SSS 2020: EAFs to fill void left by integrated mills

Steel Dynamics Inc (SDI) isn’t worried about a flood of new flat-rolled electric-arc furnace (EAF) steelmaking capacity because it will be offset by the closure of older integrated mills, the company’s top executive said.

Approximately 15 million tons of annualized steelmaking capacity was taken offline following the outbreak of the Covid-19 pandemic, a period that saw US mills reduce capacity utilization to around 50%, SDI president and chief executive officer Mark Millett said.

Approximately five million to six million tons of that capacity has since restarted. And while it is likely that “some additional capacity will also restart, it is doubtful all will come back,” Millett said.

Millett did not mention any companies or facilities by name. His words, however, were blunt.

“Capital intense steelmaking assets tend to linger. But we are nearing the end of a long, integrated steel mill decline. And the final high-cost inefficient relics will meet their end,” he said during a keynote presentation at Fastmarkets’ Steel Success Strategies Online conference on Wednesday October 28.

Integrated mills, the dinosaurs of steel
“There has been recognition by integrated steel producers that they continue to lose automotive market share. As the technical and product capabilities of mini-mills continue to evolve, the electric-arc furnace producers will garner even more market share over time,” Millett predicted, adding that EAF mills already account for 70% of US steel production capability.

He said, for example, that SDI’s new mill in Sinton, Texas, would gun for exposed automotive parts previously made only at integrated steelmakers.

“Importantly, the rationalization of old and inefficient capacity will likely more than offset the new state-of-the-art electric-arc furnace capacity coming online over the next 24 months,” Millett said.

A host of EAF steelmakers – including not only SDI but also Big River, Nucor and North Star BlueScope – intend to add new flat-rolled steelmaking capacity in the years ahead.

Another thorn in the side of integrated mills – which melt iron ore and coking coal in blast furnaces to get liquid metal as opposed to EAFs, which melt scrap and other iron units with electricity – is that their process is not flexible. That’s an Achilles’ heel in a flat-rolled steel market characterized by increasing price volatility, Millett said.

Case in point: US hot-rolled coil prices fell to their lowest point in more than four years following the outbreak of the Covid-19 pandemic in North America. They have since risen to their highest point in more than 18 months in part because automakers, which stopped production for 10 weeks in response to the crisis, have had to make up for that lost production again – and also catch up to strong demand from consumers eager to avoid public transit.

 While some blast furnaces banked in the early days of the pandemic have been restarted, others have remain idled – and so have perhaps missed a period of higher prices over the last two months.

“The massive scale of the blast furnace route inhibits operational flexibility needed to combat ever-increasing market volatility,” Millett said.

One thing that should help the integrated steel industry survive is consolidation, like that which Cleveland-Cliffs has undertaken with its acquisition of AK Steel and with its pending deal for ArcelorMittal USA, he said

Another viable model is the hybrid approach U.S. Steel plans to take via keeping key integrated facilities running while also adding significant EAF capacity with its stake, and planned acquisition, of Big River Steel, Millett said.

“The necessity for change was evident in their actions prior to the pandemic. Covid-19 has only catalyzed and accelerated these actions,” he said.

Pig iron to the rescue
Millett brushed aside a question during a question-and-answer session about whether increased flat-rolled EAF capacity would drive prices for the prime scrap needed to make sheet steel via the mini-mill route.

The issue came to the fore of the market when automakers stopped producing, which cut off the flow of prime scrap and drove up prices even as finished steel prices crashed for lack of demand.

SDI was already in a good position in the United States because of its acquisition of scrap recycler OmniSource in 2007. And it will be well positioned in Texas thanks to its acquisition of Mexican ferrous scrap processor Zimmer SA de CV in August, Millett said.

What’s more, the domestic EAF industry should benefit from the Nucor’s direct-reduced iron (DRI) capabilities as well as from the hot-briquetted iron (HBI) plant that Cliffs is commissioning in Ohio, he said.

Scrap alternatives such as DRI, HBI and pig iron allow EAF producers to offset the impurities associated with scrap, something that is increasingly necessary as they seek to make value-added products such as special-bar quality steel (SBQ) and automotive-grade steel.

US mills typical source pig iron from abroad, usually from Brazil, Russia or the Ukraine.

But that could change as domestic integrated mills seek better ways to keep their operations running profitably, Millett said.

“I do believe you will see with the rationalization and consolidation of the integrated sector, that those folks will start producing pig iron to make sure that certain assets are fully utilized,” he said. “So I don’t believe there is going to be a lack of scrap. The market price may go up a little. But certainly at SDI we have scrap available.”

Cliffs, for example, has said that it could make merchant pig iron from its Ashland Works in Kentucky, which was acquired as part of its deal for AK Steel. When that might happen is not yet clear. “I want to start with HBI, see how the market behaves – and then we will make a decision regarding pig iron,” Cliffs chairman, president and chief executive officer Lourenco Goncalves said during an earnings conference call last week.

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