Unit Economics in Steel Manufacturing
Unit economics in Steel refers to understanding the cost and profit per ton of steel produced.
Even a small reduction in cost per ton, such as ₹500, can translate into substantial annual savings reaching crores of rupees.
Unit Economics approach helps companies:
- Determine which products or processes are profitable and which are not
- Identify high-cost areas and implement targeted cost-reduction strategies
- Make informed, data-driven decisions to improve margins and drive growth
- Monitor (KPIs) like contribution margin, EBITDA per ton, and break-even tonnage
In a highly competitive steel market with thin margins and fluctuating raw material prices, focusing on unit economics enables sustainable and scalable growth while improving operational efficiency.
Do you know the accurate cost of producing one ton of steel in your company?
What if I told you “Saving just ₹500 per ton can make a huge difference”
Yes, that is the power of unit economics. Let me explain with the help of an example.
Suppose your company produces 15,000 tons of steel per month.
If you can reduce production costs by just ₹500 per ton
You will save ₹75 Lakhs per month. That translates to ₹9 crore a year
Does your steel company focus on Unit Economics?
What is Unit Economics?
Unit economics evaluates profitability of one unit of good manufactured. In the steel industry, it will measure what is the profit or loss per ton of steel. When each ton of steel sold, generates more revenue than production cost, it is profitable. If steel companies continuously lower the production cost per ton, they will earn higher profits. Small Change Big Results!
Why should Steel companies focus on Unit Economics?
- Steel Industry is highly competitive & profit margins are low
- Raw material prices are market driven & directly impact cost of production
- Power & fuel constitute a large part of the production costs
- Capital expenditure for machinery is very high
All these factors drive up cost of production, hence it is important to be aware of the exact price of 1 ton of steel to ensure sustainable growth & profitability.
What do companies need to implement Unit Economic?
For calculating accurate production costs steel companies must have:
- Centralized data collection from all departments
- Accurate costs of raw materials, direct & indirect overheads, maintenance / spares, consumables, transportation, rework/ rejections
- Categorize costs precisely
- Good collaboration among all departments
What are the Strategies to Implement Unit Economics?
- Implement manufacturing best practices
- Define & closely monitor the important parameters and KPIs
- Monitor costs closely. Identify high-cost areas and take remedial steps
- Use combination of materials that cost less without compromising quality
- Build a culture that focuses on identifying ways to reduce unit cost
What are Important Parameters to Measure in Steel Companies for Unit Economics?
| Parameter | Description |
| Selling Price per Ton | Realization after freight and discounts |
| Raw Material Cost | Iron ore, coal, scrap, alloys, flux |
| Power & Fuel Cost | kWh, LPG, LDO, coal per ton |
| Labour Cost | Wages per ton produced |
| Maintenance & Consumables | Per heat or per batch basis |
| Freight & Handling | Transport cost per ton |
| Plant Utilization % | Impacts cost absorption of fixed expenses |
| Yield | Ratio of finished to input material |
| Rework/Rejection % | Waste affects effective unit cost |
Which Important KPIs to monitor for achieving Unit Economics in Steel Companies?
- Contribution Margin per Ton = Selling Price – Variable Costs
- EBITDA per Ton = Earnings before tax, interest, depreciation, and amortization / Total Tons
- Energy Cost per Ton = Total Energy Cost / Total Tons
- Break-even Tonnage = Fixed Costs / Contribution per Ton
- Cost-to-Sales Ratio = Total Cost / Total Sales
- Return on Capital Employed (ROCE) = EBIT / Capital Employed
Summary
Unit Economic is a framework that helps identify areas of inefficiencies and plug the leaks that can push costs up. Focusing on unit economics enables steel manufacturing companies to:
- Determine profitability of each unit accurately
- Identify & control specific costs to lower cost of production
- Make data-driven decisions for improvement
- Gain insights which products can be scaled up profitably
ERP Software helps steel manufacturers to closely monitor & control costs to achieve unit economics & increase profitability.
Read more about Spectrum ERP
