MAY/JUNE 2007
Electric-arc furnaces are gaining ground in steel production due to new technologies and growth in demand. MINIMILLS worry, however, that rising costs and international production growth might put them right back where they started.
BY LINDSAY HOLST
For steel, these are the good days. In the wake of an era in which the market was virtually stagnant on a global level, the industry’s health has steadily improved, due in large part to changes in how steelmakers respond to dips in demand, industry consolidation, and the return of strong domestic and global markets for steel. As the steel industry has evolved, so too have its technologies, particularly in electric-arc furnaces. Though minimills have always boasted superior productivity and lower initial and operating costs compared with integrated mills, initially they were considered limited in their ability to produce anything but low-value steel products. They proved themselves over time, however, gradually employing technologies that allow them to produce higher-value products. Minimills continue to grow, giving integrated producers a run for their money by producing a greater proportion of total U.S. steel output each year. Though there will always be room for integrated producers, minimills seem to have the momentum.
CHOPPY WATERS TO SMOOTH SAILING
To understand minimills today, you must understand the history of the U.S. steel industry they have come to dominate. Less than a decade ago, issues of overcapacity relative to demand plagued the structurally imbalanced steel market. “People were responding to blips in demand by cutting prices to chase volume,” says Tony Taccone, a strategy consultant for First River Consulting (Pittsburgh), which specializes in the steel industry. “So you had a sort of double whammy of declining volume and declining prices, which meant that during periods of weak demand, companies lost money—or
didn’t make much money—and the industry gained the reputation of being cyclical.”
Global economic downturns further exacerbated the dips in demand, leaving the United States flooded with lower-priced imports. In March 2002, the U.S. government imposed the controversial Section 201 tariffs, which ran as high as 30 percent on imported steel, to give domestic steelmakers three years to restructure and consolidate their operations. (After seeing evidence that the tariffs drove jobs and plants offshore and after other countries threatened to impose their own tariffs, the government cut them short in 2004.)
Industry development outside the United States further bolstered U.S. steel industry restructuring. “We’re now seeing significant consolidation on a global and regional basis that we expect to continue,” Taccone says. “This typically means more pricing discipline and better markets across the cycle.” Today the industry finally has its feet on solid ground, but it faces challenges in raw material supply, higher costs, and international competition.
TODAY’S TRENDS
EAFs produced 57 percent of U.S. raw steel in 2006, up from 45 percent in 1999, according to the American Iron and Steel Institute (Washington, D.C.).
One reason minimills are garnering an ever-larger share of the steel market is their ability to produce a wider variety of products. Minimills initially produced only low-end products such as rebar, but they now make a range of higher-value steel products that includes hot-rolled sheet, cold-rolled sheet, plate-in-coils, wide-flanged beams, and high-quality bar products. “Now the minimills can compete with integrated producers for flat-rolled products,” says Bob Garino, ISRI’s director of commodities. “They were never able to do that before. Now that technology favors them—and they don’t have the same financial and labor pressures the old, established integrated producers have—they have a leg up.”
High-value products require high-quality scrap, however, meaning scrap devoid of contaminants, especially copper. Minimills dilute undesirable elements in their scrap by mixing it with scrap alternatives such as hot-briquetted iron, direct-reduced iron, and pig iron to create their own raw material blends, seeking the perfect combination for optimal cost effectiveness and chemistry.
Depending on the product they are producing, using more alternative iron products in the steelmaking process can help EAF producers use less scrap, potentially saving them money when prime scrap availability is low and prices are high. “Minimills’ biggest costs are energy and raw materials,” Garino says. “They can’t do as much about energy, but they do have some say over the raw materials they use. It’s a matter of finding the right blend of raw materials.”
Robert Hunter of Midrex Technologies, a Charlotte, N.C.-based DRI technology company, notes that there is plenty of scrap in the United States, but there is a finite quantity of high-quality, low-residual scrap, or “prime scrap,” which EAF steelmakers use to produce flat-rolled products. “The industry demand has grown beyond North American availability of prime scrap,” Hunter says, noting that EAF steelmakers use “every bit of” the 8 million to 12 million tons of prime scrap available in the United States as well as 8 million tons of imported alternative iron units. The main point, Hunter says, is that if alternative iron units such as DRI and HBI did not exist, the United States would have only the 12 million tons of prime scrap to work with. “If that were the case, the products made by those minimills would have to be produced in integrated plants,” Hunter says. Because integrateds are limited in the amount of scrap they use in their processes and minimills can use 100 percent scrap to produce steel, “the existence of that [alternative] iron actually causes more scrap to be used in the United States than would be otherwise,” Hunter says.
The fact that major steelmakers like Nucor Corp. (Charlotte, N.C.) and Steel Dynamics Inc. (Fort Wayne, Ind.), among others, are investing in alternative iron technologies such as HBI and DRI indicates that they also recognize the value of diversifying their raw material sources, says Mark Parr, a senior industrial equity analyst with KeyBanc Capital Markets (Cleveland). Most recently, Nucor bought a Louisiana-based DRI plant and moved it to Trinidad, starting production in January.
The raw material stream is not an either/or situation, says Thomas Danjczek, president of the Steel Manufacturers Association (Washington, D.C.). “People tend to see HBI, DRI, and pig iron as scrap substitutes, and this is absolutely the wrong terminology,” he says. “They are scrap enhancers that allow steelmakers to use more scrap because they have put us in product areas that we would not be in otherwise.” Danjczek says that using alternative iron units in the steelmaking process has enabled minimills to move up the steel mill product value chain and enter the markets for finished products.
Minimills are hardly getting out of the scrap-buying business. With scrap typically costing less than alternatives and with ready domestic sources, minimills are instead working to ensure a constant scrap supply by purchasing shredders and the scrapyards that have them. Major EAF steel producers such as Nucor, Steel Dynamics, and Gerdau Ameristeel (Tampa, Fla.) have recently purchased shredders or scrapyards, exploring backward integration into scrap processing. Garino is skeptical of these moves, noting that they might not necessarily be in minimills’ long-term best interests. “The EAF producers’ core business is to make steel, not to process scrap,” he says. “Steel mills have all sorts of mechanisms for supply. Why take on that extra capital expense when you have a customer who always holds your inventory?”
Others maintain that backward integration is, in fact, in steel mills’ best interests. “Integrated producers have historically controlled their raw materials by owning iron ore mines and coal mines,” says Bill Heenan, president of the Steel Recycling Institute (Pittsburgh), a business unit of AISI. “If your number-one raw material is scrap, it makes logical sense to follow the steel industry tradition of controlling your raw materials. Otherwise, you’re at the mercy of someone else who is providing a service.”
The scrapyard purchasing trend isn’t new, Danjczek says, noting that there have been “steel companies involved in scrap and scrap companies involved in steel, and it’s been beneficial for both sides.” With metallics accounting for about 60 percent of steel costs, it’s natural for mills to try to control and integrate the metal units they need into their systems, he says.
The so-called micromill also might play a significant part in the future of EAF steelmaking. First announced by scrap processor and steelmaker Commercial Metals Co. (Irving, Texas) in December 2006, this new technology is essentially a smaller minimill that will employ a “continuous continuous” design, allowing metal to flow uninterrupted from melting to casting to rolling. CMC worked with Danieli & Co. S.p.A. (Buttrio, Italy) to design the mill using that company’s endless casting rolling system, which connects the high-speed caster with the rolling mill, allowing a nonstop production cycle, according to Danieli’s Web site.
The proposed building of a micromill is just one in a long line of technological improvements to EAFs. “Over the past 20 years, many of the improvements have taken place in quality and labor,” Danjczek says. “During the next 20 years, the developments will continue in quality, but they will most likely be driven by increasing cost pressures” for energy, raw materials, and environmental compliance.
CMC’s micromill seems designed to anticipate some of these cost pressures. Danieli’s Web site notes that its ECR processes can save up to $40 a ton for specialty steels and up to $20 a ton for commercial steels. The mill’s small size (its estimated capacity is 280,000 tons a year) will limit its power costs. And in a press release, CMC states that it will take advantage of lower initial capital construction costs and constant operating efficiencies by producing steel within a specific product range, primarily rebar products, and marketing it to a small area as a specialized producer. The growing greater-Phoenix area, with its plentiful scrap and solid construction market, will provide CMC’s new micromill with access to locally generated raw material and nearby end-use markets, the company stated.
“There will always be a place for niche producers,” Garino says. “Steel is not as high-value a commodity as, say, copper. You figure cost per ton, value per ton. You don’t want to ship it any great distance because freight costs make a difference. Niche producers can cut back on freight by serving a local market and be successful.” With production expected to commence in 2009, only time will tell whether the micromill will become a success that other companies will replicate.
CHALLENGES AHEAD
The growth of Chinese production is the major potential obstacle to the health of the U.S. steel industry, analysts say. Using preferential loans from state banks, tax incentives and reductions, debt forgiveness, and export subsidies, China has been able to produce more steel each year, seemingly unabated, and steelmakers worry about the potential for overcapacity. Many believe that if China continues to expand capacity, it will have excess to sell, bringing down other markets and repeating the crisis the U.S. steel industry experienced earlier in the decade.
Currently, China’s 5 million tons of exports to the U.S. reportedly are not a disruption except in three or four product areas. The fact is that U.S. mills alone cannot meet domestic steel demand without importing. “Last year, China had record net exports, which concerned a lot of trade lobbyists, but the U.S. steel industry had all-time record profits,” Parr says. “Despite the increase in Chinese production, as of yet we haven’t seen a dramatically onerous financial outcome for U.S. producers. If anything, U.S. producers have participated in the prosperity and growth that’s occurring in China, India, and around the world.”
This strong market position of U.S. mills shouldn’t be surprising because they have several competitive advantages compared with China and other global steel producers. “On a cost-per-ton basis, U.S. steel producers can compete with anyone in the global market,” Garino says. As part of that equation, U.S. mills are ahead of the competition in labor-hours per ton of steel. “The United States can produce a ton of steel for less than two man-hours per ton,” Heenan notes. “In some developing countries, steel mills need 15 or 18 man-hours per ton.”
U.S. mills are also ahead of the environmental curve compared with other countries, especially China. As Heenan explains, China is building new mills with “all the bells and whistles” of environmental stewardship, but it is not shutting down old, polluting operations. “There are 40 to 60 million tons of capacity in China that need to play the game the way the rest of the world is playing environmentally,” he says. “We don’t need an extra ton of pollution with every extra ton of steel.”
Rising cost pressures are another challenge facing U.S. minimills. The cost of transportation has been rising quickly in both rail and truck. Labor costs, primarily healthcare, also are on the rise, growing at the rate of 8 percent to 12 percent each year. And scrap prices are going up as well. “The minimills in the U.S. market have grown and the price of scrap has risen to a much higher level than it has been historically,” Taccone says, noting that in the past few years, minimills have successfully implemented scrap surcharges on their consumers to combat rising raw material prices.
The strength of the U.S. dollar also can affect the price of steel and other imports. “As the dollar continues to weaken against currencies likes the yuan and the euro, the cost of imported steel goes up,” Parr says. “So a weak dollar is something that domestic steel mills feel is helpful to them in protecting their market position.” Conversely, a very strong U.S. dollar would make importing items into the U.S. less expensive, posing a greater threat to the U.S. mills because consumers could more easily afford overseas steel. But a strong dollar would also make scrap exports, which are booming today, less attractive, which would benefit domestic mills. “One thing that has certainly emerged in this market over the past six or seven years is tremendous growth in scrap exports,” Parr says. “So the potential for the weak dollar to perhaps reduce the available domestic supply of scrap is a risk for the EAF producers.”
The past five years have seen a geographic shift in steel industry growth from mature, industrial economies such as the United States and Europe to the BRIC economies of Brazil, Russia, India, and China, Parr says. “In the last five years, non-BRIC economies have grown at about 1.7 percent, and the BRIC economies have grown at 17 percent,” he adds. As the global steel industry continues to grow, steelmakers might start to see shortages of raw materials, something “no one ever thought would happen,” Parr says.
Danjczek doesn’t seem worried, though. Scrap supply has been relatively fixed over the past five years, but with recent price increases, “some tonnages have come out of the woodwork,” he says. Scrap always seems to follow principles of supply and demand: “If you want to pay the price, you’ll get the material,” he says. “It’s an issue of price; it doesn’t necessarily mean that there is a shortage.”
So what will U.S. steelmakers need to do to remain competitive in the future? “Whatever it takes,” Danjczek says. “We know we have challenges ahead, but through high flexibility; low labor, capital, and fixed costs; and technological improvements we will adapt to face the world going forward.”
The industry must continue to become more international, Taccone says. “There are many threats, but also many opportunities on a global basis. The more international the U.S. industries are, the more they will be able to manage their position in a global market and expand internationally.” China has set the pace for industry growth, Parr says, “and now we’re looking at an industry that has been underinvested in for decades.”
At the end of the day, steel is still a cyclical business. “Less cyclical than before, we hope, but still cyclical,”
Danjczek says. Inevitably, sources say, the industry will once again face higher interest rates, economic downturns, and slower periods, but minimills are adapting at every turn, growing in size and market share. “It’s a lean, mean, diversified industry,” Heenan says. “There is no such thing as a minimill anymore. The day of the megamill is here.”
U.S. Minimills
The following state-by-state list comprises locations of some of the larger minimills
in the United States and their companies’ headquarters.
ALABAMA
CMC Steel Alabama, Birmingham
IPSCO Enterprises Inc., Mobile
Nucor Corp., Birmingham, Decatur, Tuscaloosa
ARKANSAS
Arkansas Steel Associates, Newport
CMC Steel Arkansas, Magnolia
Macsteel, Fort Smith
Nucor Corp., Armorel
Blytheville, Hickman
CALIFORNIA
Cascade Steel Rolling Mills, El Monte
TAMCO, Rancho Cucamonga
COLORADO
Oregon Steel Mills, Pueblo
CONNECTICUT
Nucor Corp., Wallingford
DELAWARE
Claymont Steel Inc., Claymont
FLORIDA
Gerdau Ameristeel, Baldwin, Tampa
Steel Dynamics Inc., Lake City
GEORGIA
Gerdau Ameristeel, Cartersville
ILLINOIS
Alton Steel, Alton
Gerdau Ameristeel, Joliet
IPSCO Enterprises Inc., Lisle (HQ)
Keystone Steel and Wire Co., Peoria
Mittal Steel, Chicago (HQ)
Nucor Corp., Kankakee, Bourbonnais,
Sterling Steel Co. LLC, Sterling
INDIANA
Beta Steel Corp., Portage
Mittal Steel, East Chicago
Nucor Corp., Crawfordsville
Republic Engineered Products, Gary
Steel Dynamics Inc., Butler, Columbia City, Fort Wayne (HQ), Pittsboro
IOWA
Gerdau Ameristeel, Wilton
IBSCO Enterprises Inc., Muscatine
KENTUCKY
Gallatin Steel, Ghent
Gerdau Ameristeel, Calvert City
IPSCO Enterprises Inc., Newport
Kentucky Electric Steel, Ashland
LOUISIANA
Bayou Steel Corp., LaPlace
MICHIGAN
Macsteel, Monroe
MINNESOTA
Gerdau Ameristeel, St. Paul
MISSISSIPPI
Macsteel, Jackson
Nucor Steel Jackson Inc., Jackson
SeverCorr, Columbus
MISSOURI
Gerdau Ameristeel, Kansas City
NEBRASKA
Nucor Corp., Norfolk
NEW JERSEY
Gerdau Ameristeel, Perth Amboy, Sayreville
NEW YORK
Nucor Corp., Auburn
Republic Engineered Products, Blasdell
NORTH CAROLINA
Nucor Corp., Charlotte (HQ), Hertford County, Winton
Gerdau Ameristeel, Charlotte
OHIO
Charter Manufacturing Co., Cleveland, Cuyahoga Heights
North Star BlueScope Steel, Delta
NucorCorp., Marion
Republic Engineered Products, Akron (HQ), Canton, Massillon
The Timken Co. , Canton
V&M Star, Youngstown
OKLAHOMA
Gerdau Ameristeel
Sand Springs
OREGON
Cascade Steel Rolling Mills
McMinnville
Oregon Steel Mills
Portland (HQ)
PENNSYLVANIA
IPSCO Enterprises Inc., Koppel
Mittal Steel, Coatesville, Conshohocken, Steelton
SOUTH CAROLINA
CMC Steel South Carolina, Columbia
Mittal Steel, Georgetown
Nucor Corp., Berkeley County, Darlington
TENNESSEE
Gerdau Ameristeel, Jackson, Knoxville
Nucor Steel Memphis Inc., Memphis
TEXAS
Border Steel, El Paso
Chaparral Steel, Midlothian
CMC Steel Texas, Seguin
Gerdau Ameristeel, Beaumont
Keystone Steel and Wire Co., Dallas (HQ)
Nucor Corp., Jewett
V&M Star, Houston
UTAH
Nucor Corp.
Brigham City
Plymouth
VIRGINIA
Chaparral Steel, Petersburg
Steel Dynamics Inc., Roanoke
WASHINGTON
Nucor Corp., Seattle
WEST VIRGINIA
Steel Dynamics Inc., Huntington
WISCONSIN
Charter Manufacturing Co., Mequon
Saukville
Nucor Corp., Oak Creek
Publisher’s Note: Scrap invites any U.S. minimills not included in this list to submit their information to kentkiser@scrap.org.
Lindsay Holst is assistant editor of Scrap.
Electric-arc furnaces are gaining ground in steel production due to new technologies and growth in demand. MINIMILLS worry, however, that rising costs and international production growth might put them right back where they started.