UPDATE 1-Brazil miner Vale wants part of U.S. steel recovery

Tue May 7, 2013 4:24pm EDT

* CEO says shale gas makes U.S. steel industry competitive

* Recovery in United States would reduce dependence on China

By Guillermo Parra-Bernal and Gustavo Bonato

SAO PAULO, May 7 (Reuters) - Vale SA, the world's biggest iron ore miner, hopes to boost sales to the U.S. steel industry, which has become more competitive as the country's shale gas boom has lowered costs, the Brazilian miner's CEO said on Tuesday.

Growth in the United States presents an opportunity for Vale to reduce its dependence on Chinese demand, Vale CEO Murilo Ferreira told a gathering of executives and government officials in Sao Paulo sponsored by a Brazilian magazine.

"Shale gas has made the U.S competitive again," he said. "And we feel that we want to be part of the resurgence of the steel industry in that country."

About 3 percent of Vale's sales went to the United States last year, less than a tenth of its sales to China, and some analysts question how eager the U.S. market will be for foreign iron ore.

Currently, the North American iron ore market is nearly self sufficient, with mines located close to rail and water links that can ship the ore cheaply and efficiently to mills.

DIRECT REDUCED IRON

Natural gas provides the greatest opportunities to operators of electric arc steel mills. Such mills have traditionally used scrap steel as a raw material and cost about $1.2 billion to build - around a quarter of the price of a traditional blast furnace that smelts steel directly from iron ore - said Michelle Applebaum, who publishes the Steel Market Intelligence newsletter.

Natural gas, though, can be used to cheaply convert iron ore into a raw material that can be used directly by electric furnaces through a process called direct reduced iron or DRI. As gas prices fall and scrap becomes scarce and expensive, DRI has offered a way to make electric mills operate competitively using iron ore directly, Applebaum said.

"Before the price of gas fell, DRI wasn't very economical in the U.S. Now its being talked about heavily again," she said adding that the most likely customer for Vale ore under a DRI plan is Nucor Corp., the biggest U.S. steelmaker by market value.

Nucor is building a $750 million DRI plant in St. James Parish, Louisiana and has a 20 year natural gas supply contract.

Applebaum, though, thinks Vale's market opportunities in the United States will be small.

"The U.S. is mostly self sufficient in iron ore and outside of the Nucor plant I don't see much demand right now."

She estimates that Vale, which produces more than 300 million tonnes of iron ore a year, might be able to sell an additional 5 million tonnes to the U.S. for DRI in the near future.

DRI in the U.S. could also reduce demand for Brazilian pig iron, another source of iron for electric steel mills. Vale supplies much of the iron ore used by Brazilian pig iron manufacturers, though some Brazilian pig iron producers have been criticized for using illegal lumber from Brazilian forests to make the charcoal used to smelt the pig iron.

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