Is There a Looming Raw Material Shortage in the World Steel Industry?

By Laura Neubert

When people think of raw materials for steelmaking, most immediately think of iron ore and metallurgical coal, only a few in-the-know think of steel scrap. Contrary to conventional wisdom however, all steel producers, whether they run electric arc furnaces (EAF), blast furnaces or basic oxygen furnaces (BOF), use steel scrap to produce steel.

World Steel Dynamics (WSD) in their 2011 World Crude Steel Forecast, report that between 2011 and 2020, the requirements for obsolete scrap for steelmaking may grow faster than the obsolete scrap reservoir. They further state that this imbalance may lead to a variety of consequences for the price of scrap, including: more frequent ‘price spikes’; increased demand for scrap substitutes; higher on average prices for steel scrap.

WSD also report that scrap consumption by the world steel industry was 339mm tonnes in 2011. By 2015 global scrap requirement is forecast to be 376 mm tonnes, which is an increase of 10.91% over the next four years. WSD expect the global scrap market may be tightest in 2020 when demand is expected to reach 481mm tonnes.

The International Iron Metallics Association (IIMA) report that there are already 26 countries with some form of restriction on steel scrap exports, as it is seen by many nations as a strategic resource with a finite supply; restrictions range from outright bans on exports to increased taxation on scrap exports.

Largely due to limited supply of this valuable urban resource, the scrap price has increased by 385% since 2001. In addition, scrap quality is declining because of the rising copper content in scrap steel. Steel is the most recycled material on earth. Copper content increases each time the material is recycled and currently there is no economic way to remove it.           

The raw material for EAFs is almost 100% scrap, where blast furnaces and BOFs use 25 -35% scrap. 

60% of North American steel is manufactured in EAFs and this method of production is growing around the world at about 1.5% per year.  With a looming shortage of a strategic raw material, steel makers everywhere are looking to alternatives to steel scrap. Blast furnace operators have more choices but iron ore cannot be used in EAFs as the process involves shorting an electric current through a metallic product rather than the reduction of an oxide as in a blast furnace. Thus EAF operators require metallic raw materials and will be negatively impacted by any shortage of scrap steel.

According to a report published by the Zurich-based financial powerhouse UBS, in North America there has been renewed interest in metallics over the last twelve months. Direct Reduced Iron (DRI) and Hot Briquetted Iron (HBI), a safer more transportable form of DRI are seen as practical and economical substitutes for scrap steel. Globally, HBI is widely used as a scrap substitute or supplement and has advantages that scrap does not provide. Unique benefits include: guaranteed chemistry, lower residual content, higher bulk density, ease of handling, same metallic yield as hot metal, reduced CO₂ and other emissions. The IIMA reports that production of HBI and DRI increased by 30% in 2011 and the trend is expected to continue.

China is currently increasing its consumption of steel scrap as it tries to clean up its steel industry. This activity is part of China’s 12^th Five Year Plan. China currently imports about 14.4 million tonnes of scrap per year and is targeted to increase this to 28.8 million tonnes by 2013 to fulfill the mandate of the 12th Five Year Plan.

This increase in consumption enables steel mills to reduce electricity consumption by as much as 60%, while producing significantly less ash, slag and emissions. The use of steel scrap can save up to 400kg of coking coal per tonne of steel produced. It is expected that this increased demand from China will be one of the main drivers of the looming scrap shortage and will subsequently lead to higher prices.

With so much iron ore available around the world and prices currently running around $130 per tonne for 65% concentrate, coupled with rising demand for HBI with prices close to $400 per tonne, the logical question is; Why aren’t more iron ore producers producing HBI or DRI instead of concentrate?

The simple answer is that most iron ore producers don’t have the required combination of resources and infrastructure. To economically produce either of these important raw materials (HBI/DRI), requires a unique combination of resources: The first is suitable iron ore as not all iron ore makes iron ore pellets suitable for reduction to DRI.  Next is cheap reductant; natural gas is preferred but coal can also be used. Water is also important, as are labour and transportation. Few iron ore miners have all of these resources available to them as many are in remote locations with poor logistics and infrastructure. Thus for these producers it is easier to make a concentrate which is sold directly to steel mills for further processing, as a result some analysts believe that the supply side of iron ore is advancing towards an oversupply situation, whereas metallics are likely to be under-supplied.

Steel mills in North America are rethinking their supply chains and producing DRI for their own use. Nucor (NYSE-NUE) is currently building a $750 million DRI plant in Louisiana to supplement supplies from their plant in Trinidad. This plant will produce 2.5 million tons of DRI beginning in 2013 and will likely acquire high quality iron ore pellets off the open market.

Steel Dynamics (NASDAQ-STLD) is still working on producing iron nuggets at its Mesabi Nugget facility after having spent $300 million, but has yet to perfect the rotary hearth process, so that production is both consistent and reliable. The process, which is still in a relatively early stage of development, mixes coal with iron fines in small pellets which are then spun on a gas heated hearth. The coal reduces the iron ore from the inside out producing a high quality nugget.

According to the UBS report, US Steel (NYSE -X) is also investigating the benefits of a 1,000,000 ton DRI plant that will be fed by expanded capacity at its Keetac Mine in Minnesota.

Northern Iron Corp (TSX-V NFE) is a Canadian past producer of DRI and is working towards bringing the Griffith Mine in the Red Lake area of Northern Ontario back into production to create the only North American manufacturer of merchant HBI.

The Griffith Mine produced DRI for Stelco from 1968 to 1986 when it closed due to depressed iron ore prices.  The Griffith property has the entire required infrastructure already in place except for a short rail spur for which the right of way and rail bed still exists. There is a gas pipeline on the property and electricity within 3.5 km. Water and labour are available and the property is well served by all-weather roads.

Basil Botha, President and CEO of NFE says “While a number of Canadian producers have investigated HBI, it appears that NFE is the only project in North America that has all of the requirements for successful production of HBI already in place. By that I mean: the right quality iron ore, electric power, natural gas, water and labour, we have it all. NFE is also making excellent progress in its efforts to secure off-take agreements and strategic partnerships and we recently announced a 900,000 tonne HBI order from China Railway Materials Company. This order, to be delivered in 2016 represents 60% of NFE’s planned production.”

Botha adds, “A resource estimate for the neighbouring, 100% owned Karas property, will be announced in August. Drilling on the Griffith Property will start before the end of the summer.”

UBS reports that since 2000, there have been several changes that are likely to alter the global competitiveness of North American HBI production. For example the price of iron ore has increased dramatically as a result of Chinese demand; this in turn has pushed steel prices up. An equally important change is the downward pressure on natural gas prices in North America. This looks like it will last for the foreseeable future.

As steel makers around the world come to grips with rising costs and raw material shortages HBI and DRI producers are likely to be the beneficiaries.