Valuation of Iron and Steel Plant

What are Iron and Steel Plants?

Iron and steel plants are manufacturing businesses that provide the raw material for making industrial machinery, electrical machinery, defense equipment, railway tracks, dams, houses, and a host of other industrial and consumer goods. It is a primary industry and forms the backbone of industrial development in any country.

The characteristics of  Iron and Steel Plants

Plants of this type have several characteristics:

1. A high portion of fixed assets: enterprises of this type must have a lot of fixed assets: The most important asset is the factory. The factory sits on land, and it owns the machines that produce the iron and steel.
2.  High financial leverage: Because these types of enterprises have a lot of fixed assets, they will often have high financial leverage, and as a result, they will be exposed to financial risk.
3. Purchase of raw materials:

The raw materials used by the factories can be raw materials that have been extracted or recycled raw materials. In other words, iron and steel plants can be found in almost any country. However, the raw materials for the production of steel and iron products can be found only in a few countries. Some countries do not have iron and steel mines within their territory. Factories located in countries where the raw materials are not produced may encounter supply difficulties. The factories import raw materials from abroad - and they may run into challenges in receiving raw materials due to problems in the country of origin, issues with the transport company, and problems in the country where the factory is located. In other words, they are exposed to operational risk due to the fear of raw material supply difficulties.

4. workforces: Steel and iron plants are manpower-intensive plants. A lot of personnel is required to operate them - to transport the raw materials, transport the raw materials and store them inside the factory, control the production process, and more. The large workforce means exposure to operational risk, given that the workers can start a strike to improve their wage level.

The financial factors that affect profitability and, consequently, the value of the plant

As mentioned above, factories of this type have two primary sources of costs - raw materials and personnel. Changes in the price of raw materials and labor costs can affect the planet's profit. As a result - it will affect its value.

Which method is recommended for the valuation of Iron and steel plants?

When evaluating the value of an Iron and steel factory - the appraisal should first examine the purpose of the valuation. Does the factory expect to continue operating, or is the intention actually to close the factory - and use its real estate assets?

If we look at the plant as a going concern - it should be valued using the cash flow discounting method. If the intention is to close the factory - the factory must be valued using the asset value method.

Infographic: Valuation of Iron and Steel Plant

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Conclusion

In this article, we have discussed the Valuation of Iron and Steel Plant. Suppose you look for a straightforward way to evaluate your business, manage your cap table, or create a pitch deck. In that case, you can try our intuitive ai based business valuation software or our business valuation calculator, or you can contact us for free advice or schedule a demo.