THE IRON ORE SOURCING DECISION OF THE UNITED STATES STEEL INDUSTRY

Price is generally regarded as the allocation mechanism for goods and services in a free-market economy. Identical goods, or commodities, will be consumed in greater or lesser quantities depending on their prices. In the case of two similar goods, the one with the lowest price will be consumed in the largest quantity.; Iron ore is a basic commodity for the industrial society of the United States. Steel, which is an essential material for construction and transportation, is made from iron ore. But the iron ore industry does not appear to abide by the conventional wisdom of price as an allocative mechanism. In particular, the U.S. steel industry over the last 30 years has steadily moved towards sourcing its iron ore with North American pellets which have consistently been higher-priced than South American natural ores.; This study examines this iron ore sourcing decision of the United States steel industry.; Commencing with a description of market demand for iron ore, the study goes over the past 30 years of pellet acceptance by the U.S. steel industry. In the early years after World War II, depletion of domestic natural ores encouraged search for alternative raw material. Development of the pellet coincided with discovery of foreign natural ores. Investment decisions were then strongly influenced by the internal politics of iron ore countries. In later years, growing awareness of ironmaking economics combined with financial nuances to cause the near total conversion to the new agglomeration method, despite the premium over similar grade natural ore.; The Japanese example of steelmaking efficiency using natural ores is then presented as a viable alternative to the pellet as a blast furnace feed. The importance of price in the sourcing decision is then tested using a statistical model of iron ore consumption. The Japanese alternative and statistical test indicate that cheaper foreign ore is a viable alternative and that the U.S. steel industry has not paid very much attention to list prices in its iron ore sourcing decision.; These data lead to the conclusion that there is considerable discrepancy between list prices and actual perceived prices for iron ore. The steel industry has perceived foreign natural ore to be higher-priced than list because of the risk of South American politics. And North American pellets have been perceived to be lower-priced than list because of blast furnace production efficiencies and financial nuances involving the structure of the U.S. iron ore industry. These perceptions have reduced the actual effective price of pellets below that of off-shore natural ore. And the iron ore sourcing decision has led to complete adoption of the pellet.