Producers look to secure supply of vital feedstock and lower costs
July 2014 - Laying in iron ore stocks near furnace operations as a hedge against a lingering winter may be one of the tools steel producers employ in the coming years.
Other hedges for secure supply include buying all or part of a mine, developing new pelletizing or nugget production technology, and building a direct reduced iron (DRI) facility. As a group, U.S. steelmakers are taking an all-of-the-above approach.
An unexpected development this year was the long-lasting deep freeze. Steelmakers were still talking about that at a major industry gathering in mid-June.
“The icing on the Great Lakes caught most people by surprise,” comments Christopher Plummer, managing director of Metal Strategies Consulting LLC, West Chester, Pennsylvania.
“In the last decade companies played the game tightly, including hedging bets on weather. This year was an unfortunate example of getting caught shorthanded. It’s a trade-off as companies go leaner on inventories to match production cycles and weather cycles. It causes problems on rare occasions, so it’s hard to draw any conclusions as to whether this needs looking at longer term.”
Iron ore shipment volume on the Great Lakes through May 31 was 12.7 million tons, down 26 percent from 2013, reflecting “the brutal ice conditions that prevailed well into April. It was not until May 2 that the U.S. Coast Guard allowed vessels to transit Lake Superior unescorted,” the Lake Carriers Association reported.
U.S. Steel Corp., Pittsburgh, appeared to be affected most by delays in domestic iron ore shipments. It expects to report a second-quarter loss in its flat-rolled business as a result of having to slow production at two Gary, Indiana, blast furnaces during spring, President and Chief Operating Officer Mario Longhi told investors. The steel that was produced went to satisfy contract customers and there was no excess to sell on the rising spot market.
Numerous sheet buyers told Modern Metals that domestic supply has been tight through June, relieved only somewhat by higher imports. One affected steel producer acknowledged publicly that its scheduled deliveries of ore across the lakes wouldn’t catch up until perhaps early autumn.
“Ice conditions in the Great Lakes and particularly Lake Superior were the worst we have seen in over 30 years,” according to Longhi, who noted that two of the company’s ore carriers were “pierced by unheard-of icebergs” and temporarily removed from service for repairs.
Although U.S. Steel is 100 percent self-sufficient in iron ore with its Keetac and Minntac mines, “If you look at the geographic position we have comparing the mine and [steel] facilities, we are much more dependent on Lake Superior than any others,” Executive Vice President and Chief Financial Officer David B. Burritt said during an earnings call. Company leaders are asking whether such weather constraints represent the new norm and they are “analyzing how we’re going to be prepared to deal with this. Do we put more semifinished inventory or [iron] some other place?”
Severstal North America buys iron ore pellets from the Great Lakes region and imports pig iron from Russia, Ukraine and Brazil on a spot contract basis, Vice President of Procurement Gerrit Reepsmeyer says. “We were in the comfortable position of having sufficient iron ore pellets at our Dearborn [Michigan] plant during the 2013-14 winter. Our strategy for the 2014-15 winter remains unchanged.”
U.S. Steel, Severstal and others agree that high-quality iron ore feedstock is essential to producing steel products that qualify for critical applications such as automotive bodies.
Another integrated producer, ArcelorMittal, expanded its Mines Canada division’s production by 50 percent to 24 million metric tons last year and shipped 28 percent more iron during first quarter, chairman, chief executive officer and president Lakshmi Mittal recently informed investors.
The company is considering expanding Canadian output still further to 30 million metric tons. “It has become obvious that this has real additional potential,” Mittal said.
Severe weather did impact the mine last season. Deliveries were “hand to mouth” early in the second quarter, said Claus Ehrenbeck, director of investor relations. “We had to have icebreakers involved in moving material. The convoys took much longer than in the past.”
AK Steel Corp., West Chester, Ohio, broke ground in June 2013 on a new iron ore pellet plant. Through a joint venture, Keewatin, Minnesota-based Magnetation LLC produces iron ore concentrate from legacy reserves. The process consists of magnetically separating pure iron from tailings, which negates the need for drilling, blasting and excavating.
The material, to be pelletized at a new plant in Reynolds, Indiana, will feed AK Steel’s blast furnaces in Middletown, Ohio, and Ashland, Kentucky.
“By becoming more vertically integrated on iron ore and coal, we’ll gain greater control over our cost structure, enhance our raw materials’ self-sufficiency and benefit from a financial hedge against global market price increases for these steelmaking inputs,” Chairman, President and CEO James L. Wainscott said at the annual meeting May 29.
“We hope to see the first pellets here during third quarter. A full run rate achieving 3 million tons per year in 2015 would represent about 50 percent of our annual iron ore pellet requirements,” said Wainscott.
Steel Dynamics Inc. has its Mesabi Nugget LLC joint venture producing iron for SDI’s Butler Works in Indiana.
“The learning curve has been very, very steep,” president and chief executive officer Mark D. Millett recently told shareholders. Mesabi’s rated capacity is 500,000 metric tons but it shipped only 216,000 metric tons last year. Nonetheless, “I am confident that plant availability can be in excess of 85 percent; that we can get to 30,000 tons or more per month,” said Millett.
Much like SDI, Nucor Corp. has backward integrated into owning raw materials production. Both companies own large scrap companies. The latest development for Nucor is its DRI plant in St. James Parish, Louisiana. The company has been producing DRI in Trinidad since 2007.
Started up Christmas Eve 2013, the $750 million facility is operating at about 80 percent of capacity with a high rate of metallization and a carbon content of almost 5 percent, Nucor Chairman, President and Chief Executive Officer John Ferriola says. The more carbon in the DRI, the less that must be added in the melt shop.
“By owning a DRI facility, you control supply. And as you experiment and work through the reaction in the furnace, you can adjust the chemistry of the DRI to optimize exactly what’s going on,” he says.
“The results we are getting in our furnaces exceed anything we expected in terms of energy reduction. It’s producing heat from the carbon, which means you have to put fewer electrodes in it. The carbon also lets you form slag, which acts as a cushion when you dump scrap into it, so you improve the life of your furnace lining,” Ferriola explains.
“We expected to see energy savings but we didn’t really anticipate such an improvement on furnace life or on electrode consumption.”
Nucor also purchases pig iron from Brazil, Canada and Sweden, says Ferriola. “The first issue is assurance of supply,” particularly in light of geopolitical issues and volatile currency exchange rates, which calls into question the ability of foreign mines to ship iron to the United States.
“Don’t dismiss the logistical advantages: You’re not bringing that product from Brazil or Ukraine, you’re bringing it from Louisiana. That’s a much shorter, faster supply chain that allows you to have less inventory on the ground.”
Nucor signed a bargain-priced, long-term natural gas supply contract, which will keep its DRI facility’s operating costs competitive against the global ferrous raw materials market far into the future, says Ferriola.
Essar Steel Minnesota LLC has roughly 1.7 billion metric tons of proven iron ore reserves in Hibbing. It entered a 10-year contract in February to supply ArcelorMittal USA with 3.5 million metric tons of standard and fluxed iron ore pellets per year.
Essar is building a $1.8 billion, 7-million-metric-ton pellet plant at Nashwauk, Minnesota, and in mid-May secured $450 million in bond financing to continue development of the project.
Cliffs Natural Resources, a Cleveland, Ohio-based independent iron miner, declined to comment for this article. Cliffs is facing a proxy fight for control of its board with Casablanca Capital, New York, which holds 5.2 percent of the shares.
Severstal’s Reepsmeyer says he’s “pleased to hear of new [domestic] direct reduced ironmaking capacity.” If the availability of DRI or hot briquetted iron in North America increases, it is “likely to reduce the urgency for Severstal to make its own upstream investments” in these technologies. In addition, “if pricing and value in use are appropriate and the required infrastructure is in place, we are open to buying DRI from a North American producer,” he said.
Questions that arose in discussions at recent industry conferences are whether the current low iron ore price ($94.19 per metric ton in Metal Bulletin’s index as of June 25) is sustainable, whether low pricing might curb investment in mines and processing, and whether such pricing might be favorable or detrimental for steelmakers. No one had definitive answers. MM