Analysis: Steelmakers eye gas to cut costs, drive exports

NEW YORK (Reuters) - America’s steel industry, for decades a symbol of industrial decline, is betting on natural gas to make it more competitive against foreign producers.

U.S. Steel Corp X.N and Nucor Inc NUE.N, the two largest U.S. steel producers, are changing their traditional manufacturing processes as relatively cheap domestic natural gas supplies become more plentiful.

Some experts believe the new techniques will not only allow steelmakers to cut costs and lower selling prices at home, but also give U.S. companies a chance to compete with Japanese, South Korean and European rivals for a slice of the export pie.

“Gas is very positive for steel; it really lowers the cost of the product,” said Michael Locker of Locker Associates, a consultant for steel companies.

U.S. Steel Chief Executive John Surma said in an interview that using natural gas in some stages of production can cut the use of more expensive coking coal by some 10 percent.

He estimated that factoring in costs such as labor, energy and transportation, the overall savings would be $6 to $7 per ton of steel. U.S. Steel produces 23 million tons per year.

Christopher Plummer, managing director of Metal Strategies, an industry consultant in West Chester, Pennsylvania, said the global average cost of producing a ton of steel is about $600 to $700. Russian steelmakers produce at the bottom of the cost curve, averaging about $500 per ton. Americans are in the middle at about $625 to $675 per ton. The most expensive are the Japanese and Koreans, at $650 to $750 per ton.

While a savings of about 1 percent may not sound like much, every little bit counts for companies in an industry that has been struggling with steep rises in raw material costs, such as coking coal, iron ore and scrap metal.

“You do an analysis of our costs and they are much higher than five years ago,” said Surma, whose company posted a net loss of $226 million for the fourth quarter -- its fifth in the last eight quarters. “The capital cost to increase our ability to inject greater quantities of natural gas into our blast furnaces is minimal, but the potential savings certainly start to add up when you are producing 20 million tons or more of steel every year.”


With natural gas prices at 10-year lows because new fracking technology has opened up huge deposits in the Northeast United States, most domestic steelmakers are looking to use more of it.

“There is a new focus on natgas,” said Larry Kavanagh, president of the American Iron and Steel Institute’s Steel Market Development Institute. “Until the recent discovery, we believed coal-based technologies would dominate the future. Now the game has changed in the near term.”

Nucor, for instance, has dropped plans to build a traditional blast furnace in Louisiana and instead is constructing a gas-fired plant to produce direct reduced iron, or DRI, a key ingredient in its steel-making process.

The $750 million facility will convert natural gas and iron ore pellets into high-quality DRI used by Nucor’s steel mills, along with recycled scrap, to produce 2.5 million tons of steel a year. Like U.S. Steel, Nucor produces about 23 million tons of steel a year. According to Nucor officials, the DRI offers a carbon footprint that is one-third of that for the coke oven/blast furnace, and at less than half the capital cost.

Nucor may be better placed than U.S. Steel to reap the benefits of lower-cost gas because it is a so-called mini-mill operator, which melts recycled steel or pig iron in electric arc furnaces. Electricity is expensive, but costs can be cut by substituting natural gas to fire the furnace. U.S. Steel is an integrated manufacturer that largely makes steel the old-fashioned way, by cooking iron ore and coking coal in a blast furnace. Thus, there is a limit on the amount of natural gas it can substitute for coal.

Nucor has not said how much it expects to save on the cost of a ton of steel by using more natural gas.

Of course, there is no guarantee that natural gas prices will stay low forever; but increases are likely to be more limited than in the past because of the increased production. In the past, prices were volatile and in 2005 were as high as $14 per million British thermal units (BTU), compared with slightly above $2 per million BTU today.

But John Anton, director of steel services for the global forecasting company IHS, said he believes there is little risk that steel companies will get burned should gas prices rise again.

“DRI cannot stand high gas prices; but with fracking technology, we see low prices around $4 lasting for 30 years and under $8 for the next 80 years.”

Nucor, which posted a $137 million profit for the fourth quarter, is using a variety of measures to lock in current low prices. President and Chief Operating Officer John Ferriola said the company has long-term gas contracts at its DRI plant in Trinidad with an average cost of about $2 per million BTU.

In addition, Nucor and U.S. Steel are using hedging techniques to protect themselves against potential price rises.


Surma said the shift to natural gas could give U.S. Steel, a 110-year-old symbol of American industrial power, a competitive edge in the 21st Century.

Coke prices have risen sharply in the last five years as demand from Asian steelmakers has increased with the China-driven infrastructure building boom.

Although U.S. Steel cannot completely replace coke with natural gas, Surma said the company will try to use gas as much as possible. “We plan to keep pushing the envelope because the economics of gas are just so good,” he said.

Steel Market Intelligence analyst Michelle Applebaum said U.S. steelmakers have taken many steps to boost their competitiveness since the 1970s, when they were hobbled by high labor and pension costs and tepid demand. “The U.S. has cut a third of the capacity over the last 30 years to keep the industry alive,” she said. “It has made the companies very competitive and the U.S. is very well positioned for exports.”

Indeed, U.S. steel exports have recovered to pre-recession levels. The American Iron and Steel Institute forecast exports this year will reach 13.7 million tons, up from 13.45 million tons in 2011 and 9.3 million tons in 2010.

Anton of IHS expects most of the growth to be in Europe and Mexico in the near term. Further out, demand will grow in Asia and Africa. He expects U.S. steel manufacturers to increase their market share at home as well as abroad.

“Overall import penetration into the U.S. is about 20 to 25 percent of steel consumption. We see that falling to the low teens by the end of the decade,” he said.

Jim Mahoney, general manager of New Process Steel, a private steel purchaser based in Apodaca, Mexico, said his company buys most of its steel in the United States, Canada and Mexico.

“Steel is a commodity like anything else; it’s no different from a consumer choosing where to buy gas (gasoline),” he said. “Once you deal with the issues of convenience and reliability, it comes down to price.”

Reporting By Steve James, editing by Patricia Kranz and Gerald E. McCormick