US steel sector thrives as mills move up quality ladder

Ahead of the S&P Global Platts Global Metals Awards in London, on May 16, The Barrel presents a special series of articles looking at the global metals trade. In this feature, Nicholas Tolomeo, Michael Fitzgerald and Joe Eckelman report on changing approaches to steelmaking in the US, as companies target higher-quality steel products.

When it comes to raw materials, steel mills in the US are developing expensive tastes.

Of all the major steel-producing nations, no country is so geared toward electric-arc furnace (EAF), flat-rolled steel production as the US. Profits from EAFs, or mini-mills, are at their peak, and producers Nucor and Steel Dynamics last year had record profits of $2.4 billion and $1.3 billion, respectively.

As the US steel market moves further towards a market dominated by EAF, flat-rolled production, the shopping list that mini-mill raw material buyers take into the market is evolving, getting more specific and pricier. EAF mills that were once relegated to the lower ranks on the quality scale, charging their furnaces almost exclusively with steel scrap, now seek better-quality raw materials – leading to better-quality steel output.

Scrap still dominates these mills’ raw material needs but EAF producers have an increasing need to “sweeten” the raw materials mix with virtually pure iron and prime scrap to continue climbing the quality ladder. The Holy Grail is exterior automotive sheet and its mirror-like finish.

If there was ever a place to build a steel industry reliant on scrap metal as a main raw material, it is the US, the world’s largest economy. High GDP has historically meant high scrap generation. Americans typically do not hold onto white goods and vehicles as long as consumers in most countries, generating a steady flow of steel scrap – the most recycled material on the planet – that feeds the US steel market.

However, when it comes to the global steelmaking picture, the US is an exception, not the rule. Globally, about three-fourths of all steel is produced via the blast furnace or basic oxygen furnace (BF/BOF), according to the World Steel Association. China is the main factor in this, as the country produces about half the world’s steel and does so primarily via the BF/BOF route, which relies mainly on using iron ore and coking coal in a blast furnace.

BF/BOF steelmaking is responsible for over 90% of Chinese steel production, accounting for about half of world steel output, and China remains heavily reliant on importing those mined raw materials, primarily from Australia.

The fully integrated BF/BOF steelmaking route dominates the market for auto-quality sheet, even in the US. The blast furnace is an economical iron producer, feeding a time-tested system that includes thick slabs of semi-finished steel, which are worked down to paper-thin sheet. The mini-mills pioneered a thin-slab system, which is more economical and nimble but still climbing the quality scale.

Technology choices

Companies have a choice when investing in steelmaking technology, and decisions vary from country to country. In resource-rich countries like Brazil and Russia, using iron ore is a no-brainer. In the US, iron ore is mostly concentrated in the interior states of Michigan and Minnesota.

As a high US GDP fueled the growth of the domestic scrap reservoir and EAF technology improved, EAFs were able to produce higher-end steels at lower costs that could compete with BOF-produced steel, and steelmaking investment decisions in the US soon became a no-brainer too.

US EAF pioneer Nucor opened its first mini-mill in Darlington, South Carolina in 1969. Mini-mills slowly spread throughout the US over the next two decades but their product lines were limited to long products such as rebar. That changed in 1989 when Nucor’s mini-mill in Crawfordsville, Indiana began to produce flat-rolled steel. Others soon followed as better EAF technology allowed mini-mills, once mainly construction steel producers, to encroach on product lines long dominated by BOFs, such as power generation, oil and gas, and the automotive sector.

The newest operating blast furnace in the US opened in 1964 in Burns Harbor, Indiana. The newest operating EAF in the US began melting scrap in 2017 in Durant, Oklahoma. It will not be the youngest for long, as a wave of new EAF projects have been announced in the US.

A steel-friendly administration under President Donald Trump has implemented tariffs and quotas on imported steel over the last year. The trade barriers, in addition to a strong US economy, have fueled exploration and investment into new steelmaking capacity, all of which is planned as EAF capacity.

Raw material needs shift

The US steel market, already home to the largest fleet of mini-mills in the world, and preparing to add more, will command an appetite for steelmaking raw materials unlike any other country.

Now, steel mills, their raw materials suppliers and technology firms are rushing to make sure the shelves are stocked with the raw materials needed to satisfy this evolving steel market.

In 2018, US crude steel production reached 92.4 million short tons (83.8 million metric tons), according to the American Iron and Steel Institute – 67% of which came from EAFs.

Rewind to 13 years ago and the split was more balanced as EAFs maintained only a slight majority market share in 2005 of 55% to 45%, during a time when the US was producing over 100 million st/year of crude steel.

The financial crisis-induced US market shake-out disproportionally hurt the less nimble blast furnace mills, which basically make steel from scratch, and have high capital costs and typically less-favorable legacy labor arrangements.

In 2008, blast furnaces fueled 42.2 million st of crude steel output, or 43% of total US production. It would be the last time the BF/BOF process would account for more than 42% of the market or produce more than 40 million st of crude steel in a year.

In the post-crisis steel world, EAFs have maintained US market share, ranging from 58% to as high as 67% in 2017 and 2018.

Among the 10 largest steel-producing nations, only EAFs in Turkey maintain a market share over 60%. Unlike the US, however, the Turkish market is dominated by long products production. Longs mills typically use a less expensive melt mix that includes heavy melting scrap, turnings and little if any pig iron or prime scrap.

In 2018, Turkey produced 37.3 million mt of crude steel, of which 69%, or 25.8 million mt, was produced via EAF. Of the total output, 66%, or 24.7 million mt, was long products, according to the Turkish Steel Producers’ Association (TCUD).

In 2018, total steel shipments in the US were 93.9 million st. Of those shipments, 65.6 million st – or 70% – were flat-rolled products. From 2014-2018, flat-rolled shipments in the US accounted for 70-72% of all steel shipments, compared with 28-30% shipments of long products.

The main raw material in most EAFs producing light flat-rolled steel is prime scrap. Raw material procurement teams at modern EAF sheet mills indicate 30%-40% of their melt is prime scrap, mostly No. 1 bundles and No. 1 busheling, compared with 25%-35% of shredded scrap.

As mills move up the finished steel value chain, they need to move up the raw material value chain as well. In addition to prime scrap, metallic raw materials such as pig iron, hot-briquetted iron (HBI) and direct-reduced iron (DRI) have become more in demand than ever in the US. Pig iron, HBI and DRI are all ore-based metallics, material derived from iron ore that can be used in mini-mill EAFs.

Pig iron is generated via a blast furnace and transferred directly within the mill in liquid form as hot pig iron for BOF steel production. However it is also supplied by merchant pig iron producers who use blast furnaces and then cast the molten iron into ingots to produce cold pig iron, which is typically shipped via ocean-going bulk vessels to overseas EAF mills.

DRI is derived from the direct reduction of iron ore, typically by using natural gas or coal, so that it can be used in an EAF. DRI can be compacted into HBI to allow for easier shipping and handling. Pig iron, DRI and HBI can help EAF mills lessen their need for high-quality scrap by diluting impurities in lower-quality scrap.

Adapting supply chain

The growing demand for high-quality iron units in the US is creating opportunities for technology firms prepared to invest in the country.

This decade, the US has seen the startup of a 2.5 million mt/year DRI facility in Louisiana by Nucor and a 2 million mt/year HBI facility in Texas by Voestalpine. DRI and HBI production in the US had been long gone before a natural gas revival allowed companies to produce these ore-based metallics in a cost-effective way.

Cleveland Cliffs announced it was building a 1.6 million mt/year HBI facility in Toledo, Ohio, and well before the expected 2020 startup date, the company announced recently it was expanding the plant to 1.9 million mt/year.

“There is clearly room in the [US] market for at least one more [HBI plant],” John Kopfle, Midrex corporate development director, told S&P Global Platts earlier this year. “Gas prices will continue to remain low [around $3/MMBtu] in the US for the foreseeable future.”

Midrex, a global ironmaking technology firm, estimates a pending shortfall of ore-based metallics (HBI, DRI, pig iron) in North American to the tune of 8.2 million mt/year over the next few years.

Procurement strategies

The hunt for high-quality ferrous scrap has created a situation where export cargoes of US scrap headed to Europe off the Atlantic Ocean shores might be passing incoming scrap from Europe en route to the US.

The US exported 17.3 million mt of ferrous scrap in 2018 but it also imported over 5 million mt, an all-time high. The US is the world’s largest ferrous scrap exporter, but now it is also a top five importer.

By volume, the largest grade of scrap the US exports is the obsolete grade – heavy melting scrap – while over a quarter of the scrap the US is importing is prime scrap, No. 1 and No. 2 bundles, according to US Department of Commerce data.

“It’s a result of what’s happening in the industry,” Nucor CEO John Ferriola told S&P Global Platts. “There are several things happening. One, more companies are shifting to the electric-arc furnace model. Second, more companies are producing because customers are demanding higher strength, higher quality steels, so you need purer scrap to go into it. That’s why you see Nucor investing so heavily into DRI plants because we believe in 10 years there is going to be pressure on prime scrap.”

Pig iron typically accounts for 20%-25% of the melt mix for the newer sheet-producing EAFs in the US. Overseas, Ukraine and Russia have come to dominate the US imported pig iron market.

The two CIS merchant pig iron producers account for over three fourths of all US pig iron imports and both countries set records for pig iron export volume to the US in 2018.

Investment and expansion

The movement toward mini-mill steel production is showing no signs of slowing. Fueled by Section 232 import tariffs, mini-mill producers had record profits last year and, as the bottom line swelled, capacity expansions were soon on these companies' wish lists.

In September 2018, Nucor announced it would be making a $650 million investment at its Kentucky sheet mill to add 1.4 million st/year of capacity. Four months later, Nucor followed the sheet expansion announcement with a $1.35 billion plan to build a 1.2 million st/year steel plate mill in Kentucky.

In November, SDI announced it would be investing $1.7-$1.8 billion on a new 3 million st/year flat-rolled steel mill in the southwestern US.

The new capacity expansions were not limited to just the largest players. BlueScope Steel is upbeat about a possible $600-$700 million expansion at its Ohio-based flat-roll mini mill. The expansion would add a third electric-arc furnace and a second caster to the mill and grow capacity by an additional 881,000 992,000 st/year.

JSW Steel announced up to $1 billion of investments, which included adding an EAF at its 1.3 million st/year Baytown, Texas, plate and pipe mill, as well as investments into the restarted 1.6 million st/year EAF at its recently acquired Ohio flat-roll mill. JSW noted the potential for a phase-two expansion in Ohio, which would add another furnace to the mill and double capacity.

In July 2018, Arkansas-based Big River Steel announced its phase-two expansion, which will cost $1.2 billion and double its annual capacity to 3.3 million st/year.

At least psychologically, the most telling announcement perhaps came from US Steel, the blast furnace giant founded in 1901. The company announced it will move forward with plans to build its first EAF, a 1.6 million st/year mill, in Fairfield, Alabama. Construction was suspended at the facility in December 2015 due to unfavorable market conditions at the time.

This new facility is expected to be producing steel tube rounds in the second half of 2020. When the EAF is completed, US Steel expects to save $90/st for each seamless tubular round it produces versus its current cost of purchasing rounds from outside sources, Phil Gibbs, analyst at KeyBanc Capital Markets, said in a recent research note.

Through a combination of new and restarting capacity, either commissioned, announced, or being explored since the start of 2018, an S&P Global Platts analysis shows an estimated 17.5 million st/year potential increase in US steelmaking capacity. That would equate to a 19% increase from 2018 steel production.

Steel industry momentum in the US is squarely on the side of EAF, flat-rolled producers and their appetite for high-quality raw materials is unlikely to be sated anytime soon. Now, it is up to the steel mills and their raw material suppliers to feed that appetite in an economically viable way.