The Efficacy of the Tolling Model’s Ability to Improve Project Profitability on International Steel Plants

Dong-Hyun Kim, Eul-Bum Lee, In-Hyeo Jung and Douglas Alleman
Additional contact information
Dong-Hyun Kim: Kukdo Chemical Company, Gasan digital 2-ro, Geumcheon-gu, Seoul 08558, Korea
Eul-Bum Lee: Graduate Institute of Ferrous Technology (GIFT), Pohang University of Science and Technology (POSTECH), 77 Cheongam-Ro, Nam-Ku, Pohang 37673, Korea
In-Hyeo Jung: Graduate Institute of Ferrous Technology (GIFT), Pohang University of Science and Technology (POSTECH), 77 Cheongam-Ro, Nam-Ku, Pohang 37673, Korea
Douglas Alleman: Construction Engineering and Management, Department of Civil, Environmental and Architectural Engineering, University of Colorado, Boulder, CO 80309, USA

Energies, 2019, vol. 12, issue 7, 1-18

Abstract: To overcome profitability deterioration in executing steel price projects, companies are seeking overseas expansion, which increases market size while reducing profit certainty. Special purpose companies (SPCs) have been found to better manage these risks through tolling agreements which transfer the local pricing volatility risks (raw material, steel sales, licensing and income tax) to the project sponsor. The energy market has benefited from policy changes allowing the use of the tolling model, finding an increase in profitability for both project sponsors and SPCs through more effective risk sharing. While successes have been published in the energy, gas, and highway sectors, the tolling model’s efficacy has yet to be tested on the steel sector. As such, this research adds to the existing body of knowledge by testing the financial feasibility of using the tolling model on three million ton/year capacity steel projects. The data analyzed has been collected from “Company A”, a company with 50 years of domestic and 20 years international steel-iron plant project execution and operation experience. An economic analysis is performed on the best, most likely, and worst-case cost/revenue scenarios of a virtual project (which represents the average of all Company A projects) and two Company A projects under construction/operation. The findings support the use of the tolling model in volatile markets, showing a net present value (NPV) profitability increase of up to $940 versus the traditional project company model under worst case market conditions. However, the traditional project company model was found to be superior in best case market conditions. With these findings, international steel companies are able to consider alternative financing structures when executing projects in volatile markets, potentially resulting in greater project sponsor and SPC profit.

Keywords: contract management; tolling agreement; risk sharing; steel mills; net present value (NPV); internal rate of return (IRR) (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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