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Supply side effects

Dec 31, 2013 | 08:00 PM | AMM staff

Tags  DRI, direct-reduced iron, SA Recycling LLC, Jack Stutz, Nucor Corp., Lynn Lupori, Hatch Associates Pty. Ltd., CRU International Ltd. Sara Hornby

Getting a handle on raw material costs and supply, as well as having more control over quality, have been important issues for steel mills since the Great Recession began, but the unremarkable and somewhat stagnant results of 2013 have intensified those concerns.

In the latest AMM survey of metal executives’ outlook on the future business climate, about the same percentages said they believe that raw materials will have as much of a role as the general U.S. economy in determining the final cost of products sold to distributors and end-users.

“U.S. steel mills recognize that the winners in the cost game will be the steel mills who have greater control over their raw material costs and they will seek vertical integration through ownership of scrap and (direct-reduced iron) processors,” said Jack Stutz, chief operating officer of Orange, Calif.-based SA Recycling LLC.

Direct-reduced iron (DRI) dominated discussions throughout 2013 as the industry awaited the opening of Charlotte, N.C.-based Nucor Corp.’s DRI facility in Louisiana.

Lynn Lupori, managing consultant in Hatch Associates Pty. Ltd.’s North American Strategy Consulting Practice, said that much of the DRI demand was driven by concerns over a perceived deterioration in steel scrap quality in the U.S. market. “A number of operators have told us that the main reason they’re looking at DRI is not just from a cost standpoint but from a scrap quality standpointÑthat they’re having difficulties keeping residuals down,” she said.

Due to quality and cost issues, the future looks bright for DRI use in the North American steelmaking industry, sources said, although some players remain wary about whether the technology can retain its advantages.

Several sources outlined the North American market’s distinct suitability for DRI production facilities, most notably access to cheap natural gas. Natural gas prices in Louisiana, for example, averaged around $4 per million British thermal unit (mmBtu) compared with $15 per mmBtu in China.

Sara Hornby, principal at Global Strategic Solutions Inc., Charlotte, N.C., estimated that as many as seven DRI production plants are being considered in the United States.

But one analyst believes there may not be much opportunity for additional DRI facilities to supply domestic steelmakers, although the situation could change, given a strong manufacturing boom, a move toward higher-value goods and increased dependence on shale gas. DRI demand in the United States is expected to total around 4.6 million tons annually by the end of 2017, Alex Laugharne, a senior consultant at London-based CRU International Ltd., said. “What this means is that beyond the Nucor (Corp.) plant ... there’s not a huge amount of room for other new producers.”

Even so, building a standalone or integrated DRI facility could be beneficial if production were to take market share from imports of merchant pig iron, which is the market expected to be most impacted by the start-up of new metallics facilities.

Steelmakers have expressed interest in DRI production in recent years due to competitive natural gas prices. Laugharne noted, however, that the move is not a new one, pointing out that a DRI facility had been built more than a decade ago when natural gas prices were competitive. “We’ve seen gas prices drop off from about $10 per GJ (gigajoule) to around $3 per GJ today. That sort of explains why people now see DRI as viable again,” he said.

Laugharne emphasized that the demand for metallics is not rooted in their prices relative to scrap, but rather by the high-value product mix they make it possible to produce in electric-arc furnaces (EFs), particularly for mills that want to offer higher-quality material. “Aside from the quality implications of DRI, the material doesn’t necessarily have a positive impact on use in the EF,” he said, but should EFs choose to improve quality mixes, demand for DRI could increase.

For many, the quality of scrap makes other options attractive, although not everyone agrees. “We’ve done a study and found it (scrap quality) hasn’t declined at all,” one steelmaking source said.

Still, the chemistry of scrap is pushing the grading of material to the back seat, industry executives said last fall at AMM’s 7th Annual Steel Scrap Conference in Chicago.

“The quality of scrap is improving, but the chemistry of the scrap steel is deteriorating,” said Kevin Crary, executive vice president of commercial at Burnham, Ill.-based Scrap Metal Services LLC. “We have customers willing to pay for good chemistry. Customers are paying premiums for material traditionally sold as (plate and structural). Customers then substitute that material for busheling. Customers gets lower copper, consistent product and better price than busheling.”

Today’s scrap contains higher amounts of copper and tin, he said. “Each time scrap goes through its life cycle and comes back it has higher residuals in it. Today’s rejections would have been accepted years ago,” Crary said, noting that mills are moving toward valuing the quality of the chemistry rather than valuing the grade, and are willing to compensate suppliers. “The scrap generator gets better prices and the mill gets better chemistry.”

Crary said there will be more EF output and less integrated steel production, and feed optimization practices have become much better over the past 20 years at both EF and integrated mills. “With increased prices for copper, stainless, etc., scrap quality in general and shred specifically have improved greatly in the past 10 years,” he said. “In general, significant amounts of high-quality scrap do not leave the U.S. However, mills should value quality differently. More and more mills will move to valuing chemistry as ‘grade’ chemistry deteriorates.”

Stan Davis, Severstal North America Inc.’s manager of scrap procurement, said he encourages suppliers to work with the Dearborn, Mich.-based company’s customers to improve the material arriving at the mill. “The furnace is not the place to clean up scrap. Scrap companies need to get out and educate their suppliers better, which will eliminate chances of rejects,” he said.

“The low-copper, low-residual steel of the 20th Century is disappearing,” Davis said, adding that Severstal is vigilant in training its inspectors, who spend time pulling out copper, angle iron and rebar from its shredded scrap. Mills are taking steps to differentiate between suppliers, he said. “If you are a supplier to a mill and have quality issues and go to another mill and have quality issues, then you need to get your house in order.”

Another major raw material supply chain issue raised at the AMM conference was the U.S. auto shredder market and how it interacts with demand, supply and profit margins in the scrap world.

“In the pre-2008 period of high scrap demand, we saw an increase of new scrap dealers and an expansion of existing scrap dealers as the number of shredders operating in the U.S. increased from 230 in 2006 to 300 in 2013,” Stutz said. “So, I reasonably say that, like the steel industry, we have overcapacity contributing to lower prices.”

“Shredders have a price margin problem because of demand and falling prices over the past 18 months,” said Ben Abrams, president of Consolidated Scrap Resources Inc., York, Pa. “It is more than just an issue of too many shredders in the market. The bigger issue facing shredders is the lack of construction demand, and it has probably been the biggest obstacle for shredders and prices.”

Shredders are the most efficient processors of scrap steel and large-size mixed nonferrous metals, Abrams said. “The trend over the past 20 years is that the more shredded scrap that’s produced, the more that’s consumed. Furthermore, shredded scrap has and will continue to displace other obsolete grades. Shredders will continue to proliferate because they evolve technologically, are the most efficient scrap processing machines available and produce a very marketable product.”

But the expansion of shredding capacity has increased competition for feedstock, and there has been among some shredders “an erroneous belief that more volume compensates for bad buying practices,” Abrams said. Tighter gross margins have pushed some shredders to make enormous investments in nonferrous recovery plants, he said. “But ... are we starting to see more buying discipline? Maybe.”

Scrap production trends suggest the supply of shredded scrap relative to other grades will continue to increase; it will be the predominant grade globally, Abrams said. Larger shredders are shredding more material that used to be cut for No. 1 heavy melting scrap.

“Some mills are adapting to use more shred because of a price delta to busheling and availability of cut grades,” he said, although there are benefits in using cut grades so they will not disappear. “Better-quality iron units for flat-roll, (special bar quality), rail, structural and other mills that are sensitive to copper contentÑsome mills are paying premium prices for low-copper shred.”

More shredders are coming in the United States and globally, he said, and numerous smaller 60/80 and mobile shredders will be used because 1,500- to 2,000-horsepower machines can be acquired for 30 to 40 percent of the cost of a larger machine, meaning less risk for dealers, he said. Larger machines will continue to shred heavy melting grades.

Beyond the United States, 100 new shredders were installed in China in the past five years, Abrams said, and EF capacity is increasing globally, with Turkey adding capacity and possibly China as well. “Shredders are not going away en masse,” he said.

Scrap processors have been able to meet increased demand for shred because of the improvement in new car sales in the United States, Stutz said, and they are shredding lighter HMS grades. The scrap charge and menu have changed over the years, he said, noting that the use of shredded rose to an average of 36 percent in 2012 from 24 percent in 2008.

Another area where steel mills are moving to reduce costs is including higher percentages of turnings in their scrap mixes, which lowers their average scrap cost while reducing the cost of furnace additives. “Mills that are considering more compact scrap to allow for fewer charges to improve productivity have been able to justify the additional preparation charges,” Stutz said. “Scrap consumers are requesting lower copper specifications in their shred and processors should be able to meet this request.”

“Just adhere to the specifications and you will improve our melts,” one steel mill operator said.

New mill locations will change scrap demand regionally, but new sites were chosen with scrap movement logistics in mind, Stutz said. “There is a recognition by domestic scrap consumers that they must partner with their local scrap source to ensure the last look at scrap pricing to keep scrap from leaving their area during periods of high scrap demand,” Stutz said.

As for the impact of imported alternative metallics, U.S. imports of merchant pig iron are expected to decline sharply as new DRI facilities come into operation in the country, according to AMM sister publication Steel First, citing data from Metal Bulletin Research (MBR). This will compel Brazilian and Russian pig iron suppliers to look for new export markets for their material.

U.S. merchant pig iron imports fell 17 percent year on year to 3.5 million tonnes in 2013, according to MBR estimates, amid weaker domestic crude steel production resulting from subdued domestic consumption of finished steel.

According to American Iron and Steel Institute data, U.S. mill shipments slipped 4.1 percent year on year during the first seven months of 2013, while crude steel output declined 3.6 percent through mid-September.

This has been driven particularly by reduced domestic shipments of hot-rolled long products, which fell 7.1 percent in the first half of 2013 compared with a year earlier, MBR said.

Service center shipments of long products also have declined more sharply than flat products. As a result, U.S. steelmakers that operate lean raw material inventories and apply a hand-to-mouth purchasing strategy have been unable to maintain their typical import volumes of higher-priced iron units from suppliers in Brazil and Russia.

More pertinently, Nucor’s 2.5-million-ton-per-year DRI facility in St. James Parish, La., will have a significant impact.

A large proportion of the company’s pig iron import volumes are expected to be displaced by its DRI output, MBR said, which estimated Nucor’s pig iron requirements at around 60 percent of total U.S. imports.

The new DRI facility is part of Nucor’s long-term strategy to supply and manage its raw material requirements for 6 million to 7 million tonnes of low-cost, high-quality iron units for its steel mills.

The effect on overall U.S. merchant pig iron imports will be more evident in 2014, according to MBR. By then, Nucor’s Louisiana DRI facility will be fully operational and the company will need lower imports of raw materials.

As a result, MBR forecasts U.S. pig iron imports will fall to 3 million tonnes in 2014. This likely will create significant challenges for the five remaining Brazilian pig iron producers, which together exported 2 million tonnes of material to the United States in 2012, or 70 percent of Brazil’s total exports for the year.

Looking ahead, competitive Brazilian pig iron merchants will need to shift their sales efforts to markets further afield, as happened with a 50,000-tonne cargo recently shipped to Italy. MBR also expects steel producers in China, South Korea and Taiwan to try to exploit the situation to feed their own steel expansions.

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