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Chapter 2: Review of Related Literature

Effect of Steel in the Industry

Steel is one of the most-sold construction materials in the market. At the same time, it has been competing
in terms on merchandising and putting up for sale with other building items such as wood, aggregates,
cements, etc. This material gives an impact in the economical aspect because of its importance to the
standard structures being constructed around the world. According to Gonzalez (Gonzalez & Jacek
Kamiski 2011), iron and steel industry is a very complex sector which is intrinsically linked with the world
economy as a whole. Basically, we all believe that steel is not just necessary in the construction industry
but also to automotive and manufacturing region.

Some countries give a serious outlook to steel production. Ukrainian administers an economical and
industrial hit by the validation of law which states that there will be one price of exported steel to the worlds
merchandise. This result confirms the segmented nature of world steel industry which is due to large
transportation cost associated with freight of dry bulk on long distances according to Orlov (2009).
Emulously, theres a quick adjustment happened due to the commodity that surprised other countries which
received good feedback but also issued to affect the steel price in Ukrainian market in just 4-5 weeks. The
consequence was led by the steel dealers who pushed to increase their profits. Somehow, if we analyze
this conclusion, it had given the structural engineers and building contractors a lesser opportunity to be
budget wise in the construction they are going to conduct.
Another country that made the steel more appealing is China. Due to its rapid prosperity in economy, it
manages to construct a lot of vertical structures such as real estate, infrastructure, etc. As they produce
more buildings, the steel industry varies directly to it. Wang Shuo (2014) states that according to 2013
annual report of the World Steel Association, it shows that China is the most active producer of steel
wherein theyve release a 717 million tons of the material in 2012.The country really made an association of
steel. The success also has a negative impact. Chinas steel firms faced low profits and losses which are
caused by the price of raw items of smelting of iron ore. Hence, a limited competition happened in the
market due to small producers and sellers, steel businesses are divided into categories which are large
state-owned enterprises, and small and medium private enterprises. Due to priveledges, the rights and
interests of large state-owned steel firms are mirrored by China Steel Association. This has a huge
opportunity to have a negotiation with four raw steel companies. Unlike small and medium private
companies, they have to compete and extend big efforts for them to be recognize to other training
companies in legit price before they engage into a long-term agreement price.

Steel Structure Production and Prices

The paper of Zhirui Zhu (2012) promotes an effective variables and collective estimation of the supply and
demand in the world of trading and merchandising of iron ore considering the competition in the market. He
sets a limitation that spans from 1960-2010 yearly. Zhu found out that theres an upward sloping supply
curve and downward slope for the demand curve. The 3SLS method is used for the supply and demand
curves identification. Also, the mechanisms that are chosen are efficient and credible. The output indicates
that the assuming prices are consistent also in the historical prices, and world GDP maturity rate is the
factor in the calculating the prices of raw steel.

According to the American Institute of Steel Construction when competing framing systems are evaluated
for projects using comparable, current cost data, structural steel remains the cost leader for the majority of
construction projects. Comparative studies indicate that a structural steel framing system including decking
and fire protection will typically cost 5% to 7% less than a concrete framing system on a national basis. One
of the reasons why a lot of designers prefer the structural steel more than other framing is the lower project
costs, where the overall expenses especially the man-hours in detailing and fabricating tons of steel is
decreased compare to reinforced concrete framing.
According to news articles at reuters (May 2016), the recent increases of global steel prices are due to
stronger demand, rising overall investment in China and capacity cuts, a spokesman for China's Commerce
Ministry said. We believe the current round of steel price increases is caused by a combination of domestic
and international factors. China is using unprecedented strength to cut capacity and will take measures to
increase steel consumption," spokesman Shen Danyang said at a press conference. "If relevant countries
and regions take responsible steps to cut capacity as China has done, it is possible for the global steel
sector to emerge from this difficult situation."

Our predictions are based on a wide experience of steel consumption patterns. The econometric models
we have constructed take into account raw materials costs, macro-economic factors, past price trends and
the dynamics of the market. However, steel prices can be influenced by a number of other factors. These
include currency exchange rates, trade regulations including import safeguard measures, anti-dumping
actions and other government interference in normal trade patterns. More than one third of all steel
produced is sold outside the country of manufacture. Accordingly, changes in market conditions in one
country can impact on pricing in other parts of the world. Consequently, these forecasts should be used
only as guide to future tendencies. (According to MEPS International Ltd.)

The paper is about monitoring economic health of the US steel industry over the years, They/It found out
that the implementation of steel safeguard tariffs and China's demand for imported steel have great impacts
on the fluctuation of steel prices in the US. The paper relates to the intended research concerning about
observation of changes of steel structure prices over the years.

Price Index

Steel prices index in China are affected by upstream and downstream of steel supply chain, so it is
necessary for steel prices index prediction to conduct correlation analysis between steel prices index and
its influence factors Z. Liu et al. (2014). And these factors are very important to relate in the study to
improve the efficiency of the steel for the constructing structures.

Bulk shipping providers predominantly supply transportation services for bulk cargo, such as iron ore, grain
and coal. As steel price index is a leading indicator of Baltic Dry Index, the cost of marine fuel becomes one
of the key costs for shipping providers. By collecting data and building a VARMA model, this study will
attempt to discover the dynamic relationship between crude oil price and the global steel price index. The
results of this study are as follows: (1) The outcomes of examining the unit root using the Phillips-Perron-
test indicates that the two variables, the crude oil price and global steel price index, have a co-integration
effect. This also proves that a long term balancing phenomenon exists between the crude oil price and
global steel price index. (2) VARMA (3, 2) is the most suitable stage of the model for both the crude oil price
and global steel price index. (3) There is a unidirectional relationship between crude oil price and the global
steel price index, which means that the price of crude oil is only impacted from its own volatility. However,
the global steel price index is impacted from both the movements of its own price and the volatility of crude
oil price. (4) The crude oil price moves prior to movements in the global steel price index. When crude oil
price increases, the global steel price index follows this upward movement. This study aims to provide a
reference for investors investment activities and shipping operators risk aversion decisions. ( According
to Ming-Tao Chou, Ya - Ling Yang, and Su-Chiung Chang of Chang Jung Christian University, Republic of
China (Taiwan) in their study A Study of the Dynamic Relationship between Crude Oil Price and the Steel
Price Index)

The world steel price index has been trending downwards since the second quarter of 2011. It decreased to
158 points in April 2015, 44% lower than its post-crisis peak in April 2011. World hot-rolled coil (HRC) and
rebar prices have been below the USD 500 per tonne since December 2014, reaching USD 443 per tonne
and USD 452 per tonne in April 2015, respectively. (Steel Market Developments by Naoki Sekiguchi 2015)
The falling raw material prices and weak steel demand have caused the steel price index to trend
downwards while greater competition in global steel market have caused the producers of steel to cut or to
slow down the production.

Name of Author: Naoki Sekiguchi

Name of the book/article: Steel market developments
Year: 2015
Month:
Day:
Pages: 14-15

On an annual basis, the Construction Materials Wholesale Price Index (CMWPI) in the National Capital
Region (NCR) further moved up to 1.5 percent in July 2016. Last month, it rose 1.3 percent while in July
2015, it declined by 1.0 percent. The uptrend was brought about by higher annual mark-ups posted in the
indices of sand and gravel at 3.6 percent and cement, 2.7 percent. Slower annual increases were, however,
seen in the indices of concrete products at 2.7 percent; hardware, 1.1 percent; plywood, 1.0 percent;
reinforcing steel, 6.5 percent; electrical works, 0.8 percent; and plumbing fixtures and
accessories/waterworks, 2.0 percent. Moreover, annual decreases were still registered in the indices of
lumber at -0.7 percent; G.I. sheet, -2.7 percent; structural steel, -3.7 percent; tileworks, -1.1 percent; doors,
jambs, and steel casement, -1.5 percent; painting works, -0.4 percent, and fuels and lubricants, -3.3
percent. The rest of the commodity groups recorded a flat growth with the index for PVC pipes retaining its
previous months rate for 0.2 percent.(According to Philippine Statistics Authority )

On an annual basis, the Construction Materials Retail Price Index (CMRPI) in the National Capital Region
(NCR) picked up 1.5 percent in July 2016. Last month, it increased by 1.4 percent while in July 2015, it
decreased by 0.3 percent. Higher annual increments were observed in the indices of tinsmithry materials at
0.7 percent and miscellaneous construction materials, 2.5 percent. Meanwhile, annual gain in masonry
material index slowed down to 3.3 percent. Annual movements in the indices of carpentry materials,
electrical materials, painting materials and related compounds, and plumbing materials remained at their
previous months rate. .(According to Philippine Statistics Authority )

The paper aims to address the need and feasibility of producing an input price index at the US Bureau of
Labor Statistics (BLS) to help illuminate a problem. The paper relates to the intended research about
producing input price index specifically of steel structure constructions.

Performance Index of Steel Companies

According to Kolluri Srinivas (2005) The Indian steel industry has been showing tremendous improvements
in terms of growth in capacity, production and exports and has become a major competitor in the global
arena. India will be among the top 5 consumers of steel by 2010. The primary objective of this study is to
measure an overall index of performance across the Indian steel companies based on eleven financial
ratios including the profit ratio for each company by using the globally popular method - the Taxonomic
Method. This method is preferred over the parametric methods using flexible functional forms and the Data
Envelope Analysis (DEA). The empirical results show that, overall composite index would serve as a better
performance indicator than the conventional stand-alone operating profit margin. Statistically speaking, the
performance of eleven companies appeared to be converging during 1999-2003. The regression results
reveal that the size factor - log (assets) - has been dominant. Contrary to conventional expectations the
sign of market share shows positive and significant relation with overall performance. This is, perhaps,
attributable to the price controls the steel industry has been subjected to for a long time before
liberalization. Also, the larger companies are in the public sector excepting the TISCO. As a consequence,
the expected U-shaped relationship between OPM/CPI turned to be counter-intuitively umbrella shaped.

China has become the largest producer of steel and iron. The paper aims to gain insights into the policy
options to achieve the technical efficiency and Malmquist productivity indexes of sample enterprises for a
certain period to reduce emissions and waste. The paper may relate to the intended research to one of the
factors of price index of steel structures in the Philippines.

Name of Author: Jinlong Ma, David G. Evans, Robert J. Fuller, Donald F. Stewart
Name of the book/article: Technical efficiency and productivity change of Chinas iron and steel industry
Year: 2002
Month: April
Day:
Pages: 293-312

The steel industry conducted a paper to present a method for development of composite sustainability
performance index (CSPI) of steel industry along its pillars of sustainability- economic, environmental and
societal. The intended research relates to the development of an index by presenting a method of
evaluating steel.

Name of Author: Rajesh Kumar Singh, H.R. Murty, S.K. Gupta, A.K.Dikshit
Name of the book/article: Development of composite sustainability performance index for steel industry
Year: 2007
Month: July
Day:
Pages: 565-588

Key drivers

The economic health of the US steel industry has fluctuated enormously over the last ten years. The
implementation of steel safeguard tariffs in 2002 brought intense scrutiny by academics and industry
observers, but little empirical work has focused on the factors that led to the industrys dramatic reversal of
fortune in the period that followed. We use a panel data set of product level monthly price observations
between 1997 and March 2005 to test the importance of the safeguards compared to other possible
determinants. We find little evidence that the safeguards affected steel prices in the United States. Instead,
results indicate that declining production capacity, improved macroeconomic conditions, and a falling dollar
helped return prices to healthier levels. Finally, Chinas demand for imported steel, which has not been
included in previous empirical studies on the US steel industry, also appears to impact prices, but only after
a lag of more than six months

Name of Author: Benjamin H. Liebman

Name of the book/article: Review of World Economics
Year: 2006
Month: July
Day:
Pages: 354-373