With easily accessible steel scrap of utmost importance, US mills look to integrate
There has been an evolution in US steelmakers’ raw material strategy in the past several years, with mills pivoting from an effort to randomly own as many tons as they could to becoming more vertically integrated and owning material that can feed their meltshops
During the 2007-08 supercycle, scrap demand was strong and prices were high, as were export opportunities. Producers were concerned about supply, so they snapped up scrap assets in defensive moves.
In 2007, Steel Dynamics Inc (SDI) bought OmniSource for $1 billion, and Nucor Corp bought The David J Joseph Co (DJJ) for $1.44 billion in 2008. Over time, the strategy shifted to something more sophisticated.
Steelmakers are no longer just worried about protecting tons. They are showing increasing interest in controlling the material near mills they own and operate. Producers have built mills around their scrap assets, and they are seeking scrap assets around their mills.
Commercial Metals Co (CMC), Nucor and SDI are examples of electric-arc furnace (EAF) producers with scrap assets that have shifted their raw material strategies to buying or even divesting assets.
CMC mills in Birmingham, Alabama, and Cayce, South Carolina, have benefitted from scrap acquisitions designed to promote self-sufficiency.
Historically, CMC has been scrap-rich - but mostly in Texas. In 2017, CMC had 26 scrap processing facilities, half of them in Texas.
CMC relied on the spot market to feed the Cayce and Birmingham mills until 2017, when it signed a deal to buy seven sites owned by SDI/OmniSource in South Carolina and Georgia.
SDI didn’t need these assets - none of them fed SDI mills, which were located primarily in the Midwest. CMC, however, needed these facilities to become more self-sufficient in the Carolinas and in Alabama. The deal boosted CMC’s scrap independence in these areas.
CMC also purchased a rival shredder in 2014 in San Antonio, giving it a deeper footprint in that area. And in 2015, CMC decided to build a mill in Durant, Oklahoma, a strategic move considering that the company’s Texas scrapyards could help supply the mill’s raw material.
Mills have become shrewd. CMC recognized that having a nearby raw material supply was critical, so it bought scrap assets near the South Carolina and Alabama mill and built the mill in Durant, a location it was capable of supplying.
CMC also divested a shredder in Corpus Christi, Texas, that was not close enough to supply its mill in Seguin, Texas. The facility was sold to SDI, which required scrap feed for its newest mill, in Sinton, Texas.
SD has been on a more complicated course. Aside from the OmniSource acquisition, it has worked feverishly to lock up supply for its Sinton mill, which is expected to require 250,000 tons of scrap per month when its fully ramped up.
The Corpus Christi shredder SDI purchased from CMC is 32 miles from Sinton.
SDI also bought Mexico’s Zimmer Recycling, which ships 500,000 tons per year and is capable of processing 2 million tons per year.
And just last month, SDI announced that it had entered into a definitive agreement to acquire the equity interest of Monterrey, Mexico-based recycler Roca Acero as part of its strategy to feed its flat-rolled mills in Sinton and Columbus, Mississippi.
Roca operates four scrap processing facilities that are located near high-volume prime scrap sources in central and northern Mexico.
The SDI/OmniSource journey shows that scrap is not being targeted just for the sake of owning it; it is being targeted for self-sufficiency. In fact, SDI divested its OmniSource Southeast assets to CMC, in part because these assets could not feed SDI’s mills.
SDI stated in its full-year 2020 earnings report that it had shipped 4.6 million gross tons of ferrous scrap - 1.4 million tons to external customers. Based on these figures, SDI consumed 70% of its scrap and brokered the remaining 30% in 2020.
In 2012, SDI shipped 5.6 million tons of ferrous scrap, with approximately 51% of the tonnage going to its own mills - meaning nearly half of its tons that year were brokered elsewhere.
It now processes 1 million less but consumes 20% more internally.
SDI has purchased other assets when it has made sense. In 2020, it purchased a shredder in New Carlisle, Indiana, which is 90 miles from its Columbia City, Indiana, mill and 115 miles from its Butler, Indiana, sheet mill.
Nucor has also fine-tuned its vertical integration strategy.
Long before it bought DJJ, Nucor recognized the importance of raw materials. It commissioned a direct-reduced iron (DRI) plant in Trinidad & Tobago in 2007; it purchased DJJ and metal recycler Galamba Metals in 2008; and it began construction of a DRI plant in Louisiana in 2011 and commissioned it in 2013, enabling it to feed its Mississippi River mills while its Trinidad DRI plant feeds its coastal mills in the Carolinas.
Nucor also recognizes that, when determining locations for new mills, access to its own scrap is essential. Its newer Frostproof, Florida, mill is not far from its Trademark Recycling operations.
The recent decision to expand at Nucor Gallatin in Ghent, Kentucky, was an easy one due to its proximity to its own raw materials. DJJ has a lot of scrap assets near Gallatin, and Nucor acquired shredders in Louisville, Kentucky, and Mansbach, Ohio, when the opportunity arose.
A lot of steelmakers’ recent purchases of strategic raw material assets have come at a time of high scrap prices amid robust demand and tight supply - particularly for prime grades - due to lingering automotive production disruptions resulting from a silicon chip shortage.
For example, the steel scrap No1 busheling, consumer buying price, delivered mill Chicago soared to $760 per gross ton in April - near a record high.
Against this backdrop, it is clear that mills’ raw material strategies have become more sophisticated, with access to readily accessible scrap at the fore.