November/December 1994
Steelmakers have been consuming more DRI, HBI, and iron carbide, and are expected to use more in the future. Here’s a look at the factors driving this usage and what it all means for scrap recyclers.
By Kent Kiser
Kent Kiser is an associate editor of Scrap Processing and Recycling.
When Nucor Corp. (Charlotte, N.C.) opened the world's first commercial production iron carbide plant in Trinidad this fall, the move signified more than just another first for the world's largest mini-mill company.
This $76-million gamble serves as further evidence that so-called steel scrap substitutes—primarily direct-reduced iron (DRI); its compacted form, known as hot-briquetted iron (HBI); and now, iron carbide—are expanding their role in the steel industry.
The principal proof of this expanding role lies in DRI/HBI production figures. Except for slight dips in 1982 and 1983, world DRI/HBI production has risen every year since 1970, with an average growth rate of about 11 percent in the past five years, according to statistics from Midrex Direct Reduction Corp. (Charlotte, N.C.), the largest DRI technology company. The most recent figures for 1993 show annual DRI/HBI production at 23.87 million metric tons (mt), a 15-percent surge over the 1992 total of 20.71 million mt. (For comparison's sake, steel mills worldwide consumed about 357 million mt of ferrous scrap in 1993, while producing about 726 million mt of crude steel, reports Resource Strategies Inc. (Exton, Pa.).)
Looking ahead, Midrex expects DRI/HBI production to reach 28 million mt by 1995, 35 million mt by 2000, and 40 million mt by 2005. And that's not counting the potential additional tonnage of iron carbide.
What's behind the growth of these direct-reduced raw materials? Analysts point to a combination of market factors, including existing and anticipated strong steel demand, scrap price movements, rising product quality requirements, and potential supply worries of some scrap grades. With these factors in place, most forecasts note, the use of DRI, HBI, and iron carbide by minimills as well as integrated producers is likely to increase.
For ferrous scrap recyclers, the ascent of scrap "substitutes" naturally raises concerns, but the trend could be a positive one for the scrap industry.
The Supply-Demand Imbalance
One fact you should know right off is that DRI, HBI, and iron carbide are misnamed as substitutes because, in practice, they serve as complements or supplements to a mill's scrap mix. Most minimills rely on scrap as their raw material of choice, purchasing scrap complements as an optional high-quality feedstock—a "swing product”—when scrap market conditions make it prudent to do so. And when mills do use scrap complements, the material rarely accounts for more than 20 percent of the charging mix.
Whether a steelmaker is interested in scrap complements depends to a large extent on the products it makes. Mills that make rebar, structurals, merchant bar, and some plate, for example, don't require scrap complements or premium scrap grades such as factory bundles, which are prized for their consistent chemistry and low levels of residual, or tramp, elements such as copper, tin, nickel, chromium, molybdenum, and sulfur. In fact, such mills actually benefit from having some residual elements-such as nickel, chromium, and molybdenum-in their scrap, because they serve as alloying elements to strengthen the steel, thus saving the mills from having to add expensive ferroalloys. (It should be noted, however, that the inherent advantages of melting premium scrap can lead some mills to use it even though their products don't necessarily require such a high-quality feedstock.)
For other minimills, however-particularly those that make high-grade products such as flat-rolled sheet, seamless pipe, special quality bar, and high-quality wire rod-scrap complements, premium scrap, and residual elements are a big concern, The general rule of steelmaking is that producing higher-quality products requires higher-quality feedstocks. This means that high-end minimills may be limited in the amount of non-premium, ob they can use in their charges excess of certain residual elements can affect the performance as well as the casting, drawing, and welding characteristics of their products.
The problem for such minimills is there apparently isn't enough premium, prompt industrial scrap available to satisfy the demand of all the mills that may want it-not to mention foundries, which consume about a third of all premium scrap, as well as integrated producers.
What this situation creates is a textbook example of a potential supply-demand imbalance. Besides the fact that there is no "reserve supply" of premium scrap as there is with obsolete scrap, the worldwide generation rate of premium, low-residual scrap from molds, home scrap, and new scrap has been declining for the past 15 years, from a high of about 220 million mt in 1979 to 130 million mt this year, according to Peter Marcus, managing director of PaineWebber Inc. (New York City). And that total will taper further to about 110 million mt by 2010, he forecasts, as steelmakers and steel fabricators continue to improve their efficiency.
The bottom line? "There is little to no potential for rising supply from this source " he states.
While most forecasts echo Marcus’ prediction, a recent report from Charles River Associates Inc. (Boston) contradicts this view, asserting that despite efficiency gains by the steel industry, "the rate of high-quality prompt scrap generation will steadily rise as total tonnage of steel consumption increases." The study notes, however, that most of this scrap will be generated in less-developed countries, which means that minimills in North America, Western Europe, and Japan will still have to "balance site-specific scrap issues, steel product quality issues, and reduced-iron feed prices to address their needs."
The supply concerns about premium scrap have arisen in large part due to estimates of demand for the material, which is expected to rise due to several factors. The first relates to overall steel demand, which is forecast to grow steadily, progressing an average of 2.5 percent a year to 2010, predicts Marcus. (Of course, if steel demand falls short of this forecast, the concerns about premium scrap supplies would likely diminish.)
In the same period, the number of minimills is forecast to mushroom. Inspired by Nucor's success, dozens of entrepreneurs and existing steel companies have announced plans to build their own minimills, with many aspiring o produce flat-rolled sheet. As a result, North American minimill thin-slab capacity, currently at about 4 million tons, could grow by an additional 10 million tons by 2000, and there could also be another 15 million to 20 million tons under construction in the rest of the world by that time, predicts Chris Plummer, director of steel services for Resource Strategies. Every sheet maker in North America seems to have a thin-slab caster on the drawing board," he says.
What this expansion of electric-furnace-based thin-slab casters and strip casters translates to, says Gordon H. Geiger, a consultant with T.P. McNulty & Associates (Minneapolis), is a rise in demand for low-residual scrap. In fact, he maintains, "demand will increase still further, by another 4 million mt per year by 1997 for sure, based on publicly announced and/or under-construction activities alone." (As ReMA Executive Director Herschel Cutler notes, however, "Whether or not this exuberant expansion will, in fact, occur remains a controversial issue with clear effects on the supply question.")
And there's another trend that could boost demand for premium scrap, Plummer notes. The scenario goes like this: As a cost-cutting measure, many domestic steelmakers have eliminated their "peaking" production capacity, which has forced them to import more semi-finished steel during periods of strong demand. This year, for instance, domestic mills are expected to import around 7 million tons of semi-finished steel, compared with an average of 2 million to 3 million tons annually in the previous decade.
In the process of turning the imported semi-finished steel into finished product, the mills generate high-quality home s to use in their melting operations. So far, so good-until the economy softens. Then, Plummer predicts, domestic mills will cut their semifinished imports and attempt to maintain their crude steel production volume. By doing this, they will cut their generation of home scrap from the imported semi-finished steel and, thus, boost their needs for purchased premium scrap to feed their furnaces. The result? Domestic mills could find themselves needing 300,000 to 400,000 additional tons of premium scrap, Plummer forecasts.
Addressing the Shortfall Theory
In light of the above supply-demand dynamics, Donald Barnett of Economic Associates Inc. (McLean, Va.) and John Kopfle, manager of marketing services for Midrex, state with foreboding, "An analysis of the world metallics situation shows we are heading down a path that leads to a severe problem." Marcus adds his own drama by saying that the current supply/demand imbalance will be exacerbated to the point where the steel industry will experience a "metallics shortfall."
One way to make up this purported shortfall would be through increased use of both obsolete scrap and steel scrap complements. The reasoning is this: Obsolete scrap would enable minimills to meet the scrap demands of their electric-arc furnaces, while scrap complements, if needed, would provide purer iron units to attenuate the scrap's residual elements-thus allowing mills to produce high-quality finished products.
If that's all it took to resolve the problem, there wouldn't be a problem. But there could be complicating factors. Marcus warns, for instance, that his predicted metallics shortfall could include a shortage of as much as I 10 million mt of obsolete scrap by 2010, despite a projected increase of 90 million mt in the production of steel scrap complements and other "alternative metallics." His analysis is based, in part, on a projected decline in the generation of obsolete scrap, with the rate rising only 2.4 percent a year to 2010, compared with the much-healthier rate of 6.4 percent a year between 1975 and 1993. Also, as Barnett points out about obsolete scrap, "There is a tremendous potential supply of scrap worldwide, but much of it cannot be economically recovered."
Some scrap recyclers scoff at the notion of a sustained obsolete scrap shortage, asserting that such a shortage is impossible from a technical standpoint. They concede, however, that there could be short-term dislocations between demand and supply during periods of raging world steel demand. "If you suddenly have demand that hasn't been there before, there could be a lag," says E. Burns Apfeld, marketing manager for Sadoff Iron & Metal Co. (Fond du Lac, Wis.). "As the world economy grows, it could outstrip the scrap supply for the moment, and the market could be thrown out of sync for a while." Such temporary outstripping of the existing scrap collection and processing infrastructure is possible, Cutler points out, but it does not indicate a shortage.
Short-term dislocations could also develop due to regional factors, Apfeld says, noting that "the right scrap is not always in the right place at the right time. You can have some oddball location problems."
Stephen Wulff, vice president of planning for the ferrous division of David J. Joseph Co. (Cincinnati), agrees, stating, could be spot shortages for some items, but the shortages will not exist over the long term. Something else will likely intervene on the road to a shortage. The reaction of the marketplace to potential or existing shortages is the collection of more scrap and investment of capital in facilities to produce scrap complements."
As Cutler explains, "What is not economically recoverable at one price level might be readily recoverable at another. The scrap market has always demonstrated an ever-increasing price elasticity as the price of scrap goes up. Higher scrap demand may bring about higher prices, but this demand eventually draws greater scrap supplies into the market, which ultimately lowers prices as supply and demand reach equilibrium."
The Price Factor
In addition to scrap supply-demand fundamentals, "the high prices of scrap in the market today have encouraged further investigation and investment in alternative scrap sources," offers LeRoy Prichard, manager of new steel technology for Nucor. Wulff concurs, noting, "We're seeing the beginning development of a matrix of materials that mills can choose to make steel. The high prices created by strong steel demand will allow these other technologies to happen."
For steel mills, it's axiomatic that the higher scrap prices rise, the more attractive scrap complements look-and the more economical they are to use. Indeed, a few years ago, it was common for DRI to cost between $10 and $30 a mt more than premium scrap, but this price differential has evaporated in the past two years as top ferrous scrap grades have fetched record prices.
And steelmakers shouldn't expect any relief in premium scrap prices anytime soon, sources indicate. Since the supply of premium scrap is inelastic and demand for it is expected to intensify-based on predictions of strong steel production-the price of this material is likely to remain high until an increased supply of low-residual material in the form of scrap complements becomes available. "Since there is no other source of low-residual scrap than what is available today ... there is no reason for clean prompt industrial scrap to come down in price, nor for DRI and other forms of reduced iron products to be priced much below those grades," says Geiger. "For this reason, perhaps for the first time in history, the potential to make a reasonable return on investment in a direct-reduced iron facility exists."
A Scrap Complement Boom?
This potential for scrap complements to be produced economically is important in the future for these raw materials. After all, the steel industry's growing interest in scrap complements will naturally require expansion of existing production facilities as well as construction of new ones. And unlike scrap, the supply of scrap complements is a function of capital investment-that is, their production depends on someone spending money to produce them. As Marcus 0. Davies, former president and chief executive officer of Midrex, asserts, "Steelmakers must realize that to secure a source of high-quality iron, a substantial investment is required"-the kind of investment Nucor has made in its Trinidad iron carbide plant.
Nucor isn't the only minimill lighting out for scrap complement territory. Many companies around the world are considering or already building plants to produce scrap complements for their own use and/or sale on the open market. (See "Here Come the Scrap Complements" on page 42.)
As for what's ahead, Plummer notes, "There's a lot of activity going on with facilities under construction and much interest all over the world in these technologies," though he hastens to add that "in many of these cases, the technology has yet to be commercialized, so there's reluctance on the part of many investors to put up money until a commercial-scale plant is proven or guaranteed."
Dispelling the Threat
So what does all this mean for ferrous scrap recyclers?
In market terms, assuming no drastic change in current high levels of demand for finished steel, it means recyclers can likely expect demand for premium scrap to exceed supply in the near term.
As the supply of scrap complements grows, however, premium scrap is expected to face new limits, especially in terms of price, while obsolete scrap could enjoy unprecedented demand. The reason? Greater supplies of high-purity scrap supplements could give minimills broader leeway to use more obsolete, dealer-grade scrap, thus creating stronger demand-and perhaps higher prices-for this material.
While some recyclers may still fear the growing use of scrap complements, Wulff points out an important reason why they should embrace them. "Absent something else to use in the furnace to dilute the commodity grades of obsolete scrap, the limited supply of low-residual scrap would become a limitation to minimill growth," he explains. "The availability of some quantity of scrap complements will allow additional growth of electric furnaces and allow increased use of obsolete scrap."
Wulff's point reinforces the notion that scrap supplements, far from being substitutes for ferrous scrap, can be seen as allies, filling in where the supply of low-residual, premium scrap leaves off. Wulff, for one, recognizes this, asserting, "We welcome the introduction of additional scrap substitutes into the marketplace. We don't view them as a threat at all."
Here Come the Scrap Complements
In addition to the estimated 100 DRI/HBI modules already in operation around the world, there are many new scrap complement production facilities either under construction or under consideration.
DRI Projects
Midrex Direct Reduction Corp. and Kobe Steel Ltd. (Kobe, Japan) are embarking on a first in the direct-reduction field, building a 2.5-mt-an-hour, $14-million plant to demonstrate Midrex's Fastmet technology, which uses pulverized coal-and other carbon-bearing materials-and iron ore concentrate to produce DRI and HBI, The plant, slated to Stan production in the second half of 1995, will be located within Kobe Steel's Kakogawa Works in Western Japan.
Tianjin Iron & Steel (Tianjin, China) is building two coal-based DRI systems in Tianjin, each with a planned capacity of 150,000 mt and commissioning planned for 1996.
Lloyds Steel Industries (Bombay, India) is building a DRI plant using a coal-based process in Ghugus, India, with a planned capacity to produce 300,000 mt when it comes on-line in 1995.
Cyprus Northshore Mining Corp. (Silver Bay, Minn.)—an iron ore producer—is reportedly considering building a 405,000-mt-a-year DRI plant in Minnesota.
Simsmetal Pty Ltd. (North Sydney, Australia), a multinational scrap processing and brokerage company, has announced its interest in securing an equity position in a DRI or iron carbide plant,
HBI Plans
Midrex is studying the feasibility of building a 1.2-million-mt HBI plant in Alaska. This Alaska Pacific Iron Project is targeting Alaska because of the state's abundant natural gas-needed to make some forms of HBI-proximity to iron oxide from South America and ores from sources such as Europe and Australia, and access to consumers in the Northern Pacific Rim,
BHP Iron Ore, part of the BHP Minerals division of Broken Hill Proprietary Co. Ltd. (Melbourne, Australia), is planning an HBI plant near Port Hedland in Western Australia with a planned capacity of 2 million mt a year and a tentative start date in 1997.
Oregon Steel Mills Inc. (Portland, Ore.) could become an equity investor with Kobe Steel Ltd. and Hanbo Steel & General Construction Co. Ltd. (Seoul) in an HBI joint venture plant in Puerto Ordaz, Venezuela, The project, dubbed Comsigua, would reportedly produce 1 million mt a year, with the minimill receiving about 180,000 mt of that total.
Iron Carbide Ventures
In October, Nucor Corp. commissioned Nucor Iron Carbide Inc., which is planned to produce 300,000 mt a year of iron carbide for use in its flat-rolled minimills in Hickman, Ark., and Crawfordsville, Ind. The plant, located in the Pt. Lisas Industrial Site on Trinidad's west coast, could reportedly add four or five additional production modules.
North Star Steel Co. (Minneapolis) and Cleveland-Cliffs Inc. (Cleveland) have reportedly each taken out options to build commercial iron carbide plants, with the latter focusing its attentions in South America and the Pacific Rim.
U.S. Steel (Pittsburgh), meanwhile, is said to be putting together a consortium to develop and demonstrate the iron carbide process. And Mitsubishi Corp. (Tokyo) holds a license to construct iron carbide plants in Southeast Asia and Western Australia.•
Steelmakers have been consuming more DRI, HBI, and iron carbide, and are expected to use more in the future. Here’s a look at the factors driving this usage and what it all means for scrap recyclers.