Prime scrap deficit forces US steel mills to change tack

US steelmakers continue to fine tune or ramp up their raw materials strategies in a race to cover the prime scrap shortfall as the pendulum swings further away from blast furnaces toward electric arc furnace (EAF) production

The sobering truth of a prime scrap (No1 busheling) shortage that is forecasted to worsen on the heels of increased demand is motivating steel producers to create individually tailored solutions to overcome the obstacle.

The reality of how fragile the situation is moved center stage in the March ferrous scrap trade. An unexpected war between Russia and Ukraine disrupted the pig iron supply chain and sent No1 busheling up an unprecedented $175 per gross ton overnight as mills scrambled to cover their requirements. Supplies of pig iron from Russia and Ukraine accounted for around 61% of total US pig iron imports last year.

Moreover, the market experienced an unusual situation over the last year where no.1 busheling rose above the price for pig iron. This was fueled by strong demand and a tightness driven partly by lingering production disruptions across the automotive supply chain due to a silicon chip shortage that slowed generation levels.

So how bad is the supply of prime scrap?

It has been shrinking for 50 years, according to a Cleveland Cliffs investor presentation, from more than 40 million tons of prime scrap generated annually in the early 1970s to around 13 million tons today.

‘Prime scrap remains in short supply,” Cliffs noted in the presentation.

At the same time, it forecast the deficit to widen because all the new capacity coming online equates to an additional 9 million tons of prime scrap needed by 2025.

Prime is a “critical feedstock” and “the next precious metal,” the company added.

“Scrap demand will continue to increase due to industry decarbonization efforts.”

In the US, 70.6% of steel comes from EAF, which is remarkable when one realizes globally only 26% of production is EAF-based, according to a spokeswoman at the American Iron & Steel Institute in Washington.

US steelmakers consume nearly 70 million tons of domestic scrap annually, according to the Steel Manufacturers Association in Washington.

“Recycling is at the very heart of the steel industry’s commitment to sustainability. By using steel scrap to make new steel, the American steel industry conserves energy, emissions, raw materials and natural resources,” SMA posts on its website.

Cliffs and other hot-rolled coil steelmakers have taken a 3-pronged approach to the shortage. Owning recycling assets, securing scrap buyback agreements with customers and owing alternative iron operations.

Cliffs not only has buyback agreements with its customers, but it also owns a hot briquetted iron (HBI) plant in Toledo and paid $775 million to lock up metal recycler Ferrous Process & Trading (FPT).

When it closed on the acquisition, FPT processed roughly 3 million tons per year of scrap - half of which is prime-grade material. Sources indicate that this number has increased as FPT has locked up more prime scrap accounts since the October 2021 acquisition.

Steelmaker Nucor owns a pair of direct reduced iron facilities in Louisiana and Trinidad & Tobago. Since 2008, it also has owned The David J Joseph Co., (DJJ) a brokerage and recycling firm. It also has industrial scrap accounts, according to sources.

Steel Dynamics Inc. has buyback agreements, owns a recycling entity OmniSource and internally sources liquid pig iron from its Iron Dynamics Inc (IDI). IDI is a liquid ironmaking facility situated on its Butler, Indiana steelmaking campus.

Meanwhile, US Steel is working to produce pig iron at its Gary, Indiana facility and AM/NS (an ArcelorMittal Nippon Steel joint venture) purchased an HBI facility from Voestalpine in April 2022. The plant can feed its EAF under construction in Calvert, Alabama.

It comes as the vulnerabilities of the pig iron supply chain were glaringly exposed following the Russia-Ukraine conflict that drove prices to record highs earlier this year.

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