Cost factors for steel construction

What influence does the production location have on the prices of welded steel structures and steel components and when is low-cost country sourcing worthwhile in order to benefit from locational advantages? How do get at a meaningful price comparison for steel structures? These questions are essential for buyers of machinery and plant engineering companies in building up their supply chain. The answer is highly individual and depends on many different factors.

Cost factors in steel construction

In simple terms, the producer prices for steel construction ex-works are composed of three cost factors:

  • Labor costs (labor costs for cutting, welding, fitting, preservation and assembly of parts)
  • Material costs (costs for raw materials such as plates, beams, steel profiles or pipes, as well as auxiliary materials such as welding electrodes or grinding wheels)
  • Administration costs (building costs, quality assurance, distribution, payroll accounting, distribution costs, levies, etc.)

In addition, the purchaser must also take into account the internal costs for supplier support on site, as well as the delivery costs in order to receive meaningful total cost comparison.

Distribution of costs in steel construction

The allocation of these costs depends to a large extent on the complexity and type of steel components, as well as the production site.

Steel prices and material costs

Steel prices are relatively homogeneous due to the open markets in Europe and do not differ significantly. Transport costs have an influence at most, so that nearby production companies have slight cost advantages. Even worldwide, prices differ only slightly, so that there is hardly any potential for savings due to the long transport distances. In November 2017, for example, one ton of hot strip steel cost €574 in the US, €536 in Europe and €451 in China. On Chinese steel tariffs or around 20% apply, so that there is more or less a balance again (source).

For simple, heavy steel structures with high wall thicknesses and few processing steps, the material costs gain influence, but due to the small differences, no major locational advantages can be discerned here.

For lighter steel construction with thin sheet thicknesses and more complex structures, the importance of material prices is lower. The component weight also plays a smaller role and contributes less to the total cost.

The more standardized semi-finished products are used, such as pipes, profiles or fittings the more it depends also on the supplier’s sources.

Energy and auxiliary materials

Energy prices for industry in Europe vary up to 100%. However, unlike steel production and processing, energy costs have little impact on the production of steel structures. According to Eurostat, the lowest electricity prices for industrial customers can be found in Serbia (0.05 €/kWh), the highest in Italy (0.15 €/kWh). Industrial customers in Poland or Hungary pay only slightly more than half as industrial customers in Germany.

Auxiliary materials such as technical gases or welding electrodes are available in all industrial nations at similar prices and have little effect on the final price of a steel structure.

Labor costs

 

On the other hand, the situation is quite different for labor costs. Labor costs are the decisive cost factor in the production of steel components such as weldments. Especially for complex lightweight steel components with many processing steps, labour costs contribute disproportionately to the final price. However, this statement only applies to components with many manual work steps. For orders with a high level of value added by machines, such as the serial production of stamped parts, cuttings or CNC bending, the labour costs lose influence and other costs, especially transport costs gain more weight.

According to Eurostat, the cost for one working hour in the industry in 2016 was €33 in Germany, compared with only €5.50 in Romania. The other labour costs of some major EU industrial locations can be found in the table below:

Country€/h
Germany33,00
Austria32,70
Italy27,80
EU (28 countries)25,40
Slovenia16,20
Slovakia10,40
Czech Republic10,20
Croatia10,00
Poland8,60
Hungary8,30
Romania5,50
Bulgaria4.40

Switzerland is not mentioned in this table. In 2012 the industrial labor costs were according to the swiss statistical lexicon already exceeded 50€ per hour. For this reason, labor costs in Switzerland have an above-average impact on steel construction prices.

Depending on the type of steel components, the EU-wide average cost split for steel components can be divided into approximately 35% labour costs, 40% material costs and 25% administrative and other costs.

For a medium structural steel structure made of commercially available steel plates and steel profiles (sheet thickness 5-10mm), the following costs per kg are therefore available on average in the EU:

  • Material costs incl. 20% cutting and delivery costs: € 1,50/kg
  • Wage costs: € 1.31/kg
  • Administration: € 0.94/kg

This results in a total price of approx. 3.75€ per kg of welded steel construction, which is quite realistic on average in the EU.

Cost comparison by producer country

If, instead of the EU average, the labour costs for other manufacturing sites are taken as a yardstick, the following cost comparison for steel structures is as follows:

ShareEU-28GermanyPolandHungaryRomania
Wage costs per hour worked

€/h

25,4033,008,608,30

5,50

Material costs incl. Delivery and 20% blend

€/kg

40%1.501.501.501.50

1.50

Wage costs

€/kg

35%1.311,710,440,43

0,28

Administration

€/kg

25%0.941,070,650,64

0.60

 Total €/kg100%3,754,282,592,57

2,38

If you now choose Poland as a production location instead of Germany, you can save 1.69€ per kg steel construction. This corresponds to a cost reduction of almost 40%. In Romania, savings of more than 40% would even be possible.

In this cost comparison, it was assumed that the administration costs also change proportionally with the labour costs. In this example, the administration costs for all countries are 25% of the total cost per kg of steel construction.

Determining the total cost of steel construction

When is outsourcing steel components worthwhile in countries with lower labour costs? In order to do this, the following cost factors must be taken into account in addition to the direct costs for steel construction, which have been determined earlier:

  • Transportation costs
  • Internal costs for supplier support
    • Quality assurance
    • Where applicable, costs for the translation of design documents, contracts and acceptance protocols
    • Travel and telecommunications costs
  • Costs for rework
  • Costs for short-term parts

When is low cost country sourcing worthwhile for steel components?

Whether or not low-cost country sourcing of steel components is worthwhile for purchasing in individual cases cannot be assessed on a blanket basis, but depends, among other things, on the following factors:

Complexity of steel components

The more complex a component is, the more difficult it is to develop the supplier at a long distance. For large quantities and long-term requirements, however, it is particularly worthwhile to produce in a convenient location, especially for complex, labour-intensive components.

Reference quantity or Order

For one-off requirements, it is comparatively expensive to develop a new supplier. Unless they are very simple components, or large individual projects, low-cost country sourcing is often too complicated. For recurring orders and corresponding purchase volume, the move abroad is also worthwhile for more complex orders.

Prerequisites for successful low-cost country sourcing

In order for low-cost country sourcing to be a success, the course must also be set internally within the company and it must be clarified whether the company meets the necessary conditions.

Does the company have the necessary resources and competence to find and develop the right supplier? There are countless steel construction companies, but which one can really meet the requirements? The searching for the right steel construction supplier often resembles the search for the needle in a haystack and often consumes more time than expected.

Many times you wait in vain for offers. If you get them then often the price, the delivery time or the availability do not correspond to the original conceptions. Many projects are unique and also the many steel construction suppliers have individual strengths and weaknesses. To find out these and to find the right partner for the right inquiry Jactio.com has set itself the goal.