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Entry barriers to the steel industry

Entering the steel industry requires a high degree of capital and human investment. Traditional steel smelting facilities are intricate labyrinths of expensive equipment operated by men with years of experience in the industry. Upstream supply can also be a challenge. Many steel companies own their own mines or have developed close relationships with producers, any entrant must find a way of procuring ore.

  Steel making facilities are not cheap.


  1. Sam Wilson Sam Wilson

    Not only do these new entries have to put down the capital to acquire the machinery and raw goods, but they must also to get a foothold in the marketshare. This would be difficult because for companies to pull shares away from other companies they would have to either offer a cheaper good (which would cause less revenue), create a new or different product (requiring R&D), or be able to specialize in one type of good (minimal demand). Given these challenges it would be difficult for new steel industries to get a foothold unless they had quite a large capital reserve left over after all of the acquisitions in PPE.

  2. Hugh Gooding Hugh Gooding

    Sam really summed it up well. In saying this and remembering back to my last post on licensing in the steel industry, there seems to be a bigger push and more demand in R&D. It is less costly and allows for entrepreneurs to sell their ideas to established firms in the form of licenses. It goes back to the idea of economies of scale, where steel firms are able to cut costs from R&D by owning licenses. It’s also a benefit to the steel industry where substitutes, even with the introduction and technological progresses of aluminum, still remain relatively low.

  3. Tyler Kaelin Tyler Kaelin

    From a historical perspective, I think it would be interesting to look at trends for when still firms began. Obviously, a number of mergers have occurred recently, but looking specifically at periods where market entry spiked might be very telling.

    I would imagine that huge technology shifts like the introduction of BOF and EAF furnaces are really the only times where new firms are actually entering in any significant numbers. Excluding of course centralized economies like China, where entry is mandated at the government level.

  4. Ah, but the commodity end of the industry is a commodity because there are few barriers to entry besides coming up with the cash. It doesn’t require a lot of technical sophistication (no need for R&D), there lots of equipment suppliers and consulting engineers for design and operations. All you need is cash, and in China that was available. Bankers were few in number so focused on large projects where one person could lend a lot of money. Added to that was the fact that local government could be pulled into such projects and thereby created a perception of low risk. [That perception may prove poorly focused!] So yes, a big lump sum, particularly at the efficient end of integrated steel production, but not if your goal was to be a modest-sized local producer selling to local construction projects, even better if you were situated near local coal mines too small in scale to easily sell to better customers.

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