Pumping Iron

ISOM 2700 Case 1 Pumping Iron at Cliffs & Associates

Introduction

Current situation and challenges

Cleveland Cliffs has been expanding its own DRI business by implementing the Circored technology in order to increase the purity of their inputs and result in a high-quality steel and respond to the evolving market needs.

It is expected to make profit with the introduction of Circored technology. However, he current production cost are close to $130/ton while the market price is $90/ton. From Exhibit 2, Cleveland Cliffs Inc. can make a positive net income but it is mainly based on the revenue on royalties and management fee. The revenue from product sales and service ($380.2 millions) is smaller than the cost of goods sold and operating expenses ($ 379.4 millions) that indicates a sustainable development cannot be achieved.

Summary of the proposals with advantages and limitations

Proposal 1

Under Proposal 1, the plant would stop operation. In the short-term, it can help alleviate the loss in profit from the production temporarily. In this case, all the variable costs and engineering and administrative costs could be avoided due to the freeze of the production. Furthermore, the company might suffer a huge loss if it continue operation under the economic downturn. At this moment, the market price (under $90/ton) is much lower than the production cost which means that company cannot earn any profit. In the long-term, the price is speculated to stay at $105/ton in 2004 under the worst scenario. In addition to that, the historical data from Exhibit 14 reveals the probability of the price to reach $104/ton is about 21.4% which might pose a high risk to the profitability of the company. The plant would not be able to earn profit and even suffer loss if the plant cannot reduce the operation efficiency and production costs. However, the effort and the initial investment would be squandered without any return under Proposal 1. Moreover, the company would take the risk of missing the opportunity to earn profit once the market price reach over $130/ton in the future.

Proposal 2

Under Proposal 2, the plant would be kept at the current status which meant keeping a skeleton workforce on duty. The advantage is that the plant could restart production quickly within one month if there is a recovery in market due to the minimum number of staff available. However in this case, yield improvement project will not be implemented and therefore cost of production will be remained at $130/ton. At this moment, the market price (under $90/ton) is much lower than the production cost. In the long-term, the price is speculated to stay at $105/ton in 2004 under the worst scenario, but it is still