Firms that supply metallics to the steel industry are devising strategies to deal with declining demand from steelmakers in North America, Europe and China.
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 resources.
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 Basin.
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 Rim.
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 years ahead.
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 steelmakers.
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.