As many will tell you, there have been and will continue to be winners and losers in the metals industry from the lower gas prices that shale gas has created.
Even within industries, some will see opportunities where others do not. So it is for the steel industry – and in particular, the split between EAF and integrated steel mills. Nucor Corporation leads the pack for EAF steel producers, having almost singlehandedly re-invented the EAF industry since the late 1960s and becoming the largest US steel producer and the country’s largest recycler in the process.
And therein lies the opportunity, not just for Nucor Steel, but Steel Dynamics and others employing the mini-mill model.
According to an FT article, in several countries, including Iran, Saudi Arabia and Mexico, but not presently in the US, natural gas and iron ore are used to make a product called direct reduced iron (DRI), which is then added to scrap to make steel.
Using DRI, which avoids the need for coking coal, can be significantly cheaper than conventional steelmaking, depending on the price of gas. It is not a simple calculation, as DRI uses a little more electricity to melt a ton of finished steel than using 100% scrap, but the economics appear firmly in favor of producing direct reduced iron at current and anticipated natural gas prices in the US, as Nucor’s recent investment validates.
The firm is close to completing a new DRI plant on the site of an earlier one in Louisiana, according to the FT. Ironically, the previous facility was dismantled in 2003 and shipped to Trinidad, because rising US gas prices made it uneconomic.
John Ferriola, the company’s chief executive, is quoted as saying the replacement will be “a game-changer to Nucor’s cost structure for high-quality iron.”
But Nucor’s not alone.