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How heavy will the steady rise in ferrous exports weigh on home market prices?

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Could we be heading for a battle between domestic mills and foreign steelmakers for ferrous scrap and other steelmaking raw materials? It's a definite possibility.

Mini-mills used to be restricted to the rebar and structural segment of the steel market until German engineers came up with a system called continuous strip processing (CSP). The technology gave mini-mills access to the sheet steel business, a vast and lucrative market.

They leapt into it—not just companies like Nucor Corp., Charlotte, N.C., that were already in the steel business, but also newcomers like Steel Dynamics Inc., Fort Wayne, Ind. They made sheet, but they still used the electric furnace—and scrap—to produce the hot steel that would be formed into sheet.

Some of the integrated steelmakers have disappeared in the past few years, while the others have seen their market share shrink as Nucor and others expanded.

Such an expansion was achievable because there was an abundant supply of scrap—or so it seemed. But scrap is a limited commodity. Nobody sets out to create scrap. It comes from the shredding of wrecked vehicles, the demolition of buildings and by-products of manufacturing. Scrap dealers buy and process metals that are no longer wanted and in that sense have been "recycling" even before the word was coined.

But it isn't just domestic mini-mills that have scrap as their raw material of choice. Their overseas rivals also have developed a bigger appetite for scrap. The United States is closing in on its third 20-million-tonne export year, double the tonnage that most exporters used to consider a "good" year. And the pace is not slowing up.

China, which uses basic-oxygen furnaces to produce much of its steel, also has the world's largest appetite for scrap. It imported slightly more than 4 million tonnes from the United States through the first seven months of this year, triple what it took the previous year. And Turkey, which imported close to 4.5 million tonnes last year, has received a lot of exposure for its buying binges.

But China and Turkey are mainly bulk cargo buyers of scrap. In the not-too-distant past that was how all ferrous scrap was shipped overseas. Not anymore. Many large and mid-sized yards that are not on the ocean—but not too far away from the docks—have carved out a niche for themselves in the export market. They have learned that they can sell container-loads of scrap to smaller steel mills in Thailand, Vietnam and Taiwan and not have to worry much about letters of credit and other items of high finance.

When a major exporter sells a 35,000-tonne handy-max cargo of scrap, that's easily a $10-million cargo—not exactly pocket change even for the largest overseas steelmakers. Containers, on the other hand, may hold between 20 to 40 tonnes, translating into just a $6,000 or $12,000 invoice.

Another segment of raw materials supply—Venezuelan hot-briquetted iron (HBI)—is no longer available to U.S. mills. By executive decree, Venezuelan President Hugo Chavez has nationalized the Venezuelan iron industry, taking control of HBI manufacturers Materiales Siderúrgicos SA, Complejo Siderurgico de Guayana CA, Venezolana de Perreducidos Caroní CA and Orinoco Iron SCS, as well as the country's sole seamless steel producer, TenarisTavsa.

Some believe he may be doing this to use more of the metal at home, but that's a stretch. Others say it's simply one more salvo in his economic war with the United States.

There will be HBI available for offshore markets, says one industry source, but Chavez wants the same price that U.S. mills pay the Brazilians for pig iron. In recent months, much of the HBI produced by the commercially owned HBI plants in Venezuela has been exported to Europe at prices said to be as low as $205 per tonne, cheap when compared with pig iron at more than $300 a tonne.

By taking over the HBI and steelmaking facilities, the Chavez government can produce iron at whatever price it chooses, since the government already owns the iron ore and natural gas produced in Venezuela, the two main components in making iron through the direct-reduced iron technology.

But the two products—HBI and pig iron—are not the same chemically. Pig iron is a cleaner product with higher iron content and fewer other elements that have to be fluxed or blown out of the charge. Chavez does not understand the chemistry and probably won't get the message until those briquettes start piling up on the docks along the Orinoco River.

The simple fact is that the United States is the Saudi Arabia of ferrous scrap. But unlike Saudi Arabia, which uses very little of its own oil reserves, U.S. steelmakers consume a vast amount of the available scrap—60 million tonnes a year by one count, three times the amount going overseas to nations like China, India, Malaysia and Vietnam. If domestic and foreign consumption continues at the present pace, how long will it be before we have to scour even the most remote locations of our country looking for scrap. And what will it cost to bring this material to market?

MICHAEL MARLEY


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