in the plant and u betwoen opcJrators and maintenance personnel, and tho training anheme should be do signed to provide each person With . the.

, appropriate amount o£ imtruction. For managers and supervisors a period ot train,.na i.4l an GXi~tine, similar steel compaey ( usual.ly roreif::tl) is

_ aasentia'l. Tha managerial and superv-isory team Bhould be baok at the pro­ject site tor the final ~ months of construction, so as to have an oppor­tunit)' to ooma .fully tmrd.liar with the equipaent as it is being installed.

(~) To develop a marketing strategy and build up a sales force.

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Mnrialting invc.•lvoo a n\.U\'Ibur of 09nc:Jiclnrtt.tiona, ouoh ns d~ot sales to 0\Uit.omera v:La-tt•"(.J.s ool.eo of' standnrd. prort..tcts to d:lstributoro 1 who w6\\ld in ;t,u.rn 'btl rouponeiblu i'n:c cuttlng tham to the :;izea reqttire~..i. by tho con .... INl'IISr;, astn.bl itJ,tdng warehouuan in the major oonsump1'.:lc:m centore; to f~ciJ .i .. t11tG S)'>eedy delivoriea) produolne 1i ternture sett,ing fort.h tJte propertiaa · and applications or the products t.o be !t\tU'lt~factltl"Gd and dist.rihuting it . to potential usera J \mere ,1eoencary, adV"cat:i.nt,; the introduction of I-equire­nientfJ iJlnt, steel iraoorporA.t/.id in puhlio works a.lld other major oonst:t~ot..ion ·projects oompJ.y with certain etands.1~s (AS'IM eto,); and a ouatonsr servioe unit to baJ.p users change over from impol'tod steal to the products of tho ·Oompi.ey • 'l8rms of p.n..yment &hould also be established ..

. (et) Conuniasioni11g of. ·::.he plant will take plnce in s·t;agea. It :la oustomary to oomnt1.ssion the rol.ljng mUla first using imported semi­tinisherl pXfoduo·~a and subsequently to commisoion the baaio iron and steel ... mald.ntt facilities. 'nl.ie stage represent~~ the fulril.l.mont or tho planning, enginooring and training e£forbs which have gone into tbo project. I£ all soea wll1 the build-up of· productlon should oloael.y :f'ollnv the projeot.ed . leam:I.ng curve. I:r, howover, tet9th.i.ns troubles ·arise 1 which onnnot read1.1.y' · be reaol"nd, tho oanpany's liquidity position will be seriouoJ.y impaired · · "&nd the OOl\lpN\Y mny be obliged to reso1-t to addi t:lonal borrowing. Such

· - loano are usuaJ.ly aVl1~able only on loss favorable terms than those arranged '..._./at \be 0\ltset or a project. . . .

• • ' I '

( t) '1ho last atap or the project is the reriod c•f ini till.1 operil. ... tiori 1 in whioh the tunot:l.on of tho e>:p~\trinte managers, · su{JerVioora, and workera wUl be to. train their looal counterparts to the poitlt 'Where they are fftaq to talce O"Vor the operation of the plant. ·

Thia rango oi~ ,aervitJos iu best prov:l.ded by a f:l.nn or canbino.tion ot firma poasessina ski.lla first 1 in design 1 engineering, and construction, und aocand, itt operat~iona; training, mainwnMoe, and a ala a. SaliS CoJ.1>0ra ... tions ·M.w i.nhouee oa.pabili·t,y in all or theBe .1.'-lGlda, but a combination or an enginoering oonl\11 tant Md an oper~rting oteel oompany oan be equalJ.Y iucoesstul in providing the :required aervioe3. Wh:lle some firma in develop ... ing eountries, for inErtance USINIHAS J Brl-J.Zil, would be qui to oape.blo o£ renderins udaquf:tto techttio.1J. aissiatr.moa to ~~. newl.Y PStablis,hed a't.esl.com­pu.ny 1 the nRfJdn of thoir own davalo~ntent prrlgr.:uns can bo ~"P9oted .fU.ll.Y to ~nsap their :1:4olu-lionl n·l;:J.ffs. 'fuahnionJ. 11sois t.anco will therefOre in most oQ.ies be rendered b;y n firm or comb inn tion or .rime in an industrialized counti7. ·

A8 will he seen the ateps 1 l\11:lch need to be t,oJron to execute a project i'rom inception· to :l.ni ti1ll opera.tions ·' involve to varying degreoa tbe. £OV8zt91111~1t o£ the country, the aponsoring oompuny, international .fina.n­O:iJC as~na~.e~, expott crad:t.t institutions, looru financing sources .• exper·­ienced teohni~al pa..rtrle:ra, aqui.pment aupplieraJ and construction companies, h cooper~(J.tion developed between these entities will, to a gre11t extent, be rotleotsd ~-n the auocaos of the projoct. ·

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