Attack of the Scrap Complements
Jun 9, 2014, 08:39 AM
May/June 1999
Long touted as complements to scrap, DRI and its ilk are looking more and more like scrap substitutes. What’s the truth?
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
It’s said that every dark cloud has a silver lining.
For scrap processors, last year’s plummeting scrap prices were certainly a dark cloud. But the silver lining was that the market slide helped slow the growing demand for so-called scrap complements such as direct-reduced iron (DRI), its compacted form known as hot-briquetted iron (HBI), iron carbide, and pig iron.
That slowdown, however, couldn’t erase the tremendous growth of direct-reduction facilities around the world and, more notably, in the United States in the previous few years. And industry experts suggest that scrap complements will resume their growth—and their challenge to scrap’s market share—as soon as scrap prices recover.
It’s a challenge that Cap Grossman, president and CEO of Grossman Iron & Steel Co. (St. Louis) and a past ReMA president, calls “more critical than Superfund” to the future of the U.S. scrap industry.
A Growing Piece of the Metallics Pie
To see how much ground DRI and its brethren have gained, consider this: Five to eight years ago, U.S. steelmakers purchased almost no merchant scrap complements, says Stephen Wulff, vice president of planning for the brokerage services division of the David J. Joseph Co. (Cincinnati). Last year, in contrast, U.S. minimills and integrated mills purchased nearly 10 million mt of merchant complements, an amount that’s roughly 15 percent of the total metallics purchased for melting, he notes.
And look at how the scrap-to-complements ratio has been changing in the raw material mix at U.S. steel mills. The November/December 1994 issue of Scrap noted that “when mills do use scrap complements, the material rarely accounts for more than 20 percent of the charging mix.” Today, it’s common to find U.S. mills using a mix of one-third DRI, one-third pig iron, and one-third scrap, says Christopher Plummer, managing director of Metal Strategies Inc. (West Chester, Pa.), a metals analysis firm. “They tend to even out their metallics for product quality reasons and purchasing reasons,” he explains. “They like to play one off the other.”
A growing number of companies are pushing the limits of DRI further. Georgetown Steel Corp. (Georgetown, S.C.), which installed the first DRI plant in the United States in 1971, has long used a 50/50 ratio of DRI to scrap, sometimes boosting that to 70 percent or more, notes Robert Bullard, the firm’s vice president and general manager.
Other steelmakers use even higher ratios: Ispat Mexicana makes steel with essentially 100-percent DRI, while a steel company in Qatar uses about 95 percent DRI to make the “highest-quality rebar in the world,” says John Kopfle, manager of marketing and planning for Midrex Direct Reduction Corp. (Charlotte, N.C.), the world’s largest DRI technology company.
World production of scrap complements has also been pushing some limits. In 1994, Midrex predicted that global production of DRI wouldn’t reach 35 million mt until 2000, but that goal was passed three years early when 1997’s production topped 36 million mt.
A proliferation of new direct-reduction plants helped drive production up. Since 1995, nearly 30 major DRI, HBI, or iron carbide plants with annual production of at least 20,000 mt either opened or started construction around the world, including three in the United States (where previously there was only Georgetown Steel’s site), Midrex reports. In addition, numerous other projects have either been announced or are in various stages of planning worldwide. (For more on direct-reduction operations, see “The Complement Story” on page 51.)
Given that there were about 90 major direct-reduction facilities listed in Midrex’s 1998 global report (many of which operate more than one module), that means some 30 percent of all scrap complement plants are less than four years old. Moreover, while such plants traditionally were “captive”—meaning their production was for internal use by the owning company—in recent years “the vast majority of new projects have been targeted as merchant plants,” says Plummer.
The Asian economic crisis, however, shook world steel markets last year and took a toll on the direct reduction industry as well. Despite poor market conditions, DRI production still managed to grow 2.5 percent in 1998 to a record 37.1 million mt, Midrex says. But that modest growth fell far short of the 9-percent increases of the two previous years and the double-digit jumps reported in 1994 and 1995. Midrex, in fact, has lowered its longer-term forecasts for DRI production: Instead of the 55 million mt by 2000 and 70 million mt by 2005 it had projected in two earlier reports, the firm now estimates 45 million mt in 2000 and 60 million to 65 million mt by 2005.
Due to market conditions, various complement projects around the world are being placed on hold or cancelled. And at least one international steel company with its own DRI facilities has increased its scrap consumption at certain sites, thanks to bargain prices for ferrous scrap.
Still, scrap processors like Cap Grossman, while conceding some market swings back to scrap, consider the complements issue a “crisis brewing” and a “threat to our product line.” And most observers agree that the complement industry’s current setbacks will only be temporary.
“The main factors affecting the growth of DRI remain in effect,” a Midrex report notes. “Once the steel industry recovers, DRI demand will resume its historical growth patterns.”
The Drivers Behind the Growth
Several factors fueled those historical growth patterns, including:
- the explosive increase in minimill steel production;
- the decision by many minimills to switch from making lower-grade steels to higher grades, thus increasing their need for high-quality metallic feedstocks;
- the high prices of ferrous scrap in the mid-to-late-1990s; and
- the lower prices of deregulated natural gas in the United States, which made producing scrap complements domestically more economically feasible.
Electric-arc furnaces now account for roughly 45 percent of all steelmaking in the United States. Around the world, one new electric-arc furnace reportedly starts up each week. By next year, some 20 million tons of new minimill capacity will have come online in North America alone since 1995, notes Kopfle.
Ordinarily, the growth of scrap-fed electric furnaces would mean booming demand for ferrous scrap. But there’s a catch: Much of this new capacity has been and will be devoted to producing flat-rolled products and other high-quality steels instead of lower-end products such as rebar. While mills can make rebar out of cheaper grades of scrap, they need the lowest-residual scrap possible to produce high-quality steel, explains Wulff.
Therein lies the problem for scrap processors—and the opportunity for scrap complement producers.
Although few industry experts expect there to be a scrap shortage anytime soon, many note that there’s often a perception that the highest grades of ferrous scrap—No. 1 bundles and busheling—have at least a finite supply. As Wulff observes, “It really doesn’t matter how high scrap prices go, Chrysler’s not going to intentionally make more defective fenders so it can sell more scrap.”
So, the logic goes, minimills that want to make high-grade steel need a steady supply of low-residual metallics—that is, scrap complements. And to help secure that supply, more and more minimills have opted to build captive direct-reduction plants, a practice that’s earned them the nickname “integrated minimills.”
There are, of course, holes in that logic. Firoze Katrak, vice president of Charles River Associates Inc. (Boston), argues that “proper blending” of metallics would enable minimills to use less complements than they currently think necessary.
But domestically, at least, just the possibility that there wouldn’t be adequate supplies of high-grade scrap was enough to prompt minimills to boost their demand for scrap complements.
Likewise, the high price of scrap in recent years encouraged mills to start “looking at DRI as an acceptable scrap substitute,” notes LeRoy Prichard, vice president of steel technologies for Nucor Steel Corp. (Charlotte, N.C.). Nucor tried to address its metallics needs by spending $76 million to build the world’s first commercial iron carbide production plant in Trinidad. The reason was carbon: Iron carbide has 6-percent carbon by weight, which—it was hoped—would help Nucor avoid the higher energy costs of melting other scrap complements, Prichard explains. (In January, however, Nucor decided to mothball its iron carbide plant due to operational problems and the poor metallics market.)
The cost of energy also played a key role in the expansion of scrap complements. Natural gas is the key fuel used to produce DRI and its derivatives. Domestically, Congress’s efforts to deregulate natural gas have sent prices to record lows, which in turn reduced the cost of making complements. “Deregulation enabled industrial plants to buy gas directly from the wellhead and get it to their operations at a very good rate,” Kopfle says.
In addition, the availability of cheap natural gas worldwide explains why gas-rich but scrap-poor countries like Qatar can make rebar out of DRI, Kopfle notes. But he stresses that each region has its own reasons for turning to more and more scrap complements, including energy costs, a lack of local scrap, and growing demand from burgeoning local steel industries.
Today’s Troubles
If the recent market history of ferrous scrap and scrap complements has resembled a roller-coaster—with rising scrap prices pushing up demand for complements, followed by falling scrap prices that dragged down the complement market—what’s the current situation?
The consensus is that there’s simply greater supply of scrap complements than demand, thanks to cheap scrap and all the new direct-reduction facilities. Part of the problem lies in the DRI industry’s ease of operation, Wulff notes. “The DRI supply doesn’t grow along a slow, gradual curve,” he explains. “It grows in bursts and spurts.”
As he notes, the two leading direct-reduction processes—Midrex and HYL from Hylsa S.A. de C.V. (Monterrey, Mexico)—are “pretty well-honed.” When a new plant is built, “they flick the switch and in 90 days they’re producing at their rated capacity,” Wulff says. “So yesterday you had nothing, and three months from now you’ve got a million tons a year to sell. That’s disruptive to the market. It takes a while to absorb that additional supply.”
Katrak blames the current oversupply on the fact that minimills weren’t accustomed to producing flat-rolled steel and other high-end products, so they overestimated their need for scrap complements. Also, there was an “over-enthusiasm” on the part of scrap complement suppliers. “Just because demand is growing doesn’t mean they can blindly put plants down and make money,” he says.
It’s a lesson scrap complement producers seem to have learned the hard way. In addition to Nucor’s plans to shutter its iron carbide plant, other projects are plagued by delays or facing a cautionary yellow light. “There’s a long list of people who planned to build DRI merchant plants, and most of those projects aren’t being financed today,” Wulff says.
Moreover, various reports indicate that another Trinidad project—a third module for Ispat International’s existing Caribbean DRI operation, which could potentially triple production there—has been put on hold. Bradford True, director of business development for Ispat North America, a subsidiary of Netherlands-based Ispat International N.V., denies that the expansion has been shelved, though he concedes that “construction issues” kept the facility from opening in late 1998 as scheduled. “Plus, with the current market situation, there was no need to rush completion of the project,” he says. “But it’s going to be finished.”
In addition, the first iron carbide plant in the United States—built by Qualitech Steel Corp. (Pittsboro, Ind.) in Corpus Christi, Texas—failed to open on time in December 1998 due to equipment delivery problems. (Notably, Qualitech filed for Chapter 11 bankruptcy protection in late March.) And American Iron Reduction (Convent, La.), a DRI venture owned jointly by GS Industries Inc. (Charlotte, N.C.)—Georgetown Steel’s parent—and Birmingham Steel Corp. (Birmingham, Ala.), is reportedly trimming production.
Room for Both
How long the current market slowdown will continue is the key question for both scrap processors and complement producers. A “mini-correction” in some scrap prices has been under way since late November 1998, notes Plummer. But that’s “about as good as we’re likely to see” for a while because “the fundamentals haven’t changed,” he adds.
The most optimistic view sees prices making a stronger recovery this summer or fall, while others expect no significant recovery until well into 2000. A few warn that the industry could face several more years of weak markets. Long-term, however, it’s assumed that the global steel industry will recover and, with it, the scrap and scrap complement markets.
“There’ll be a resumption in the surge of demand for low-residual metallics,” Plummer stresses, “and that will have to be pretty much filled by DRI or one of the derivative products.” Consequently, “there’ll be another investment cycle in this market very soon.”
What’s clear to Wulff, however, is that complements have failed to establish a unique niche market for themselves that’s insulated from the volatility of the scrap industry. Instead, DRI and HBI are “trading very much like a commodity product, alongside other grades of scrap.”
While scrap often remains the melting material of choice, local market conditions strongly influence the mill mix and will likely continue to do so. Ispat International, considered a world leader in producing and consuming DRI, uses nearly 100-percent DRI in its Mexican operations because there’s no viable local scrap supply. But low scrap prices have prompted the firm to increase its scrap consumption—and thus cut back on DRI—at other sites, says True.
Likewise, Thomas Scarnati, marketing manager for HYL, sees DRI’s future more as a captive product to the so-called integrated minimills rather than as a merchant product. Having a small-to-medium-sized direct-reduction facility on-site for a minimill making SBQ or other high-grade products “is where the cost-quality future of electric-furnace steelmaking is,” he says.
Even those who see a brighter future for merchant DRI concede that the next few years will be tough. Moreover, the world of scrap complements is a dynamic one, with new technologies under development and the market remaining singularly unpredictable. Pig iron, for instance, is presenting a growing challenge to both scrap and DRI/HBI, with U.S. imports surging from less than 1 million mt in 1993 to just over 5 million mt last year. Meanwhile, Midrex is focusing its research on various hot metal projects that shift the emphasis from DRI per se to the steelmakers’ ultimate goal of how to melt metallics.
What does all this mean to the scrap processing industry?
Georgetown Steel’s Bullard stresses that scrap processors must do a better job segregating and grading to enable their scrap to compete with virgin metallics. Some mills, in fact, are establishing relationships with brokers and processors to get guaranteed residual levels from scrap, he says.
Still, despite the inroads made by complements and their ongoing challenge to scrap, they haven’t gained as much as some were predicting in the mid-1990s, notes Bill Heenan, president of the Steel Recycling Institute (Pittsburgh)—which leads him to assert optimistically, “Scrap will always be a major part of our raw material base.”
The Complement story
Though the basic concept behind direct-reduced iron is thousands of years old, the modern scrap complements industry began in 1957 when Hylsa S.A. de C.V. launched its first HYL plant in Monterrey, Mexico.
Today, there are nearly 20 different processes for producing DRI and its derivatives such as HBI and iron carbide. Most of the processes use natural gas and virgin iron ore to produce a low-residual raw material in pellet or briquette form that’s then used to make high-quality steel.
Two processes dominate the industry: Midrex Direct Reduction Corp.’s process accounts for more than 65 percent of worldwide production, while HYL claims 25-plus percent.
Historically, direct-reduction facilities were sited in locations with abundant natural gas supplies and a shortage of scrap. Venezuela, with nine direct-reduction plants operating or under construction, was long the world’s leading producer. But in 1998, Mexico’s seven facilities and India’s 20-plus sites moved those countries into the lead. Other locations with a considerable DRI investment include South Africa, with six sites planned or operating, Iran with five, and the islands of Trinidad and Tobago with four (although the Nucor iron carbide plant is being shut down).
In the United States, Georgetown Steel Corp.’s DRI plant in South Carolina was the only one of its kind for more than 25 years until three new facilities were announced in the late 1990s—the American Iron Reduction plant in Convent, La.; Qualitech Steel Corp.’s iron carbide facility in Corpus Christi, Texas; and the Tuscaloosa Steel/Mobile DRI site in Mobile, Ala. •
Long touted as complements to scrap, DRI and its ilk are looking more and more like scrap substitutes. What’s the truth?