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Search for scrap substitutes ushering new age?

Jul 31, 2013 | 08:00 PM | Bill Beck

Tags  DRI, direct-reduced iron, hot briquetted iron, electric-arc furnaces, natural gas, John Ferriola, Midrex Technologies Inc., Steel Dynamics Inc. Essar Steel Ltd.

The search for ferrous scrap substitutes has taken off in recent years, prompted by the volatility of scrap prices since 2008 and the emergence of inexpensive and seemingly inexhaustible sources of recently discovered natural gas, both in North America and elsewhere around the world.

Iron and steel companies have been working with alternative iron strategies that would have appeared all but impossible just five years ago. But when prime grades of ferrous scrap in North America ballooned to more than $900 per ton in 2008Ñand crashed to less than $200 per ton a year later during the Great RecessionÑmill owners and operators began reassessing their reliance on ferrous scrap as a feed source for electric-arc furnaces (EFs), blast furnaces and basic oxygen furnaces.

Prior to the Great Recession, the most widely used scrap substitute in North America was pig iron, imported primarily from Brazil and Russia. Pig iron usually sells at a premium to prime grades of scrap, and the cost of ocean freight and the potential instability of foreign producers gave many mill operators pause about becoming too reliant on the material.

Direct-reduced iron (DRI) and hot-briquetted iron (HBI) also were viable scrap substitutes, but the fact that the alternative iron products were best reduced in natural gas furnaces made their use in the United States somewhat limited. The DRI and HBI that was used in EFs in the United States was primarily produced in facilities located offshore, particularly in the gas-rich Caribbean islands, because natural gas appeared to be in limited supply in the United States in the early years of the 21st Century and was considered far too expensive to use for the reduction of iron ore.

In the past decade, however, new techniques for unlocking natural gas from shale deposits have revolutionized gas production in the United States. Horizontal drilling and hydraulic fracturing of shale deposits has unleashed a flood of oil and gas. Just in the past five years, North Dakota has moved into second place among U.S. oil- and gas-producing states thanks to the prodigious output of the Bakken shale underlying the western third of the state. Texas, with its Eagle Ford and Barnet shale deposits, is currently producing more oil and gas than many members of the Organization of the Petroleum Exporting Countries. And undeveloped shale deposits in the Midwest and Mid-Atlantic states bode well for increased production in the near future.

In the space of just five years, the United States has moved within reach of an energy independence that has been the dream of American policymakers since the first Arab oil embargo 40 years ago. Natural gas, a clean fuel that was viewed as a commodity in sharply declining supply less than a decade ago, is starting to attract manufacturers back to North America. What’s more, the shale deposits underlying much of the United States aren’t limited to North America. Similar deposits are found all over the worldÑin South America, Europe, Russia and ChinaÑand geologists suspect that horizontal drilling and hydraulic fracturing will produce 21st Century gushers from global deposits that haven’t even been named yet.

For the global steel industry, abundant supplies of cheap natural gas present the opportunity to produce DRI, HBI and other alternative iron products at a cost-effective price, in the process reducing the industry’s reliance on ferrous scrap and its recent price volatility. Companies worldwide are in the process of developing alternative iron strategies, leading to what could become millions of tons of new DRI and other scrap-substitute capacity coming online in the near future.

Charlotte, N.C.-based Nucor Corp. has long had an interest in DRI production. The company has operated a DRI facility in Trinidad and Tobago since the 1980s, and in the 21st Century it has moved quickly to take advantage of new shale gas discoveries to build a greenfield DRI facility in coastal Louisiana.

The 2.5-million-ton-per-year facility in Louisiana will be what Nucor president and chief executive officer John Ferriola calls a “game changer.” Scheduled to come online at the end of the third quarter, the new DRI facility will allow the company to replace pig iron and prime grades of ferrous scrap in its EFs.

But the cost of bringing on new DRI production is substantial. Nucor had hoped to have the Louisiana facility in commercial production during the second quarter, but delays caused by severe weather in the first quarter pushed back the start-up. And delays cost money. Nucor’s cash and cash equivalents and short-term investment position remained strong in the first quarter at $932.2 million, but the company estimated in late March that an additional $146.6 million of restricted cash would be available for use in the construction of the DRI facility in Louisiana.

But Ferriola told New York securities analysts in April that the cost of the new facility will be worth it. Even though DRI production will add $15 to $20 per ton to the cost of production due to refractory costs and extra operating costs, the ability to displace pig iron and prime scrap will pay Nucor dividends in the future. “One of the great advantages this is going to give us is the flexibility to make good economic decisions on iron units as we move forward,” Ferriola said. “Simply put, we see this strategy as a game-changer for Nucor’s cost structure for high-quality iron units.”

Midrex Technologies Inc., another Charlotte-based company, estimated that world DRI production totaled nearly 75 million tons last year. The wholly owned subsidiary of Kobe Steel Ltd., which began offering its Midrex Process 40 years ago, is the global leader in providing technology for the rapidly growing industry. The Midrex Process utilizes a wide variety of fuels, including powdered coal, coke oven gas and natural gas.

The company currently is working with a number of steel mill clients to design and implement new DRI facilities.

Midrex Technologies, Midrex Metallurgical Services Ltd. in Shanghai and Capital Engineering & Research Inc. (CERI) last year announced plans to “market, develop, design, erect and commission Midrex direct-reduction plants in China. CERI is the leading company in China’s metallurgical industry and has completed more than 6,000 projects during the past half-century. Midrex and CERI estimate the partnership could see commercial production of new DRI plants in China by 2015.

In Russia, Midrex is working with Siemens Metals Technologies and Russia’s Metalloinvest Co. to expand HBI production at Lebedinsky Mining & Processing Integrated Works in the country’s Belgorod region. The new plant, which will join an existing 1.4-million-ton-per-year HBI plant on the site, will have a capacity of 1.8 million tons per year, making it the single-largest HBI module in the world.

Closer to home, Midrex and consortium partner Siemens signed a contract in early July to build a Midrex DRI plant near Corpus Christi, Texas, for Austria’s Voestalpine Group. The new facility, designed to have an annual capacity of 2 million tons of HBI, would eclipse the Lebedinsky facility in Russia as the single-largest HBI-producing module in the world.

The $726-million project will include comprehensive infrastructure improvements, including harbor facilities giving it direct deep-sea access to the Gulf of Mexico. Commercial start-up is scheduled for early 2016, with about half the planned output going to mills in Linz and Donawitz, Austria, and the other half sold to partners interested in a long-term supply. The facility already has signed one long-term regional customer: Altos Hornos de Mexico SA de CV, Mexico’s largest steelmaker.

Iron and steel producers with interests in the Lake Superior Iron Ranges have been investigating the feasibility of converting low-grade taconite into direct-reduction-grade pellets ever since abundant sources of natural gas from nearby Canada became available earlier in the decade. Taconite pellets from Minnesota’s Mesabi Iron Range have been the feedstock of choice for mills’ blast furnaces for almost 50 years, but the dream of converting taconite into DRI products and serving the nation’s EF industry with Minnesota iron ore might be close to realization. In recent years, Fort Wayne, Ind.-based Steel Dynamics Inc., India’s Essar Steel Ltd. and homegrown Magnetation Inc., Grand Rapids, Minn., have all worked to develop converting Mesabi Range taconite to reduction-grade products.

Now, Cliffs Natural Resources Inc., Cleveland, has entered the arena. With about 31 million tons of annual iron ore production in North America and 11 million tons of production in Australia, Cliffs is one of the world’s most important iron ore producers. But the bulk of Cliffs’ production is natural ore or processed pellets, such as taconite, and the company generally has not been a provider of reduction-grade products.

However, Cliffs last year identified its North Shore iron ore mines on Minnesota’s Mesabi Range and United Taconite mines in Minnesota as having the potential to produce DRI-grade products. This past spring, the company ran a full-scale DRI production test for two weeks at North Shore, producing 30,000 tons of DRI-grade pellets, chairman, president and chief executive officer Joseph Carrabba said during an earnings conference call with securities analysts.

“We found North Shore at this point in time to be the low-capital-cost option,” he said. “We are working closely with the companies who manufacture DRI facilities to conduct performance evaluation of our DRI pellet samples.” Cliffs will continue to run tests at North Shore and United Taconite throughout the remainder of 2013.

Carrabba noted that Cliffs has closely followed Nucor and its efforts to start commercial production of 2.5 million tons of DRI pellets in Louisiana. Nucor’s success, he said, has “strengthened people’s belief” in the financial viability of DRI production.

In January 2006, Emirates Steel Industries, the largest integrated steel producer in the United Arab Emirates, launched a two-phase expansion program. The first phase of the project was completed in June 2009 at a cost of $816 million, increasing the producer’s rolling output capacity to 2.1 million tonnes annually from 750,000 tonnes previously. The second phase, which included the design and construction of a 1.6-million-tonne DRI facility and a 1.4-million-tonne steelmaking plant, was completed last year at a cost of $1.5 billion.

Emirates Steel has reached targeted annual production capacity of 3.5 million tonnes, and this past spring signed an agreement with Sweden’s Luossavaara-Kiirunavaara AB to supply quality pellets suitable for conversion into DRI pellets. Emirates Steel currently consumes some 4.8 million tonnes of iron pellets annually, and expects to consume more in the future as it increases its steelmaking capacity to 5.5 million tonnes per year.

Ferrous scrap dealers, buyers and brokers are convinced that DRI is going to play a key role in the EF business in the coming years.

Bill Beck

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