Trucost
Chris Baldock

Could efficiency help iron out the bumps in ore prices?

Chris Baldock

Many manufacturers now see raw materials as their biggest risk. Carmakers are among industries caught between volatile commodity prices and cash-strapped customers. Companies making the most of what's available can help drive more sustainable growth.

UK manufacturers across sectors see raw materials shortages as one of their top five risks in 2012, according to findings of a survey by the manufacturers' organisation, EEF. It sees effective resource management as a significant economic and environmental challenge. The stakes are high. The World Economic Forum warned last month that the world is heading for a "peak metals" scenario that could put US$2 trillion (1.7% of GDP) of economic output at risk in 2030, unless major global economies respond to shortages in the supply of steel and iron.

The transport industry consumes 16% of global steel production. Differences in the materials efficiency of production suggest that the industry has potential to make more from less. We looked at two global automobile manufacturers, luxury car producer BMW Group - owner of BMW, Mini and Rolls-Royce Motor Cars - and India-based Tata Motors - the maker of commercial and passenger vehicles including Jaguar Land Rover - to see how efficiently they're using steel.

Each company disclosed the quantity of steel used to manufacture their vehicles. On average, Tata Motors used 0.28 tonnes of steel to produce each vehicle, while BMW used more than three times as much (see Table 1).

 Table 1: Steel use by car producers in 2010

 FOTW Iron

 

 

Considering BMW manufactures its luxury cars to high European safety standards, more steel-intensive vehicles raise the importance of recycling to use raw materials more efficiently. BMW is also investing in lightweight alternative materials such as carbon fibre reinforced plastics.

Iron ore is the main component of steel and its price has risen more than 900% over the past 10 years and fluctuated sharply since January 2010. In 2000 the cost of iron ore was US$12.50 per tonne. Fast forward 12 years and the price has increased more than tenfold to over US$130 per tonne, after peaking at nearly US$190 in early 2011. The high and fluctuating cost of iron ore and potential loss of market share is driving many steel manufacturers to switch production methods by using new electric furnaces (EAF). These are cheaper to run and include a higher proportion of recycled steel than traditional basic oxygen furnaces (BOF). This highlights room for cost savings to be made by savvy suppliers to car manufacturers.

Iron ore prices jumped despite world iron ore production rising from 1,049 mn tonnes to 2,400 mn tonnes, a 129% increase, with some warning that excess supply could lead to a cutback in mining. As iron ore consumption is expected to increase at 2% p.a and is currently growing at 10% p.a, sharp swings in commodity prices are just one of the factors push resource efficiency up manufacturers' agendas. Building new markets and diversifying into new supply chains were among opportunities spotted by manufacturers in EEF's survey. Driving demand for products that are made using fewer raw materials could help make higher car ownership and economic growth in emerging markets more sustainable.

________________________________________________________________________________

1 http://annual-report.bmwgroup.com/2010/gb/en/facts-and-figures-2010/management-report/review-of-operations/production.html

2 http://www.tatamotors.com/investors/flash-figure-details.php?id=105