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Article

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

1
Kukdo Chemical Company, Gasan digital 2-ro, Geumcheon-gu, Seoul 08558, Korea
2
Graduate Institute of Ferrous Technology (GIFT), Pohang University of Science and Technology (POSTECH), 77 Cheongam-Ro, Nam-Ku, Pohang 37673, Korea
3
Department of Industrial and Management Engineering, Pohang University of Science and Technology (POSTECH), 77 Cheongam-Ro, Nam-Ku, Pohang 37673, Korea
4
Construction Engineering and Management, Department of Civil, Environmental and Architectural Engineering, University of Colorado, Boulder, CO 80309, USA
*
Author to whom correspondence should be addressed.
Energies 2019, 12(7), 1221; https://doi.org/10.3390/en12071221
Received: 19 January 2019 / Revised: 11 March 2019 / Accepted: 27 March 2019 / Published: 29 March 2019
(This article belongs to the Special Issue Energy Policy and Policy Implications)
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. View Full-Text
Keywords: contract management; tolling agreement; risk sharing; steel mills; net present value (NPV); internal rate of return (IRR) contract management; tolling agreement; risk sharing; steel mills; net present value (NPV); internal rate of return (IRR)
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MDPI and ACS Style

Kim, D.-H.; Lee, E.-B.; Jung, I.-H.; Alleman, D. The Efficacy of the Tolling Model’s Ability to Improve Project Profitability on International Steel Plants. Energies 2019, 12, 1221. https://doi.org/10.3390/en12071221

AMA Style

Kim D-H, Lee E-B, Jung I-H, Alleman D. The Efficacy of the Tolling Model’s Ability to Improve Project Profitability on International Steel Plants. Energies. 2019; 12(7):1221. https://doi.org/10.3390/en12071221

Chicago/Turabian Style

Kim, Dong-Hyun, Eul-Bum Lee, In-Hyeo Jung, and Douglas Alleman. 2019. "The Efficacy of the Tolling Model’s Ability to Improve Project Profitability on International Steel Plants" Energies 12, no. 7: 1221. https://doi.org/10.3390/en12071221

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