Cost trends
Costs in the business increased by 21 percent compared with the preceding year and were SEK 39,305 (32,412) million. Of these costs, SEK 3,920 (3,481) million related to products purchased in the trading operations.
Remaining costs consisted primarily of processing costs, selling and administrative costs, depreciation/amortization, and costs for input materials and energy.
Processing costs, selling and administrative costs are comprised primarily of costs for the Group’s own personnel and purchased material and services. Due to the increased production and sales, the processing costs have increased significantly during the year. Part of the reduction in fixed costs in 2009 was due to the sharp cut-back in production. In 2010, fixed costs increased as production returned to a more normal level. However, the long-term reduction in costs is in line with the target set out in the cost savings program 2008.
Raw materials are priced in the world market and the prices, which are primarily quoted in USD, are very sensitive to the steel business cycle. Iron ore and coal are the dominant raw materials within the blast furnace based manufacturing in Sweden and price and delivery agreements were normally entered into annually at the beginning of the year, but a shift to quarterly based price agreements could be seen during 2010. Scrap metal is an important raw material for the North American operations with two scrap-based steel works.
The combined iron ore price for 2010 was 78 percent higher than 2009 in USD while the increase was 96 percent in SEK.
The combined coal price for 2010 was 43 percent higher than 2009 in USD while the increase was 57 percent in SEK.
The price of scrap metal in the US fluctuated during the first three quarters of the year but gradually increased during the fourth quarter and, at the end of the year, were 59 percent higher than at the end of 2009.
The Group’s cost structure is shown in the diagram below.
Energy
Coal is an essential reduction agent to remove oxygen from iron ore and constitutes one of the most important raw materials in iron ore-based steel production. Coal also provides approximately 85 percent of the energy for the Swedish steel operations.
Energy is otherwise provided through electricity, oil and LPG. In total, the Swedish steel operations consumed 1,582 (1,243) GWh of electric power and 1,494 (1,102) GWh of oil and LPG during the year. By utilizing the energy-rich gases that are formed during steel production, among other things, electricity is produced at the OK3 heat and power plant in Oxelösund and in the half-owned energy company, Lulekraft. During the year, these plants produced 702 (516) GWh of electricity.
Electricity and natural gas represent significant energy costs for SSAB North America and accounted for approximately 10 percent of total steel plant production costs. SSAB North America has long-term, inflation-indexed agreements.
In total, the Group’s energy costs (excluding coal) amounted to SEK 2,553 (2,087) million.
Research and development
SSAB’s research and development work focuses on process development, product development and customer applications. During the year, research and development expenditures amounted to almost SEK 190 million. The strategy and the new organization have strengthened the market-driven approach to research and development, with the customer’s business in focus.
Abrasion-resistant steels and wear applications constitute a key area for SSAB. During 2010, the development work within this segment intensified in respect of both product development and applications development. SSAB has expanded the product range by several dimensions (thicknesses and widths) from production plants in Oxelösund, Borlänge and Mobile. Today, SSAB is able to offer its customers abrasion-resistant steel in thicknesses ranging from 0.5 mm to 130 mm, which is the most complete product range in the market.
The development of construction steels has followed the same pattern with, among other things, the development of thicker plate dimensions and improved qualities in the form of enhanced formability and toughness. The product portfolio has been expanded with steels for the production of pipe for oil and gas shipments.
Steel for safety components for the automotive industry also constitutes a prioritized area. During 2010, several new so called Dual-Phase and martensitic grades of steel have been developed. In order to meet the automotive industry’s needs for corrosion-resistant high strength steels, considerable resources have been invested in the development of electro-galvanized steels, and DOCOL 1400 EZ was introduced in 2010.
The inauguration of a new research center in Montpelier, Iowa, and the start of construction on a research center in Kunshan, China, during 2010 constitute milestones in the increased focus on research and development. These facilities will supplement the existing research centers and will lead to an accelerated development of steel products and technical solutions, as well as improved support to local customers.
Within the scope of applications development and technical customer service, SSAB carried out some one hundred customer projects during 2010 and developed new conceptual solutions. SSAB is able to provide support throughout the customer’s entire development chain, from skills development to full-scale production and sales. The development, together with the Swedish company Wranne Fåhraeus Design, of a new type of bed which exploits the high strength of DOCOL 1200M combined with the desired elasticity, is an example of a new area of use for SSAB’s high strength steels.
SSAB cooperates closely with selected research and development institutions in both Europe and North America. During the year, SSAB signed a long-term cooperation agreement with SwereaKimab, a leading research institution within the area of materials research, in order to further strengthen long-term product development.
SSAB is also actively engaged in research and development within the environmental area, focusing on reducing carbon dioxide emissions and identifying new applications for various residual products.
All in all, the capitalized new investments within R&D during 2010 entailed an increase of approximately 20 percent for the production of new products, applications, and improved manufacturing processes.
