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Evaluating product exchange options in integrated steel mills

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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.

Keyword : Integrated steel mills, capital budgeting, Monte Carlo simulation, product exchange options, stochastic processes Siderúrgicas integradas, orçamento de capital, simulação de Monte Carlo, opções reais de troca de produto, processos estocásticos

How to Cite
Ozorio, L. de M., Pinto, C. de L. B., Baidya, T. K. N., & Brandão, L. E. T. (2013). Evaluating product exchange options in integrated steel mills. Brazilian Business Review, 10(1), 102-126. https://doi.org/10.15728/bbr.2013.10.1.5

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