Cleveland-Cliffs points to more scrap consumption

In a wide-ranging and colorful conversation with five steel industry analysts, CEO Lourenco Goncalves of Cleveland-Cliffs said the company’s use of ferrous scrap has been rising and later this decade it might consider adding to its electric arc furnace (EAF) capacity rather than paying for a blast furnace reline.

In his opening remarks, Lourenco Goncalves said of the Cleveland-based firm’s record 2021 earnings, “With this record annual profitability, we put the cash we generated to good use. We reinvested in our business, acquired the leading prime scrap processor in North America.”

The 2021 acquisition of Detroit-based Ferrous Processing & Trading Co. (FPT) figured into several remarks CEO Lourenco Goncalves and Cleveland-Cliffs Chief Financial Officer (CFO) Celso Goncalves made.

The CFO commented, “We have been offsetting our coke usage by increasing the usage of HBI (hot briquetted iron) in our blast furnaces and increasing the percentage of scrap in the charge of our BOFs (basic oxygen furnaces).”

CEO Lourenco Goncalves touted the environmental, social and corporate governance (ESG) aspects of the transaction, saying: “Another ongoing important matter for the future of Cleveland-Cliffs is our commitment to ESG. That was evident with our purchase of FPT, the national leader in prime scrap.”

Lourenco Goncalves also portrayed the steelmaker’s ownership of FPT as a competitive advantage. “Since closing the deal on Nov. 18, we have made substantial moves, securing a number of additional sources of prime scrap offtake, most notably the largest automotive stamping plant in the country. This particular stamping plant alone generates more than 150,000 tons of prime scrap per year. Our agreement replaced an incumbent scrap company, who has been servicing this stamping plant for decades, even before this scrap company was acquired by a minimill, several years ago.”

Lourenco Goncalves continued in the conference call, “Our deal was made possible with a compelling proposition. This automotive manufacturer buys the steel, primarily from Cleveland-Cliffs, and now we can feed their scrap directly back to our steelmaking shops. This is not just recycling steel. It’s a real closed loop. A closed loop is a key piece of our automotive clients’ environmental strategy, as well as a key piece of our own environmental strategy at Cleveland-Cliffs.”

Despite its roots in Minnesota iron range mining, processing and shipping, Lourenco Goncalves portrayed a steelmaking future moving away from some of the traditional technology. “On the carbon emission side, we continue to lower our usage of coal and coke by increasing the utilization of HBI as a significant part of the burden in our blast furnaces. While our flagship direct reduction plant in Toledo was originally built to supply third parties EAFs with HBI, this HBI is now being, exclusively, used in-house within Cleveland-Cliffs, the vast majority in our blast furnaces, playing a central role in lowering both our coke rate and our CO₂ emissions.”

Scrap also is part of the equation, he said. “With the use of additional scrap in our BOFs, our iron ore needs are not as high as before, and we no longer need to run our mines throughout. We will be idling all production at our Northshore mine starting in the spring, carrying through at least to the fall period and maybe beyond. At Northshore, no production, no shipments, no royalty payments,” he said of the facility in Silver Bay, Minnesota.

“Our strategy to stretch hot metal by adding increased amounts of scrap to the BOFs is working extremely well,” continued Lourenco Goncalves. “With more scrap in the BOFs, we need fewer tons of hot metal to produce the same tonnage of liquid steel. As a consequence, the Northshore idle could go longer than currently planned.”

While many of the company’s current mills use blast furnace/BOF technology, Lourenco Goncalves said the use of more EAF technology is likely for Cleveland-Cliffs. “EAFs continue to be unable to demonstrate that they can compete and produce the entire spectrum of specs demanded by the car manufacturers,” he remarked. “A blast furnace reline is a capital expenditure-heavy undertaking, albeit totally expected in our multiyear projections. In some cases, the capital requirements of a new EAF compared to the avoidance of reinvesting in a blast furnace reline and its associated supply chain could come out close to a wash. If and when that happens, the wash or better, we might consider an EAF as a replacement to a blast furnace reline in the future.”

BOF technology is not going away completely, the CEO also made clear. “You reduce emissions not [by] building EAFs. You reduce emissions [by] melting scrap, instead of melting pig iron with 4 percent carbon content. And that’s what we’re doing in our steelmaking shops. FPT is key for that.”

He continued, “My thing with EAFs is when it’s time to rely on blast furnaces, it costs a lot of money. We can, instead of relining the blast furnace, put up the EAF to melt scrap. And by the way, we have a lot of scrap because we own a scrap company. When is that going to happen? I don’t know, in the future. Certainly not in 2022. I don’t believe it will be in 2023 either.”

After its two years of mill and scrap processing purchasing activity, Lourenco Goncalves expressed frustration with analysts or media outlets who continue to refer to Cleveland-Cliffs as a mining firm. “We still are called an iron ore company, every now and then,” he remarked. “How many years do they need to learn that we are no longer an iron ore company?”

Two more topics Lourenco Goncalves covered included the progress of EV sales in the U.S. and the notion of a more consolidated steel industry in the country.

Lourenco Goncalves, who has been unapologetic about lofty steel prices, similarly defended consolidation in the sector. “We changed the industry completely, 100 percent,” he says of the Cleveland-Cliffs mill buying strategy. “We created the basis for everybody here in the U.S. to make a lot of money. Even the analysts recognize that without our actions on consolidating this industry, no steel mill, no service center and several others throughout the entire supply chain would have made money, as we all made money in 2022. So, for you guys that are listening to this call with disguised names, you are welcome. I got you that. So, that was the biggest synergy that we implemented, not just for ourselves but for the entire steel industry.”

Regarding EVs, Lourenco Goncalves says Cleveland-Cliffs is well-positioned for any changes brought about by a shift from internal combustion engine (ICE) to battery power. “My strategy on the environment is to support the ones that really knock down emissions,” he commented, saying the steel industry in America accounts for only 1 percent of carbon emissions in the U.S.

ICE vehicles, meanwhile “put out [into] the atmosphere 29 percent of the total CO₂ that pollutes the air, here in the United States,” said Lourenco Goncalves. Cleveland-Cliffs, he said, “are the only ones producing grain-oriented electrical steels that goes into transformers. So that’s for us. We are the only one, at this point, producing non-oriented electrical steels that go into the engines. There’s a lot going on in the automotive industry in terms of changing models and redesigning and respecifying materials for these new EVs. We are the suppliers of all of them. It’s always that Cleveland-Cliffs steel.”

The full 23-page transcript of the 2021 Cleveland-Cliffs earnings call can be found on this web page.