Firms that supply metallics to
the steel industry are devising strategies to deal with
declining demand from steelmakers in North America, Europe and
Demand for finished steel mostly
recovered following the global recession, but it has been
losing ground since the fourth quarter of 2012. That slippage
poses strategic challenges for the natural resource companies
that supply iron ore and metallurgical coal to the global steel
industry. And from the looks of it, U.S. firms are looking far
and wide to find ways to blunt the impact of declining demand
both domestically and overseas.
Suppliers are constrained by the
fact that integrated steelmakers consume iron ore,
metallurgical coal and limestone, while electric-arc furnace
(EF) mills consume ferrous scrap or reduced iron products.
Suppliers must deal with a decline in demand that is forcing
diversification of product lines or geographic markets. Both
strategies are currently being employed by some of the major
suppliers in the United States.
Cliffs Natural Resources Inc.
chairman, president and chief executive officer Joseph Carrabba
said the Cleveland-based company is making real progress on its
direct-reduced iron (DRI) project in Minnesota.
Cliffs, one of the United
States largest producers of iron ore, has been
experimenting for about a year with converting taconite pellets
in Minnesota to DRI-grade pellet suitable for firing in EF
steel mills. Its not so much an if but
a when, P. Kelly Tompkins, Cliffs
executive vice president of legal, government affairs and
sustainability, told local media.
Cliffs last year identified two
Minnesota minesÑUnited Taconite LLC and North
ShoreÑthat might be capable of producing DRI product,
Carrabba said, and so far they have successfully produced
30,000 tons of DRI-grade pellet, achieving targeted
specifications. We ran a full-scale production test for
two weeks at our North Shore Mine in March 2013, he said.
We will continue to test different processing methods
using a variety of ore blends and flow sheets.
The rush to convert iron ore to
DRI-grade products in the United States has been fueled by the
emergence of low-cost shale natural gas. As recently as five
years ago, most DRI-grade products were imported from Brazil
and Ukraine. With its recent experiments in Minnesota, Cliffs
joins Nucor Corp. and Steel Dynamics Inc. in announcing major
DRI projects in recent years.
Peter Kakela, professor of
resource development at Michigan State University in East
Lansing and an iron ore industry analyst, said Cliffs
venture into DRI pellet production could mark the beginning of
a trend. This is one of several new technologies up
there, he said. Its fascinating that new
technology is being applied to northern Minnesotas iron
Cliffs has been building
geographic diversity into its iron ore market for years. The
companys Wabush and Bloom Lake mines are among
Canadas largest producers, with a sales volume of close
to 10 million tons forecast for 2013, and its iron ore
operations in Australia are on track to hit a sales target of
11 million tons this year.
Cliffs began a major
diversification of its product lines in 2007, when it acquired
metallurgical coal assets in Australia and the United States.
The company acquired a 45-percent interest in the Sonoma
project in Queensland, Australia, and paid $450 million in cash
and assumed $150 million of debt to acquire PinnOak Resources
LLC and its subsidiary companies in West Virginia and northern
Alabama, giving Cliffs an immediate presence in the
metallurgical coal trade. Cliffs expects a 2013 sales volume of
about 7 million tons of coal from the PinnOak properties, about
80 percent of which will be exported through the ports of
Norfolk, Va., and Mobile, Ala.
The company is surprisingly
bullish about the prospects for the remainder of 2013. Carrabba
pointed out to analysts that Chinas steel production
continues to be healthy, with first-quarter figures suggesting
annualized production of more than 750 million tons. And iron
ore inventories at Chinese ports are at multiyear lows, further
fueling Cliffs optimism about the future.
With iron ore benchmark prices
of $148 per ton delivered to China in the first quarter of this
yearÑup substantially from $113 in the third quarter of
last yearÑsales margins are up from the same period last
year for both the United States and Canada.
For Alpha Natural Resources
Inc., its all about strategic repositioning to deal with
declining demand. The Bristol, Va.-based company, a leading
U.S. supplier and exporter of metallurgical coal with expertise
in blending and optimization, exported $2.9 billion worth of
metallurgical and thermal coal last year, or about 42 percent
of the companys total revenues.
Pure coal producers, such as
Alpha, were hit by a double whammy in recent years: Unlike
Cliffs, which is diversified in both iron ore and metallurgical
coal, Alpha has had to cope with a decline in demand for
metallurgical coal from Chinese steel producers as well as a
drop in demand for thermal coal from U.S. electric utilities
due to increasingly stringent environmental regulations at both
the state and federal level. And the same glut of low-cost
natural gas that is encouraging the production of DRI-grade
products in the United States is allowing utilities to convert
baseload power generation to natural gas from coal.
Alpha chairman and chief
executive officer Kevin Crutchfield said in announcing the
companys strategic repositioning initiative last fall
that with fundamental changes taking place in our
business, were taking decisive actions that set the table
for Alpha to compete successfully as a leader in the global
coal markets for years to come.
Crutchfield laid out a
three-pronged strategy: create a durable, sustainable steam
coal portfolio; support and augment the companys
metallurgical coal franchise; and address nonstrategic
operations. During the fourth quarter of 2012 and into the
first quarter of 2013, Alpha adjusted production and shipments
in response to the current market and pricing environment. The
company said that a combination of mine and equipment idlings,
production curtailments and mining out of reserves reduced
annualized coal production and shipments by about 16 million
tons. Approximately 40 percent of the reduction came from
higher-cost thermal coal operations in the eastern United
States, while half of the reduction was realized from
production curtailments at mines in Wyomings Powder River
The focus and shape of our
company need to change to reflect our new business
environment, Alpha president Paul Vining said. We
must have a nimble operating environment, superior cost
management, and an overhead structure that matches our
streamlined operational footprint.
Crutchfield announced at BMO
Capital Markets Corp.s Global Metal and Mining Conference
in February that the strategic repositioning and restructuring
announced in September was essentially complete. He said that
cost-containment initiatives reduced overhead expenses by more
than $150 million annually, and reduced capital expenditures of
about $300 million to $350 million this year would help further
enhance cash flow.
Like Cliffs, Alpha is optimistic
about the future. The companys metallurgical coal
portfolio, which accounts for 44 percent of production, likely
will increase in years to come to serve growing export markets.
Alpha pointed out that steel use in developing countries is up
44 percent in the past five years vs. a 15-percent drop in the
developed world, and total seaborne demand for metallurgical
coal is expected to total 400 million tonnes in 2020, up
sharply from nearly 250 million tonnes last year.
U.S. metallurgical coal
suppliers have long supplied steelmakers in the traditional
Brazilian and European markets. But since the rise of China as
a steelmaking behemoth, U.S. suppliers have become more and
more active in the export market to China and the Pacific
Although the global
metallurgical coal market weakened throughout 2012, Crutchfield
expects supply response and increasing Chinese demand to nudge
the market to a more sustainable balance in the future.
Finally, Alpha boasts of more export capacity at East Coast and
Gulf Coast ports than any other U.S. producer, which will allow
the company to take advantage of growing seaborne demand in the
Like Alpha, Lisle, Ill.-based
SunCoke Energy Partners LP intends to capitalize on the surging
demand for metallurgical coal from steelmakers in the
developing world. SunCoke Energy, one of the largest
independent producers of coke in North America, produced more
than 1 million tons in the first quarter of 2013, down only
slightly from the same period last year. The companys
U.S. cokemaking facilities are in Illinois, Indiana, Ohio and
Virginia, and the company has more than 110 million tons of
provable and probable reserves at its coal mining operations in
Virginia and West Virginia.
In recent years, SunCoke Energy
has expanded its cokemaking operations overseas to Vitoria,
Brazil, and, most recently, to the Indian subcontinent. In
March, the company joined with Visa Steel Ltd. to launch a
joint-venture cokemaking facility at Kalinganagar in
Indias Odisha state. The 400,000-tonne heat recovery coke
plant and associated steam generation units will serve Indian
SunCoke Energy invested $67
million in its 49-percent interest in the joint venture with
Visa Steel. This partnership marks a key milestone in
SunCoke Energys international growth strategy, said
chairman and chief executive officer Frederick
Fritz Henderson. By teaming with Visa Steel,
SunCoke is entering India with the wisdom and experience of a
premier and highly regarded local partner.
Still, American suppliers of metallics for the global steel
industry must see a rise in prices in order to justify the
capital investment to serve overseas markets. Metallurgical
coal is a case in point. Analysts say prices need to be around
$200 per tonne for producers to break even; in China, prices
were in a range of $150 to $160 per tonne in the spring.