Consolidation, capital investment and cunning

Features - Steel Industry Update

The U.S. steel industry is growing younger, wiser and greener.

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It’s arguably the golden age for steel in the United States, with most mills running full and hot-rolled band prices that were up almost 50 percent in January 2022 compared with the prior year despite a 22 percent correction over the prior 90 days. Public company financial guidance now is signaling caution that the money machine of the past few quarters is likely to moderate going forward.

The U.S. leads the way

Comparing the performance of steelmakers in the U.S. to that of others around the world, the January 2022 hot-rolled band export price was up just 3 percent year over year and down 38 percent from the May 2021 peak. Global steel production was up 3.7 percent in 2021 compared with 2020, according to the World Steel Association, Brussels. That compares with a 19 percent increase in U.S. steel production during the same period as reported by the American Iron & Steel Institute, Washington.

Most conversations about the strength in the U.S. market compared with the rest of the world start with “tariffs blocked imports,” but the reality in 2021 was that imports rebounded 36 percent, topping the 2019 level. We believe the increased mill pricing power in the U.S. market was more intentional and a result of consolidation, capital investment and cunning.

Continuing to grow young

It takes vision, creativity and persistence to take on overwhelming challenges. Starting with Ken Iverson of Nucor in the late 1980s, the U.S. steel industry began a transformation to recycling-based steelmaking. He “bet the future of the company” by investing big to commercialize new compact strip production, skipping several intermediary rolling steps, and revolutionized steelmaking as a result. Iverson cared deeply in his purpose and created a team culture at Nucor to accomplish his goals well before it was established as an effective management style. His footprint on the steel industry as we know it today is indelible.

Skipping ahead to 2007, Lakshmi Mittal built a global empire of steelmaking that culminated in his purchase of Europe’s crown jewel steelmaker, Arcelor of Luxembourg. He drew criticism over his motives but pushed back with his vision for the future saying, “This is not about creating a giant. It’s about creating the sustainability of the steel industry.”

As anyone who has spent time in the steel industry knows, the business is highly fragmented and cyclical, resulting in a divergence from the traditional economic supply-demand structure that would provide for a “normal” return on investment on the ginormous capital investment required. Furthermore, half of the current global steelmaking capacity that is in China doesn’t operate under the same financial constraints on investments.

In the U.S. alone, the publicly traded steel companies that report capital investments have spent $59.5 billion, with a “B,” over the past two decades to maintain and develop their facilities. Peter F. Marcus of World Steel Dynamics, Englewood Cliffs, New Jersey, used to call this “growing young.” Part of this evolution was a shift to 71 percent electric arc furnace- (EAF-) based steelmaking in 2020 compared with 47 percent in 2000, increasing recyclability in the industry, reducing costs, integrating new technologies and improving competitiveness.

Some in the industry have expressed anxiety over the current round of new mill investments, which could increase U.S. capacity by 15 percent. If we were building more of the same, I might share those concerns, but the industry is again investing in new, improved and expanded production capabilities, continuing the growing young evolution. In a strong demand year, imports can account for one-third of the U.S. supply, and I’m a proponent of the U.S. being more self-supplied.

But not just any production will suffice. Older, inefficient facilities that are no longer cost-competitive are being removed from production, which thrills my soul. The U.S. eliminated almost 6 million metric tons of capacity from 2014 to 2020, or 6 percent of 2021 estimated production, according to the Organization for Economic Cooperation and Development’s 2021 Global Forum on Steel Excess Capacity.

Becoming greener

Which brings us to the consolidation effort. The Cleveland-Cliffs purchase of AK Steel in March 2020 and the September 2020 purchase of the ArcelorMittal USA (consisting of its U.S. plants) under the leadership of Lourenco Goncalves brought a repeat of the 2002-2003 International Steel Group (ISG) Wilbur Ross/Rodney Mott consolidation discipline to the market with regard to steel production and pricing.

Also in 2020-2021, United States Steel Corp. purchased the late John Correnti’s EAF-based Arkansas steel mill, Big River Steel, the newest U.S. flat-rolled mill completed under Dave Stickler’s persistence, and has announced a Phase II expansion. The leadership exhibited within the industry in recent years has been remarkable and is happening across the integrated and EAF steelmakers.

In addition to becoming leaner and meaner, the U.S. steel industry also has committed to becoming greener. All the leading U.S. steelmakers have initiatives underway to reduce their carbon footprints, and the buzzwords in the industry are “decarbonization” and “net-zero carbon.”

Part of this effort is being driven by the automotive industry and its push toward electric vehicles, which is requiring a massive retooling of their production processes. The steel industry is partnering in these efforts by also rethinking how it makes steel. The emissions reduction targets have been expanded from just cutting the carbon footprint of the steelmaking process to also include the upstream input processes, such as energy, and the downstream processes, such as product delivery.

The U.S. is perhaps a decade ahead of Europe in these efforts, which is shifting its focus to replacing raw material-based steelmaking, which accounts for 57 percent of its total, with recycling-based steelmaking, currently 43 percent of its total.

Globally, integrated steelmaking accounts for 73 percent of the total, while in China integrated steelmaking accounts for 91 percent of the total (heading toward an estimated 88 percent by 2026).

China produced 91 million metric tons of steel through the EAF production route in 2020 and is estimated to top 102 million metric tons in 2021, close to 2019s EAF production of 103 million metric tons. China’s EAF capacity in 2021 will be approaching 200 million metric tons, according to our analysis, and over the next five years, we estimate a 7 percent EAF production compound annual growth rate to reach about 145 million metric tons by 2026 (or 12 percent of capacity).

Where is the scrap coming from?

The next most anxious question I hear is, “Where is the scrap going to come from for the new U.S. capacity?” And Europe? And China?

The scrap export market was an estimated 97 million to 99 million metric tons in 2020, according to data from the World Steel Association. The EU exports 56 percent of that material, or an approximate 54 million metric tons, so it likely increasingly will become a consumer of its own scrap. The U.S. exports 19 percent of that scrap, or an approximate 20 million metric tons, which is sufficient to cover the additional metallics requirement of the perhaps 13 million metric tons of new steelmaking capacity. Turkey imports 24 percent of these metric tons, followed by India at 9 percent and Italy at 7 percent.

Will the scrap supply chain be changing? Absolutely. If you’re a large consumer of scrap, does it make strategic sense to control that supply? It is almost critical, which is why Fort Wayne, Indiana-based Steel Dynamics purchased OmniSource in 2007, Nucor purchased DJJ in 2008, Steel Dynamics purchased a Mexican scrap processing company in 2020 in preparation for the start-up of its new Sinton, Texas, mill and Cleveland-Cliffs purchased Ferrous Processing and Trading Co. in 2021. In 2014, Charlotte, North Carolina-based Nucor went a step further by building a DRI plant in Convent, Louisiana, and in 2020 Cleveland-Cliffs started up an HBI plant in Toledo, Ohio. Pittsburgh-based U.S. Steel uses TMS International (formerly known as Tube City IMS), which also has corporate offices in Pittsburgh, to manage its scrap purchasing requirements.

China’s scrap consumption topped 200 million metric tons in 2019, and forecasts indicate that its consumption will top 300 million metric tons over the next half decade. The Chinese government has been working to increase its recycling/collection program, and the latest five-year plan has a stated goal for a “resource recycling industry” to be established by 2025. In the past few years, speculation has persisted about China entering the scrap export markets, but my personal opinion is that China will keep that scrap to supply its own steelmaking efforts.

Scrap and recycling will continue to be at the forefront of the changing global steelmaking supply chain. I’ve been advocating for branding the commodity as a lower carbon footprint raw material for the past few years but with little success so far. For sure, the industry is in the catbird seat for the future.

Becky E. Hites is president of Steel-Insights LLC, based in Douglasville, Georgia. More information on her company is available at www.steel-insights.com.