Professional Documents
Culture Documents
Why Minimills Give The US Huge Advantages in Steel
Why Minimills Give The US Huge Advantages in Steel
Why minimills
give the US huge
advantages in steel
Full costs for mini-sheet hot band? $275 per net ton
Louis L. Schorsch
Exhibit 1
In stark contrast, Europe and Japan have adopted this new
Installed minisheet
capability, 1995 production process at a glacial pace. All told, there are
around 10 million net tons of mini-sheet capacity operating
Percent
The North American lead in this technology is likely to persist for at least
the rest of the 1990s. Firm announcements – investments that are either
already under way or apparently backed by sound financing – suggest that
at least another 8 million tons of mini-sheet capacity will have been
installed in North America by the end of the decade. This compares with 2
million additional tons in Europe and none in Japan. North America will
thus be home to more than 80 percent of the developed world’s mini-sheet
capacity until at least the end of the century (Exhibit 2). Given the
competitive advantages enjoyed by such facilities, slow adoption by
European and Japanese producers is bound to create problems for those
industries in the future.
Exhibit 2
A seminal technology
The fundamental benefits of the thin-slab process used in mini-sheet plants
over conventional integrated steel production are undeniable. It oƒfers
tremendous savings in capital, overwhelmingly the most critical challenge
facing traditional steelmaking technology. It reduces operating costs by at
least as much as the two other seminal steel innovations of the postwar era,
the basic oxygen process and continuous casting. And it creates incentives
for further innovation, thus helping to revamp steel production processes.
Saving capital and operating costs
Thin-slab casting solves the principal problem facing integrated production
techniques: investment requirements that are not supported by market
At its root, the global steel crisis has always been about performance rather
than capacity balancing. The source of the excess capacity is more eƒficient
entrants: entrants that have found a lower-capital-cost route for steel
production, that can earn an attractive return at typical market prices, and
that have solved the problem of creeping obsolescence that plagues
increasingly undercapitalized integrated plants. Here lies the key advantage
of the minimills.
te e
pl ish
in hly
in
operating costs were lower – sometimes less than 5 percent. Other advantages,
particularly melt quality, underlie the BOF advantage over the open hearth.
In this light, the discrepancy in adoption rates seems even more puzzling.
With the BOF and conventional continuous casting, Europe and Japan
led the United States in adoption. Yet only the United States looks likely to
show much progress toward adopting thin-slab casting technology this
decade (Exhibit 4).
Exhibit 4
Scrap is one of the key concerns for investors in thin-slab casting tech-
nology, since such facilities must currently be linked to electric furnaces in
order to maintain their low unit capital costs. Quality requirements for
sheet products mandate low residuals – a condition that can only be met
through the substantial use of virgin inputs. The spectacular rise in thin-slab
capacity in North America has thus greatly increased the incentives for
developing scrap substitutes.
The best current example of this phenomenon is iron carbide, which is now
being commercialized – not coincidentally – by Nucor to feed its mini-sheet
plants. Nucor could have pursued a more proven technology, such as direct
reduced iron (DRI), but chose to take a risk on iron carbide, which because
of its high carbon content has a potential value-in-use advantage of at least
Exhibit 7
$10 per ton (around 8 percent) over the best DRI
Estimated economic value of
scrap and scrap substitutes* (Exhibit 7). Moreover, iron carbide should be cheap-
er to produce than most currently available scrap
Example: United States
Premium (discount) over No. 1 heavy melt substitutes, both because its ore input does not
Merchant pig iron 35† require intermediate processing and because its
capital costs are relatively low (Exhibit 8).
Granulated iron 29†
Iron carbide 26†
No. 1 bundles 25
Given these advantages, the successful commer-
cialization of iron carbide will ultimately produce a
Fior HBI 15
Midrex high met DRI HBI 13 net saving for mini-sheet plants of at least $16 per
Midrex low met DRI HBI 11
ton of hot band (perhaps much more if the tech-
Shredded 5 nology works as advertised) compared with the cost
No. 1 heavy melt 0 of using more conventional DRI products. More-
over, other technologies exist that may prove supe-
rior to iron carbide, such as Fastmet. Innovation
No. 2 heavy melt –14
thus stands a good chance of solving the ferrous
input problem posed by the low residuals require-
ments of mini-sheet plants.
No. 2 bundles –27
The story does not end there. One of the limitations
of iron carbide, particularly as a feedstock for mini-
sheet plants in developing countries, is the diƒficulty
of using it for more than about 25 percent of the
total charge. If a furnace can be designed specifi-
cally for iron carbide, however, this constraint will
ease. In theory, the cost per ton of crude steel made
in such a vessel would be very low.
Turnings –65
* Quality premium estimated at $5.3 If it follows this path, iron carbide – originally
per 0.1 percent reduction in residuals
(actual midpoint of last cycle) regarded as a potential scrap substitute – will enter
† Postcombustion capability would increase
these values by about $3 per ton the race to develop new steelmaking processes on
a small scale, at low capital cost, and without the
environmentally problematic coke required by traditional blast-furnace
technology. With the exception of Corex, the various technologies now in
that race – Hismelt, DIOS, the AISI-DOE direct steelmaking research, and
so on – are all in early stages of development, leaving both their technical
feasibility and their likely economics in the realm of speculation. Never-
theless, initial estimates suggest that iron carbide could be highly compet-
itive, producing liquid steel at a cash operating cost of about $122 per net
ton – almost $25 per ton less than the next best alternative, the combination
of Hismelt and a conventional BOF (Exhibit 9).
Far in the future, the mix of steelmaking technologies may look very
diƒferent from that prevailing today. From a cost perspective, thin-slab
casting will remain the preferred method of converting liquid steel into
Exhibit 8
bands, with a full conversion cost, including capital charges, of around $45
per ton. Consequently, the ideal total complex of the future would link some
new primary technology with thin-slab casting.
Should direct steelmaking from iron carbide prove successful, hot band
might be produced at a cash cost of $154 per ton (Exhibit 10) and a full cost
of less than $200 per ton – far below the next best alternative, and $75 per
ton less than the projected full cost of today’s best option, iron carbide and
Exhibit 9 Exhibit 10
Iro SP g a ect
st g a c t
na
nd
g d
ca kin ire
in n
e* rt
l
C in r
ur
ee
S/ ak di
ac -a
rip a d
lf
g
st
rn he
st e
SM l m ide
st l m ide
in
ee
ct id
ct
fu -t
st
re rb
ee rb
ee rb
ire
S/ d
rip d
C f
CS
ca
D e-o
SM an
st an
di ca
s t ca
s t ca
Id
F†
n
n
at
F
IS
BO
Options
EA
EA
Iro
Iro
St
A
Other Other
25 31 20 22
Labor 45 37 47 40
7 7 3 21 Labor
Energy
14 10 46 44
Energy
43 42 12 59 10 16 12 18
Materials Materials
scrap plus electric furnace plus thin-slab caster. In short, new technologies
built around thin-slab casting – and encouraged by its introduction – oƒfer
potential cost reductions on a scale unlike anything we know today.
Total cost 274 281 285 The competitiveness of the integrated sector also
20
Capital* 38
30 has an influence. Marginal European and Japanese
53 players are more competitive than their US counter-
Cash 53
operating 53 15 parts, raising an additional barrier to entry.
cost† Other 13
Labor 13 47
35
Energy 15 Nevertheless, investment in a mini-sheet facility
represents an attractive economic proposition for
all three regions. Year-to-year fluctuations in market
Materials 155 150 150 prices can significantly alter the relative attrac-
tiveness of the technology by region. In early 1994,
for example, the United States provided the highest
returns, while good returns are available in all three
es
pa
at
Ja
St
er
d
is less overt in Japan, the extensive links between integrated producers and
most minimills impose similar restrictions.
The best way to think about this impact is from a business dynamics
perspective (Exhibit 13). Mini-sheet plants enter the market because their
costs allow them to earn an attractive return at market prices. The more
they expand, however, the more they generate excess capacity and thus
depress hot-band prices, reducing the returns available to new entrants.
Additional mini-sheet plants also mean more demand, and thus higher
prices, for high-grade ferrous inputs. This again reduces the returns
earned by new entrants, while increasing returns for investors in scrap-
substitute facilities.
Exhibit 13
Returns for
investments
in scrap Impact on
substitutes profitability
Exit
How this system balances out will ultimately define both how much
mini-sheet capacity the market will support and what this capacity will
do to hot-band prices. The key variable in input prices is the cost and
availability of scrap substitutes. Iron carbide, probably produced in gas-rich
regions like Venezuela or Trinidad, may well prove the most attractive
substitute material in North America. If the technology works as promised,
iron carbide could be delivered to the Nucor facility in Hickman Arkansas
at a full cost of less than $125 per gross ton, including a 15 percent return
on capital. Even if throughput rates are only 75 percent of target, the full
cost remains below $140 per gross ton delivered.
If a material like iron carbide turns out to act as a cap on prime scrap prices
under normal market conditions, mini-sheet plants will be able to source
prime scrap for around $140 per gross ton. Under ambitious but feasible
assumptions about operating and capital costs, the “steady state” full cost
for mini-sheet hot band is around $275 per net ton.
Mini-sheet investors will enter this market so long as they can earn their
cost of capital – that is, until trend-line prices fall to around $275 per net
ton. Plants currently operating or announced will probably be enough to
achieve this result provided imports maintain their current share. If imports
fall, there will be room for more mini-sheet plants, although the equilibrium
price will remain at $275. If iron carbide achieves a full cost of less than
$140 per gross ton delivered, there will again be room for more entrants,
albeit this time with a negative eƒfect on price.