Producers seek new markets and higher prices
By Tom Stundza -- Purchasing, 1/13/2000
Expanding market share will be the main focus of North American electric-furnace-based steel mills this year. Steel buyers can expect electric-arc furnace (EAF) steelmakers to join their bigger volume oxygen-furnace brethren in pushing for higher prices. But buyers will see continued improvements in the quality and breadth of products sold by the operators of EAF steelmaking plants. And that means that mini-mills will be aggressive in seeking to expand sales of value-added products into markets that previously have been the territory of the larger steel mills.That's the consensus forecast from industry insiders and analysts who believe actual end use will stay strong and imports will be down. They say the EAF mills will try to boost transaction prices from 1999 lows that were as much as 20% below those at the start of 1998. These days, for example, it's common to hear other mini-mill CEOs repeating the mantra expressed by Charles Hanebuth of Kentucky Electric Steel that "calendar 1999 profits were stifled by lower per-ton selling prices despite good demand, solid shipments, reduced scrap costs, and lower production costs."
Several analysts agree with Richard Aldrich at Lehman Brothers, who says that "as a result of continued strength in orders and lower inventory levels throughout the distribution chain, spot pricing will rise for the rod, bar, structural, and flat-rolled products made by EAF companies." This view is dominant because most analysts believe imports will keep dropping due to the improving Asian economic situation and punitive tariffs on steel from Latin America and Russia.
But most metals mavens also agree with buyer surveys, which suggest that increases will total 8%-10% for the year, but they will be implemented gradually. Analyst John Anton at Standard & Poor's DRI says that "the U.S. is in the midst of the longest economic expansion ever, and steel-consuming durable manufacturers have profited and will continue to benefit from strong sales and high production rates." But even he admits that buyers aren't about to roll over and accept every price hike proposed by the mills. "While the full increases sought by the mills may not stick, the conditions are ripe for at least some of them to hold," he says.
Domestic demand for steel will remain robust this year, says Anton. And, since several smaller-tonnage producers have been profitable even during the 1998 import attack and the 1999 pricing collapse, he and the mavens think these mills will be more intent on driving sales toward a 40% share of domestic supply by boosting shipments. And, say the mavens, buyers can expect expanded and aggressive marketing of higher-margin value-added mill products. "Buyers can expect to see changes coming from continuous improvement processes that will tweak current steelmaking processes," says analyst Charles Bradford of Bradford Research. "And there will be changes in sales approaches from additional downstream investments in new value-added mill products."
Analyst Tom Runiewicz at WEFA Inc. agrees, noting "there are nine major mini-mill projects slated to start up in the U.S. before the end of 2003." Many of these projects are focused toward additional cold rolling and galvanizing lines for sheet. Also planned are bar, plate, and structural products for the public construction sector.
Steel Dynamics Inc., for example, announced just last month that it will produce rail products at its new structural mill being built in Whitley County, Ind. The company anticipates the addition of rail manufacturing capability could add between 250,000 and 500,000 tons of standard and premium rails to its complement of approximately 900,000 tons of beams, angles, channels, h-piling, and other products expected to be produced annually in the Whitley County facility. The plant's original production capability of one million tons/year is expected to be only moderately increased as a result of this product addition. And note that SDI is one of the new generation of mini-mills that make a broad range of flat-rolled steel products, including light-gauge, micro-alloyed, and high-strength steels for automotive applications.
The combined net increase in U.S. steelmaking capacity gain should be roughly 10 million tons over the next five years, Runiewicz says. "With this level of commitment planned by domestic manufactures, new and higher market shares will be targeted by the electric-furnace steelmakers," he says, "since almost all of the new capacity will focus on electric-arc furnace production." And that's why most market mavens see "electrics" producing half of the U.S. steel melted annually in the near future.
EAFs--a sourcing staple
The past three decades have seen substantial growth of the so-called "mini-mills" that use EAF production. Simply put, EAF mills are small-tonnage steel production facilities that use ferrous scrap as the primary input (i.e., raw material) for making new steel and use electric-arc furnaces to melt the scrap. Integrated iron and steel plants, in contrast, make steel primarily from coke and iron ore (with some scrap), using a basic oxygen furnace for steel smelting. EAF-based plants initially were designed to melt scrap and produce steel for non-critical applications such as rebar and commercial-grade bars.
Last year, about 46% of the total U.S. steel output was smelted through the electric-arc process. That's about 50 million tons. In 1981, these electric-furnace steel companies accounted for 17 million tons, or only 15% of U.S. steel production. Now, with a significant proportion of the industry's new capital investment being carried out by the mini-mills, WEFA estimates the electrics will grow to produce half the carbon, alloy, and specialty steels melted in the U.S. by 2001. Other analysts see slightly slower growth, with the 50% milestone not reached until 2002. In either case, all analysts support marketshare gains by the domestic EAF mills and a continued investment focus toward new efficient technology to make higher-grade products and improve their bottom lines.
Generally, buyers surveyed by Purchasing are happy with the steel supplied by the EAF mills. Mill execs proclaim that previous metallurgical quality issues have been resolved and point to a recent series of supplier quality awards from various OEM companies. "We have made some dramatic improvements in steel quality in the process of moving up the value chain into flat-rolled products," says David Aycock, chairman of Nucor. "A lot of it comes from improved technology and experience. Customers certainly are interested in profile and flatness of the steel, but they also want quality delivery and service. We are trying to make improvements in all those areas."
However, on its way up the value chain, Nucor has discovered that customers of its three sheet mills are more demanding than those who source bar and light structural products. "Sheet buyers are more concerned with dimensional characteristics than we realized," says Michael Wagner, sales manager for Nucor's flat-rolled mini-mill in Crawfordsville, Ind. "Shape control continues to be a big part of what customers want. They also want to do more drawing and bending of steel than we've seen in the past. Appearance has become a very big thing--whether the coil is plain, painted, coated."
Rob Levey, general manager, commercial, with Gallatin Steel, acknowledges that the mill has to establish more working partnerships with its customers to resolve product quality issues. "We're trying to work with customers one-on-one like any integrated mill would," Levey says. "We have made some dramatic improvements in surface quality."
Purchasing buyer surveys still show that sourcing from EAFs presents some challenges. The rapid expansion of new technologies and product lines beyond bars and beams into sheet, plate, structurals, and tubulars has frustrated those buyers who want a stable supply base. Even some mill marketing executives acknowledge that it has taken longer than expected for some of the newer EAF plants to get "up to speed" on productivity, quality, delivery, and service.
Part of the problem is that EAF mills are champions of the "market mill" supply concept that targets a specific product group within a limited geographic area. That's because most of these plants are smaller in tonnage than the blast furnace/oxygen furnace "integrated mills," and the mini-mills are scattered across the country and usually are limited in their product mix. Also, the buyers gripe, new mini-mills often are unable to meet as quickly as advertised the demands of the marketplace for tonnage or quality.
Still, in the U.S. especially, EAF steelmaking has been a remarkable success. Even while total U.S. steel production decreased in 1998 and 1999, EAF raw steel production actually increased. And the electric-arc furnace is increasing its share of the total raw steel production worldwide. Today, there are more than 1,200 furnaces operating globally, accounting for better than 35% of total world steel production. In many countries, the EAF process accounts for 100% of all steel production. "The ability to produce quality steel products, efficiently and economically, is a key factor in the success of EAF mills," says Raul Quintero, president of the HYL Technology division of Hylsamex, the Mexican steelmaker. "The ever-increasing use of continuous casting techniques and the more recent trends to thin-slab, thin-strip, and near-net-shape casting also have helped EAF mills enter into new and more demanding product segments."
Global EAF production of crude steel is expected to increase annually by an average 4.6% for some time to come. "Faced with more competition from all over the world, these steel mills began to look for ways to protect their market share and going to higher value steels seemed to be the best way to do this," says Thomas Danjczek, president of the Steel Manufacturers Association, the trade group for EAF mills. "The electrics have continued to penetrate the markets for higher quality, higher value-added products, such as special quality bars, heavy structurals, and flat-rolled sheet. This growth will continue."
The newest generations of electric furnaces have, in fact, changed the way steel is made. The combination of scrap-fed electrics with ladle metallurgy, continuous thin-slab casting, thin-gauge hot-rolling, and new equipment and processes for producing higher value-added sheet steel products was unthinkable a decade ago; this year, EAF-based sheet mills will ship 13-14 million tons of hot-rolled bands (versus 3 million tons in 1995). From its infancy of a million annual tons of carbon steel sheet capacity at the start of the 1990s, EAF-based hot-rolled sheet capacity at the start of the new century is closer to 14.5 million annual tons, and could be as much as 17-18 million tons in another two years. Atop that, several flat-rolled steel mini-mills have already made moves downstream into the more lucrative cold-rolled steel market, and indications are that more will take the dive as time goes on.
Nucor and Steel Dynamics have installed cold mills at their facilities, and several others are either considering doing the same or going after at least a portion of the cold-roll market via very light-gauge hot roll, which could be produced using the new thin-slab technology. Meanwhile, several processors have opened facilities near the minis, possibly hoping that the steelmakers would rather outsource services, including cold rolling. Adding cold-rolled to their product mix has several advantages for the mini-mills, notes analyst Christopher Plummer of Metal Strategies, "as it allows them to diffuse the new capacity that has recently come on line, and it allows them to produce a higher-quality product for new markets." And, of course, he adds, cold-rolled sheet sells at a higher price than hot-rolled sheet.
However, it has not been all roses for the EAF mills making sheet products. Gallatin Steel began operations in the second quarter of 1995, producing more than 1.2 million tons/year of hot-rolled sheet in coils up to 61 inches wide at various gauge and grades. Gallatin Steel's state-of-the-art manufacturing facility features a twin-shell electric-arc furnace, a ladle metallurgy facility, a thin-slab continuous caster, and a six-stand hot finishing mill. But, while the product has been received well by buyers, production has been slow in getting coordinated and the mill just recently became profitable.
Then, there's Trico Steel, which began production in 1997 and is shipping a full range of hot-rolled steel products, which are being recognized by customers for exceptional dimension and surface quality. At full capacity, the Decatur, Ala., plant can produce up to 2.2 million tons of hot-rolled steel products/year in widths up to 65 inches and gauges as thin as one millimeter. In fact, this new ultralight-gauge hot-rolled steel competes with certain grades of cold-rolled sheet. However, Trico Steel has experienced substantial equipment problems that have prevented it from reaching satisfactory levels of performance. Although permanent transformer replacements were completed in the third quarter of 1999, it is not certain that this will result in Trico Steel becoming profitable very quickly.
Searching for identity
The term "mini-mill" has lost much of its relevance as a meaningful way to describe the EAF segment of the steel supply base, according to analyst Scott Morrison with Donaldson, Lufkin & Jenrette. Most of the single-site mills now call themselves "market mills" because they tend to make a limited range of products for a specific geographic area. But there are some single-site mini-mills that make larger tonnages and market their products nationally. And there are the multi-mill firms, such as Nucor Corp. and North Star Steel, which have numerous mills making numerous products and selling them globally.
EAF steelmakers have dominated the nation's reinforcing and merchant bar and light structural markets for quite some time and now control at least a fifth of carbon steel flat-rolled sheet and plate supply. The thin-slab sheet mills are moving upstream into value-added products while the bar-mill group also is moving into value-added products. Also, plate and light structural mills are expanding into new market regions. In fact, some analysts are predicting the mini-mill share of flat-rolled markets will be about 26% of the U.S. flat-rolled market sometime soon.
Industry execs and analysts emphasize that the EAF segment is not static. As new, low-cost capacity in value-added bar, structural, plate, and sheet product from EAF companies comes on line over the next few years, "imports will be reduced and some inefficient integrated-mill capacity may close," suggests analyst Morrison. He notes that these mills "are spending the money to improve productivity, increase quality, and remedy delivery problems." In fact, U.S. mini-mills have invested nearly $7-8 billion in capital spending over the past four years and plan to keep spending on capital improvements in 1999 and beyond.
Morrison now believes there soon will be two tiers of electric-furnace-based steelmakers. One tier will continue to focus on traditional "long products"--rods, bars, and light structurals--and in most ways, except for capacity size, will continue to resemble the mini-mills as we know them. "For these producers, growth will come only from cost cutting, adding low-cost incremental capacity, and consolidation, which will result in larger and more efficient producers but fewer of them," Morrison says. The second tier of electric-furnace producers will have integrated upstream into the production of higher-quality bar, heavier structurals, sophisticated plates, and plain and coated sheet using highly capital-intensive production processes.
In fact, that second tier has been developing for some time. When Chaparral Steel Co., Nucor-Yamato Steel Co., and Northwestern Steel & Wire Co., for example, began producing medium and heavy structural products last decade, they took on imports directly, as well as most of their domestic integrated competitors. Then there's Steel Dynamics, Trico Steel, Gallatin Steel, Tuscaloosa Steel, North Star BHP, and other companies, which Morrison says "represent interesting partnerships between entrepreneurial managements, financial investors, and strategic partners.
"The EAF carbon steel producers have rejuvenated the steel industry by pioneering technological changes in production and processing," says analyst Peter Marcus at Steel Dynamics. "In less than a decade, the EAF segment also has spread the gospel of low-overhead management and low-cost manufacturing throughout the steel industry." Reason: It costs at least four times more, per ton of capacity, to build a new greenfield integrated plant than to establish new electric-furnace steelmaking capacity. Further capital cost advantages have come from the in-plant productivity and technological breakthroughs in EAF steelmaking.
All indications are that the EAF segment's capital spending spree is far from over. Ipsco is based in Regina, Sask., but has just opened a second plate mill, this one in Montpelier, Iowa, that produces discrete plate up to 2 inches thick and 120 inches wide and coils up to þ inches thick and 96 inches wide. It also is building two new coil processing facilities--a 300,000-ton-a-year plant in Toronto and a similar one in Houston--and a 300,000-ton-a-year pipe processing facility in Blytheville, Ark. Now it is building a third 1.25 million ton/year plate mill for 2001 start-up in Mobile County, Ala.
Steel Dynamics, meanwhile, plans to have its million-ton-a-year structurals mill in Whitley County, Ind., on line in the first half of this year. The facility will use new "XH" rolling technology, which, according to CEO Keith Busse, will give it a bit more flexibility in processing structurals up to 36 inches wide. The mill will be capable of making a wider variety of products, including wide-flange beams, channels, large angles, and sheet piling.
Chaparral Steel Co., Midlothian, Texas, already has opened a new wide-flange structural beam facility in Petersburg, Va. The million-ton-a-year plant includes several low-cost technologies, including near-net-shape casting and rolling facilities.
Meanwhile, Oregon Steel Mills has been working to improve the performance of its new plate mill in Portland, Ore., while Citisteel USA Inc. has upgraded its four-high plate finishing mill at Claymont, Del., to make the end product--carbon steel plate up to 160 inches wide and up to 4Þ-inches thick--more competitive in cost and quality.
And some EAF steel producers are installing new finishing equipment that will enable them to market their products in more specialized niches. SMI South Carolina has installed a new $70-million rolling mill at its plant in West Columbia, S.C., to process up to 700,000 annual tons of rebar and merchant shapes. Wire rod and wire products producer Keystone Steel and Wire has increased production capacity from 700,000 to 1 million annual tons in Peoria, Ill., by installing a new six-strand billet caster. And North Star Steel has expanded its Youngstown, Ohio, pipe mill, allowing it to produce 650,000 tons/year of seamless casings for the oil and natural gas markets, and invested $2.3 million to expand its finishing facility for tubular castings in Houston.
More change is coming
Key challenges that EAF mills still must meet revolve around raw materials. Steel scrap has been cheap in recent months, but it is a volatile commodity; alternative smelting and iron-unit inputs always are being sought. "In recent years, there has been much change in the mini-mill arena of scrap-based electric furnaces, but much more may be coming," says analyst Bradford at Bradford Research. "Strip casting and hot metal feedstock for electric furnaces are two very immediate technological changes that could offer much lower costs for the makers of flat-rolled steel and lower prices for buyers."
If it can be commercialized and surface-quality issues resolved, the strip-casting process developed by Australia's BHP Steel would make hot-rolled coils without the need for a strip mill. Capital costs would be a low $150 million for 41,000 tons of hot-band capacity, and operating costs could be as low as $36/ton. This would translate into lower-cost EAF steel mill products.
Hot-metal charging using iron fines and a thermal coal-based product could, at the worst, put a new and lower ceiling on the price of scrap, adds Bradford, and also help decrease EAF steelmaking costs. Existing plants to make direct-reduced iron (DRI) and hot-briquetted iron (HBI) use iron ore pellets and natural gas to produce a product that is both a substitute and a complement to steel scrap as feedstock for electric furnaces. "However, only certain iron ores can be used directly to make the quality pellets that are necessary for the various DRI and HBI processes currently in use," says Bradford. "The new technologies aim to use iron ore fines, a much cheaper form of iron ore--basically a powder--that cannot be used directly in blast furnaces."
Nucor built the first iron carbide plant in Trinidad, which was based on low-cost iron ore fines and cheap natural gas. The technology used by Nucor proved to be inadequate to get either the volume or degree of metalization proposed, but a second-generation iron carbide plant has been built in Corpus Christi, Texas, and an iron-fines-based DRI plant is being tested out in Trinidad. Steel Dynamics has built an iron-fines and thermal coal-based plant adjacent to its steel mill in Butler, Ind.
"It is not just a matter of whether or not these and other new processes produce hot metal or DRI, but whether these process are economically viable," adds Bradford. He suggests it may take as long as two years of stable operations to determine whether these and other new iron unit technologies will provide the long-term cost savings sought by the EAF mills.
Conventional top-charged electric-arc furnaces accounted for 46% of U.S. raw steel production in 1999, and is likely to grow to 50% of all carbon, alloy, and stainless steel output by 2002 at the latest. All stainless and specialty alloy steels also are made in electric-arc furnaces. For carbon steel grades, "electrics" last year accounted for an estimated 37% of domestic production, as compared with less than 28% a decade ago.
Almost all the capacity growth in the U.S. steel industry has come from mini-mills in recent years; in fact, production from electric-arc furnace (EAF) has increased by a 5% average annual rate since 1994. In contrast, the basic oxygen-furnace segment has seen zero growth. As a result, the production market share of electric-furnace steelmakers has grown from below 40% five years ago to an estimated 46% today. WEFA Inc. analyst Tom Runiewicz forecasts the growth in electric-furnace-produced steel will accelerate. Last year, approximately 46% of the total U.S. steel produced was through the EAF process. With a significant proportion of the new investment being carried out by mini-mills, WEFA and most other analysts estimate the production share by the electric-arc process will be 50% soon.
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