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The gas companies

Keywords: Tags  Steel, natural gas, shale, energy, direct-reduced iron, hot-briquetted iron, DRI, electric-arc furnaces Nucor Corp.

As the final days of 2013 wound down, Nucor Corp. opened a new era in U.S. steelmaking when it brought on line the first phase of its $750-million direct-reduced iron (DRI) complex in St. James Parish, La., outside New Orleans.

The facility, which began production on Christmas Eve, has been ramped up to nameplate capacity of 2.5 million tons per year. The significance of the new plant is not DRI per se, but rather that it signaled the new era of inexpensive and plentiful natural gas as a long-term fixture of the U.S. manufacturing and economic base.

The symbiosis between steel and natural gas is hard to overstate. The bonanza in domestic gas and oil production comes from directional drilling and hydraulic fracturing, which allow energy companies to extract vast quantities of hydrocarbons from shale and other dense formations that have been known about for decades but previously were not considered commercially viable. Those drilling projects require drill string, line pipe, oil country tubular goods (OCTG) and even pressure vessels for processing plants, which creates strong demand for high-value steels. In turn, steelmaking is consuming greater quantities of gas. DRI uses 10,000 cubic feet, or 10 million British thermal units (Btu), of gas per tonne of finished material. Gas also is consumed in blast furnaces to supplement coke, and is fast replacing coal as the primary fuel for generating power for electric-arc furnaces (EF). 

“The energy segment represents about 8 percent of demand for steel in the United States and is the area of demand most likely to grow for steelmakers in the next few years,” said Teri Viswanath, director of commodity research in New York for Paris-based investment bank BNP Paribas SA. “There is a great deal of pent-up demand for tubulars as shale gas moves to new areas of production and must be moved to processing and consuming markets. Producing areas are shifting, and the supply mix is changing. The story for steel will be moving gas to market, and not just new production. There is a vast aging pipeline system in the country that will have to be replaced. Some of the newest gas-producing areas in Pennsylvania and Ohio are right underneath some of the oldest infrastructure in the country.”

Pipe and tube makers have definitely taken note. However, the boom in demand for OCTG in the past few years came faster than U.S. production could be expanded, and rising prices attracted a lot of imports, especially from Asia. Those import volumes have proven to be a challenge to dislodge as domestic producers brought on new lines and planned more.

Luxembourg-based Tenaris SA said in its third-quarter results late last year that “sales and operating income decreased with sequential sales affected principally by the impact of project delays on line pipe shipments in Brazil and a less-favorable mix of OCTG products with lower sales in the Middle East and Africa, in addition to the seasonal impact of Northern Hemisphere plant stoppages.”

Tenaris announced in June 2012 plans for a seamless pipe mill and heat treatment and premium threading facilities with an estimated investment of $1.5 billion. The new mill, which is slated to begin operations in 2016, will have an annual production capacity of 650,000 tons of high-quality seamless pipe and will be fully integrated with the rest of Tenaris’ U.S. manufacturing and service operations.

The company said at the time that “U.S. market demand for high-quality OCTG and line pipe products is growing rapidly due to the development of unconventional shale (oil and gas) reserves and the resumption of deepwater drilling activity in the Gulf of Mexico. The new investment plan will strengthen Tenaris’ local production and service capabilities, allowing it to reduce lead times and serve its U.S. customers with a full range of locally manufactured seamless, welded and premium products in a market where imported products account for over half of total consumption.”

Eighteen months later, the pipe project is on schedule but Tenaris dialed back the exuberance a bit. “Drilling activity in North America (in 2013) has consolidated, supported by improving operator cash flows on higher oil prices and drilling efficiencies. (In 2014), it is expected that operator cash flows will support an increase in drilling activity if oil and gas prices remain close to current levels. In the rest of the world, oil and gas prices close to current levels should continue to support the ongoing expansion in drilling activity in the Middle East and offshore regions, and onshore activity in other regions should remain stable. Going into 2014, we expect a strong level of sales in the Middle East and Africa and a rising level of sales in North America.” 

As Viswanath indicated, there is a strong case for steel demand in oil and gas production and transportation over the long term. But with the current market somewhat stalled, attention now is more focused on gas demand in steel.

Charlotte, N.C.-based Nucor was very specific in its plans for the St. James complex, saying in 2010 that it would “convert natural gas and iron ore pellets into high-quality DRI (to) be used by Nucor’s steel mills, along with recycled scrap, in producing ... sheet, plate and special bar quality steel. The DRI facility is the first phase of a multi-phase plan that may include an additional DRI facility, coke plant, blast furnace, pellet plant and steel mill.”

The DRI facility was chosen for the first phase of the project in place of a blast furnace and coke facility, the company said, because it offered a carbon footprint one-third of that for the coke oven/blast furnace route for the same volume of production at less than half the capital cost. While there is some loss/penalty in the “value in use” in DRI vs. pig iron, Nucor said technology improvements that were developed at its Trinidad and Tobago DRI plant had significantly reduced that typical penalty. In a historical note, the train in Trinidad originally was built less than a mile from the new DRI plant in Louisiana, but was dismantled and moved to its current site because natural gas supply in the United States was expected to get tight and expensive.

The mere existence of the DRI plant shows that major industrial companies have bought into the energy industry’s assertion, corroborated by recent government research, that natural gas is plentiful and will remain economical for the foreseeable future.

“Ongoing improvements in advanced technologies for crude oil and natural gas production continue to lift domestic supply and reshape the U.S. energy economy,” the U.S. Energy Information Administration (EIA) said in its annual outlook for 2014. While domestic crude oil production is expected to level off and then slowly decline after 2020, natural gas production is expected to grow steadily, with a 56-percent increase between 2012 and 2040, when production will reach an estimated 37.6 trillion cubic feet.

As steelmakers, pipe fabricators and service centers have already seen, the EIA stated officially that “low natural gas prices boost natural gas-intensive industries. Industrial shipments (will) grow at a 3-percent annual rate over the first 10 years of the projection and then slow to 1.6-percent annual growth for the rest of the projection. Bulk chemicals and metals-based durables (will) account for much of the increased growth in industrial shipments in (2014).” The higher level of industrial shipments will lead to more natural gas consumption, including lease and plant fuel, in the U.S. industrial sector, the EIA said, increasing to 10.6 quadrillion Btu in 2025 from 8.7 quadrillion Btu in 2012.

Also very important to EF operators, the government projection anticipates that natural gas will overtake coal to provide the largest share of U.S. electric power generation. “In some areas, natural gas-fired generation (will) replace generation formerly supplied by coal and nuclear plants. In 2040, natural gas (will) account for 35 percent of total electricity generation while coal (will) account for 32 percent,” the EIA said.

Higher natural gas production also will support increased exports of line pipe and liquefied natural gas (LNG), according to the EIA, which has mixed implications for steel. Demand for pipe and processing vessels will increase, but many large-volume industrial users are concerned that significant gas exports in coming years could increase domestic prices. “U.S. exports of (LNG will) increase to 3.5 trillion cubic feet in 2029 and remain at that level through 2040,” the EIA said, adding the caveat that “projected exports are sensitive to assumptions regarding conditions in U.S. and global natural gas markets.”

Nucor is not taking any chances. As part of the Louisiana development, the steelmaker signed two long-term agreements with Encana Oil & Gas (USA) Inc., a subsidiary of Calgary, Alberta-based Encana Corp. It is not just a volume supply deal—Nucor also will take a nonworking interest in designated wells, taking its returns in gas rather than cash. The drilling of natural gas wells resulting from the two agreements is expected to provide enough natural gas to equal Nucor’s usage at all of its steel mills in the U.S. plus the usage of two or three DRI plants.

Next up is Linz, Austria-based Voestalpine AG, which announced plans to build a $748.2-million, 2-million-tonne plant to produce DRI and hot-briquetted iron (HBI) just outside Corpus Christi, Texas. The plant is due to begin operations in early 2016. Half the output will be shipped to the company’s steel mills in Linz and Donawitz, Germany, while the other half will serve as a strategic reserve and initially will be sold to partners interested in longer-term contracts. Other steelmakers, even those primarily with blast furnace operations, also are known to be considering new DRI production.

The major licensors of DRI technology confirm their phones have been ringing. Midrex Technologies Inc. is the licensor for Voestalpine, which will use DRI as a blast-furnace input. “DRI today is primarily considered an alternative to scrap in EFs, but it was originally developed for blast furnaces,” said Robert Hunter, DRI application manager at Charlotte, N.C.-based Midrex. “DRI found its true niche in EF, but it is an excellent supplement for a blast or basic oxygen furnace.

“We think of three categories: cold DRI, hot DRI and HBI,” Hunter said. “A hot charge for an EF is a real savings in energy and electrode life. All things being equal, you definitely want hot DRI for your EF. HBI in a blast furnace is also a benefit. About 80 percent of the energy in a blast furnace is used to reduce the iron, tear the oxygen away. If you are feeding metalized charge, you have already done that reducing. You already put in that energy very efficiently from natural gas. You also produce a lot less carbon dioxide. A big part of the Voestalpine project is about taking down their CO2.”

“There is a great reciprocity to natural gas and steel. As DRI and EF grew up together, DRI enabled scrap melters to compete with blast furnace operators in higher-quality steels, the kind that are in demand for OCTG and other energy industry segments,” said Chris Ravenscroft, marketing manager for Midrex. “By the end of this decade we will need 10 million tons of new DRI/HBI capacity in North America. Nucor just started, and they are at 1.5 million tons, going to 2.5 million. Voestalpine will be 2 million tons, so we will need another two to three plants. Twenty years ago 10 million tons would be 10 plants, but today 10 million tons can be just four or five plants.”

Sure enough, the phones also are ringing at other major DRI licensors. “We have been talking to many potential licensees,” said Francesco Memoli, vice president of steelmaking for Tenova Core Inc., a Milan-based sister company of Tenaris with U.S. headquarters in Pittsburgh. “I don’t think there will be any announcements of commitments to new DRI capacity early in 2014, but hopefully later in the year and into 2015. The U.S. is definitely the focus of attention, but this is not just in the United States—it’s anywhere there is gas. DRI is not new, it goes back 30 or 40 years. Quality was always a strong point, because DRI has such a high carbon ratio, up to 4 percent, and no impurities as scrap has. But cost was always a question. Now, thanks to this new gas age, the economics of DRI are very attractive.

“Today, everyone is considering using and making DRI—not just the ones you hear about, but everyone,” Memoli said. “Now just because people are thinking about it, doesn’t mean they will build or buy and use. But everyone has an interest in this technology. The natural gas revolution has been a real game changer in steel, both in terms of manufacture and demand.”

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