Scrap. Electricity. Action!

One could say that the steel mini-mill industry is much like the career of John Travolta. It has its highs—Saturday Night Fever, Pulp Fiction, and Urban Cowboy—and it has its lows (Battlefield Earth, or do you remember Shout? Neither do we). He has made a career out of riding out the good and the bad, much as the steelmaking industry has had to do.

But, as we await the next new release, or in steelmaking terms a potential market surge, the steel mini-mill industry and Travolta’s career seem to be riding on the same path. That would be a fairly stable (albeit not Academy Award winning) level for the moment—even if it is Battlefield Earth out there in the competitive industrial jungle.

And as the fortunes of electric arc furnace (EAF) mini-mills go, so the fortunes of the ferrous scrap trade often follow.

THE BIG TICKET

For the moment, steel pricing seems to be falling compared to the higher prices experienced earlier in the year. “Prices in the steel industry have peaked out and now are heading lower,” says Chuck Bradford, president, Bradford Research Inc., New York.

Birmingham Steel chairman and CEO John Correnti says that business is good at the moment, although it could be and has been better. “I would consider the business good,” he says. “Two months ago business was great. There has been a lot of softening due to supply considerations. A lot of pricing pressures are coming in from Russia, the Ukraine and Korea,” he says, naming several countries that are exporting competitively priced steel to the United States.

Portland, Ore.-based Schnitzer Steel Industries Inc. (SSI) says the order books are full on the West Coast. Although there are rumors of some potential softening in the market, things appear to be good for the moment, says Kurt Zetzsche, president of SSI subsidiary Cascade Steel Rolling Mills, McMinnville, Ore. “The economy is holding in place,” Schnitzer says. “For Cascade, our diverse product mix is a definite advantage in this regard.”

And, as in many situations, the psychology of the pricing situation can toy with the heads of company officials. “A lot of people have dropped prices and it is really causing a lot of confusion,” Correnti says. “People see prices dropping and the psychology kicks in. Average pricing is down $25 to $30 a ton.”

Scrap pricing is down as well, and with EAF-produced steel being composed of about 63% scrap (a figure used by Correnti), that also has an effect on finished product pricing.

FIGHTING FOR THAT BLOCKBUSTER HIT

Much like a surprise hit movie that comes from somewhere other than Hollywood, foreign competition can cause problems for the steel-making industry as well. Imports to North America can cause price declines and excess inventory for American-based steel producers.

Correnti says that foreign steel is entering the North American market in many segments of the steel industry, but, seeing as the economy is still doing fairly well, he seems to remain opti-mistic about the outcome. “The eco-nomy is still pretty good, but slowing and just not as great anymore. Business is not great, but definitely good.”

The Steel Manufacturers Association, Washington, agrees that imports from other countries can often cause problems for those in North America. “The basic problem,” says Eric Stuart, manager, committee affairs, “facing the EAF producers in North America is a world-wide excess of steelmaking capacity outside of North America, estimated by various expert organizations at 250 to 350 million metric tons. The quasi-permanent movement of this excess steel around the world market, seeking a home, is a disaster, particularly for North America, the world’s most attractive steel market.”

The steel trade deficit was about $10 billion last year, second to only 1998, when a figure of $11.8 billion was reached, according to a presentation before the Congressional Field Hearing May 5, made by Steel Manufacturers Association president Thomas Danjczek.

The Asian crisis of the late ‘90s, along with side effects of the troubled economies of the former Soviet Union and the Ukraine, is still affecting the U.S. steel industry. The European lack of growth and Japanese deflation did not help the situation any either. As was the case last year, trade flows continue to keep U.S. prices low, and the current over-supply situation arising from imports is likely to continue, Danjczek said in his presentation.

According to the Steel Manufacturers Association, when excess capacity seeks to enter the market, it often does so at any price. Thus a supply-demand imbalance creates predictable downward pressure on prices. Bradford says currently there is too much inventory, which is affecting pricing in a negative manner. “The problem with pricing is there is spot pricing and there is contract pricing that could last as long as four years. Mini-mills [use] almost entirely spot pricing.”

Spot pricing can lead to ups and downs in pricing, while the consistent, up-front prices with contract pricing that can allow companies to produced forecasts.

Some steel companies have opted to take a more conservative route in terms of both contract pricing and in forecasting to avoid “surprises” that could pop up along the way. And this method, Bradford says, definitely pays off in the end for the company, most of the time.

What some people fail to realize about the steel mini-mill is that feedstock material pricing greatly affects the cost of mini-mill steel production. Because scrap is the main component of steel made in mini-mills, the price of scrap and the price of EAF steel correlate and share a proportional relationship—when one goes up, the other follows, and vice-versa as well. “The trick about minis,” Bradford says, “is that people don’t seem to realize that scrap is the dominant cost. Because all the mini-mills have the same cost structure, steel and scrap prices correlate,” he explains. “The margins stay reasonably constant.”

Because of the cost structure in EAF’s, Bradford says they can remain profitable in almost any kind of environment.

THE COST OF A LEADING MAN

As with the film industry, the cost of securing an often necessary “plum” actor for the lead role can lead to skyrocketing production costs. The same is true for steel making with the cost of utilities, more specifically the cost of electricity. Electric Arc Furnaces, as their name implies, require a great deal of electricity. And with rising temperatures in the summer months causing air conditioners to operate on full blast and put the electric grid on full throttle, the cost of the vital component to EAF steelmaking also tends to rise, affecting overall production costs.

“An immediate issue that we can’t forecast is the weather,” Bradford says. “If you get a hot spell the amount of electricity available is pretty tight and if you get a big heat wave, then some mills are going to close.” During warm spells in recent summers, some mini-mills have faced power brown-outs that have caused unplanned curtailments in production.

Deregulation of utilities has placed an added competitive element on the price of electricity, having a direct affect on the mini-mill segment of the steelmaking industry. Bradford says a short-term spike can be projected for the third quarter because of the hot summer months and rising utility costs during that time.

A more long-term problem steelmakers may be facing in the future includes the Kyoto Accord, an international global warming reduction treaty that was signed by Clinton administration officials in 1997. The enactment of the agreement would require that the U.S. reduce carbon dioxide emissions, those believed to cause or contribute to the greenhouse effect. Although this agreement could cost American industry money, mini-mills could avoid being hit quite as hard as other segments of the steel industry because EAFs produce about one-third of the emissions that integrated steel facilities do, Bradford says. For example, a tax on emissions produced would only affect EAFs about a third of what other facilities may be hit with. That could amount to significant bottom-line differences, Bradford says.

SEARCHING FOR THE NEXT HIT

Overall, the steel mini-mill industry appears to be stable for the moment, although threats of the market softening remain, Correnti says. “We hope that the economy stays pretty good. If the automotive segment stays pretty robust, it is good for the steel industry,” he remarks, also noting that increased oil exploration and drilling activity would be a boon to the industry. “Construction is the largest area, and a lot of public works projects are going on at the municipal, state and county level. That all bodes well for the steel industry.” RT

The author is the assistant editor of Recycling Today.