NEW YORK - A need to lower costs and secure raw material supply in an increasingly competitive global steel environment is the driving force behind Nucor Corp.s decision to expand its direct-reduced iron (DRI) capacity, president and chief executive officer John Ferriola said in an interview.
Its all part of this big picture. We recognize that with the way the world is going and the way steel capacity in the world is growing and the way that demand is flat or decreasing in the world, weve got to be the low-cost producer, Ferriola told AMM in New York. We recognize that in the grand scheme of things, weve lost or reduced that raw material competitive advantage and we need to get it back. And the way were going to get it back is through DRI.
Charlotte, N.C.-based Nucor, which already operates a DRI facility in Trinidad, during the third quarter is expected to bring online a 2.5-million-ton-per-year DRI unit in Louisiana and is permitted to build a second facility of the same size at the St. James Parish, La., site. If it builds the second facility, it will ultimately have about 7 million tons of captive DRI capacity in its portfolio of assets.
The decision to expand Nucors DRI capacity stemmed in large part from a need to secure iron units for the long term, according to Ferriola. A major scrap consumer, Nucor in 2008 bought ferrous scrap broker David J. Joseph Co. (DJJ) in an effort to better secure its scrap supply. But with more and more secondary material now slated for export, Nucor decided it was time to also secure input material in the form of DRI, he said.
Scrap is leaving the country, and worldwide there are more (electric-arc furnaces) being built and theres more and more need for scrap by these producers. At the same time, more and more countries are declaring scrap as a national resource and are either taxing it or placing tariffs on it, or in some cases banning the export of scrap. So the amount of scrap that we would call ocean-going scrap (is vastly reduced), he said. Bottom line is we wanted to have more of our own control on raw materials.
DRI has always been on the companys radar, but because of high natural gas prices and the low quality of DRI material previously available worldwide, it wasnt initially an option for the steelmaker, Ferriola said.
We had to find a way to have a long-term supply of natural gas at a reasonable price and locked in for 20 to 25 years to cover the investment, and we had to get the DRI quality up to levels where it never existed before, he said.
However, as natural gas prices have come down dramatically due to the recent shale boom, the technology has become much more viable, he said.
For Nucor, the ability to capture those lower energy prices came in the form of a two-part agreement with Calgary, Alberta-based Encana Oil & Gas (USA) Inc. The first deal between the companies secured for Nucor a long-term reasonable cost of natural gas, while the second agreement vastly expanded that partnership in terms of volume (amm.com, Nov. 6).
We had sort of a marriage made in heaven. They had a need for capital so that they could continue to invest and drill wells before the leases expired and we had a need for gas. So we were able to work out this arrangement, which I cannot give you the details of other than it gives us a long-term reasonable cost of natural gas, Ferriola said.
In addition to a low-cost power supply, Nucor also needed a higher quality of DRI to make the expansion plan feasible, Ferriola said. Initially, the material coming out of Trinidad was of such low quality that the company could only put 8 to 10 percent into its mix.
We went to Trinidad, we challenged our team in Trinidad, we told them what we needed to get to, we told them we needed to get to 95-percent metallization and we needed to get to 2.5- to 3-percent carbon and that would allow us to increase significantly the amount were able to put into our furnace. A year later, they called and said come on down and see what we got ... and today theyre producing DRI at a level of 96- to 96.5-percent metallization and 3- to 3.5-percent carbon, he said.
With material of that higher purity level, the company can fill its furnaces with up to 40 percent DRI without it adversely affecting the steel.
We believe we could have put more in, but the feed system that we had wasnt fast enough, Ferriola added, noting that Nucor has since upgraded the feed mechanisms for all its sheet and special bar quality (SBQ) mills to allow for more DRI use.
But while he said Nucors mills could eventually take up to 50 or 60 percent DRI from a metallurgical perspective down the road, scrap will still play a major role in the companys raw material strategy as well.
It is another raw material, another arrow in our quiver, Ferriola said, adding that Keith Grass, who is now chief executive officer of DJJ, also runs the natural gas project and will be in charge of the commercial side of all of the companys DRI activities. So hell be out there and hell juggle iron units. At the end of the day, all we care about is iron units. An iron unit is an iron unit is an iron unit. É And it comes down to what do we pay for that iron unit, whether its HBI (hot-briquetted iron), pig iron, DRI that we make or we buy on the merchant market or scrap. So hell look at all of those things on a regular basis, balance it all out and decide what we do.
Its possible Nucor might sell some of that DRI rather than consuming it internally, but time will tell, Ferriola said.
Do we consume it (all ourselves)? Logistics will play a role in it. Were hearing that other people are going to build DRI facilities. Were hearing of one in Texas--maybe, maybe not. If it (happens), we wouldnt supply our Texas mill out of Louisiana, he said.
We dont know how thats going to play out very well yet. But we know that it gives us another arrow in the quiver of getting our costs lowest. And in a world where you have excess global capacity and a tsunami of imports heading to you, the name of the game is to be the lowest-cost producer domestically because youve got to fight imports. And if theres only one steel company left standing after this tsunami hits ... well be the one standing.