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DRI, alternatives may alter course of scrap markets

Keywords: Tags  direct reduced iron, DRI, Nucor Corp., Steel Dynamics Inc., Daniel R. DiMicco, Mesabi Nugget, Mesabi Iron Range, Peter Kakela Craig Pagel

Scrap substitutes have long played a role in North America’s electric-arc furnace mini-mill segment, but for years most scrap substitutes were processed offshore and shipped to the United States. In recent years, pig iron from Brazil and Russia, along with direct-reduced iron (DRI) from the Caribbean, have been the major scrap substitutes consumed by U.S. mini-mills.

Offshoring the sourcing of scrap substitutes was necessary because DRI processing typically requires using natural gas as a fuel, and until the very recent past firing DRI furnaces with natural gas was too costly in the United States. And primarily for environmental reasons, processing pig iron in the United States has long been prohibited.

But freight rates for bulk cargo shipments of such products as pig iron or DRI can make the cost of landing in the United States uncompetitive with prime grades of scrap, especially since many of the cargoes have to be unloaded at the port of New Orleans and transloaded into barges for delivery to steel mills along the Mississippi River and other inland waterways.

But with the discovery of seemingly near-unlimited supplies of shale gas in the United States in recent years, the paradigm for processing DRI has shifted dramatically. Natural gas has dropped to $2 to $3 per million British thermal unit in the United States from a high of $14 in the early years of the 21st Century. Processing commodities such as DRI in the United States has suddenly become competitive as a scrap substitute, and some major players in the metals recycling industry are moving to take advantage of that price competitiveness.

Both Nucor Corp., Charlotte, N.C., and Steel Dynamics Inc. (SDI), Fort Wayne, Ind., have moved aggressively to build greenfield facilities to process forms of DRI in the United States. Since both companies also have acquired metals recycling subsidiaries--David J. Joseph Co. by Nucor, and OmniSource Corp. by SDI--the move into scrap substitute processing is further evidence that the mini-mills are following the vertical integration business model that marked the steel industry at the beginning of the 20th Century.

In early September, Nucor told investment bankers at a New York conference sponsored by Credit Suisse Group that its raw materials strategy called for controlling an annual high-quality scrap substitute supply of 6 million to 7 million tons in the very near future. Nucor has 2 million tons of DRI capacity at its facility in Trinidad, and the company expects to start a DRI facility in Louisiana next year that will have an annual capacity of 2.5 million tons. The company has permitting for a second DRI model on the Louisiana site that would increase the company’s total annual capacity to more than 7 million tons.

Nucor chairman and chief executive officer Daniel R. DiMicco has been a strong proponent of tapping into America’s immense reserves of shale gas, and Nucor has signed an agreement with one of North America’s largest natural gas producers for drilling onshore wells in U.S. natural gas fields. The company estimates that the agreement will generate sufficient low-cost natural gas to hedge the gas usage at the Louisiana DRI facility’s first module for 20 years or more.

With natural gas currently going for an average of just over $2 per thousand cubic feet (mcf), Nucor points out that domestically produced DRI will cost about $324 per iron unit ton vs. pig iron at $476 per iron unit ton.

Clearly, Nucor’s raw material strategy poses the greatest threat to pig iron producers, many of whom are located in South America. And Nucor’s natural resources strategy is now accounting for 45 percent of the company’s forecast capital investment dollars, equal to the money the steelmaker is allotting for capital investment at its steel mills.

“The price of gas just keeps dropping and dropping, which is creating this story of the resurgence of new technologies,” Peter Kakela, professor of resource development at Michigan State University, said. “We went through a 20- to 30-year lull when there was virtually no innovation in this industry because of all the restructuring and downsizing.”

SDI has a raw materials strategy keyed to the production of iron-rich nuggets from a facility on Minnesota’s Mesabi Iron Range, although the facility, completed in 2009, has yet to reach its projected annual capacity of 500,000 tons.

Mesabi Nugget produced 74,000 tonnes of iron nuggets during the first six months of 2012, well below the plant’s capacity and the 156,000 tonnes produced in the same period last year. Losses from the Minnesota iron operations reduced the company’s net income in the first six months of 2012 by approximately $20 million, $5 million more than in the first six months of 2011

But SDI president and chief executive officer Mark Millett said that a joint-venture project the company is pursuing with Grand Rapids, Minn.-based Magnetation Inc. will allow Mesabi Nugget to use 800,000 tons of iron concentrates in the plant for producing iron nuggets. That’s sufficient to run the Mesabi Nugget plant at full capacity, he told a KeyBanc Capital Markets Inc. conference in Boston in September, noting that production from the concentrates is expected to begin in late 2012.

“We are currently constructing the iron tailings operation. This operation is planned to provide iron ore tailings to be concentrated for use by Mesabi Nugget as a low-cost iron concentrate to the nugget production process, replacing higher-priced concentrate from external sources,” SDI said. “Losses from our Minnesota iron operations reduced our net income in the second quarter of 2012 by approximately $11 million, $3 million more than in the second quarter of 2011. The increase in losses was due primarily to a planned outage to address normal and certain other mechanical and operational issues during April/May 2012.”

Craig Pagel, executive director of the Iron Mining Association of Minnesota, noted that the Mesabi Nugget project reportedly is heading toward full monthly capacity soon. Engineers are fine-tuning the sophisticated pressure and temperature equipment at the Hoyt Lakes, Minn., plant, he said. “This is the first time that a plant such as this has been ramped up to full-scale production.”

Magnetation, founded in 2006, is a specialty iron ore mining company that uses proprietary mineral processing technology to recover high-grade iron ore concentrate from low-grade hematite iron resources on Minnesota’s Mesabi Range, including tailing basins, lean ore stockpiles and virgin ore bodies.

Kakela noted that Magnetation, a joint venture with a subsidiary of AK Steel Corp., West Chester, Ohio, is “expanding hand over fist.” The company recently put a third unit online in Minnesota, and is already discussing further expansion with its partners and investors.

The jury is still out on the impact that domestic iron nuggets and DRI will have on the ferrous scrap segment of the industry. To date, relatively little domestic scrap substitute has come into the marketplace. Meanwhile, major mini-mill companies have announced major new capital investments.

This year, Nucor is installing a new vacuum degasser at the Hereford County, N.C., mill and its Arkansas mill; the company plans to put in a normalizing line in North Carolina and a “wide-light” sheet steel facility at Darlington, S.C., next year; and its special bar quality (SBQ) mills in Nebraska, South Carolina and Tennessee are all slated to undergo major capacity growth in 2014. All told, the company has spent $6.8 billion in capital investments--about $3 billion on the steelmaking side of the business--between 2008 and 2012, with likely as much or more capital investment slated for the 2013-16 period.

That bodes well for the ferrous scrap business, since new lines and expanded mini-mills tend to consume more scrap. But Nucor’s conscious strategy to increase DRI production on the back of low natural gas prices also could be used as a hedge against higher scrap prices.

In its second-quarter report, Nucor noted that its David J. Joseph subsidiary “experienced severe downward pressure on margins.” Nucor also said its average scrap and scrap substitute cost increased to $436 per ton in the second quarter of 2012 from $433 a year earlier. That has some in the ferrous scrap brokerage business concerned about the potential for scrap substitutes to drive down monthly prices, especially on the prime grade side of the ledger.

“We suspect commodity prices are going to go down once scrap substitutes start coming onto the market,” said one veteran Philadelphia-area broker who frequently handles imported pig iron. “We think it is going to affect the whole prime grade scenario.”

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