What was just a small portion of the steel industry as recently as the 1970s has now grown to account for almost half of all steelmaking in America. Electric Arc Furnace (EAF) steel producers have steadily increased their presence in the industry and continue to do so as a new decade begins.
Even though some sectors of the steel industry strained to compete in the late 1990s against foreign imports and competition, the EAF portion of the industry seemed to fare slightly better than its counterparts.
For a brief period of time in mid-summer of 1999, the EAF industry was unsure about how the fluctuating markets would affect mini-mills, but currently all regions are enjoying strong recovery in steel production and consumption, says Tony Trickett, general manager of economic affairs for the International Iron and Steel Institute, Brussels.
In July of last year, uncertainty surrounded the industry, according to Trickett. "In a way we are holding our breaths," said Trickett in mid-summer. "Up to this time last year everything was wonderful. Then the Asian markets all collapsed." He noted that steel consumption in Korea was down about a third in 1999 from that same time the year before.
Despite the difficulties, steel mini-mills continue to expand their presence in the industry both domestically and globally, says Shinichi Iguchi, general manager of technology for the International Iron and Steel Institute, Brussels. "Mini-mills in North America had great success during the past ten or 15 years and they still should have a strong position in next five or ten years."
Eric Stuart, staff officer with the Steel Manufacturers Association (SMA), Washington, estimates that the volume of EAF steelmaking in the steel industry will continue to grow, with about a one percent increase each year, with at least half of all steel produced in the U.S. being made in EAFs by 2001.
The popularity of using EAFs to produce steel is evident. Even during 1998, when steel production was decreasing by almost one million tons, production of steel using EAFs increased by about half a million tons, according to the SMA.
IMPORTS PUT CRIMP IN U.S. PROGRESS
The North American steel industry as a whole suffered from the 1998 onslaught of imports, although the EAF portion of the industry may have taken slightly less of a hit. One aspect that 1998 imports affected was recycling rates, says Greg Crawford, vice president, operations of the Steel Recycling Institute, Pittsburgh. "The steel companies in North America were using less scrap to make new steel and at the same time exports of scrap fell off dramatically because of poor market conditions," he says. The struggle the steel industry experienced carried over to affect the steel scrap market dramatically. Mills riding through a slump and lowering their capacity will almost certainly not need to buy as much scrap. "The scrap was not coming in and we were waiting until the prices began to bring it in again. Scrap remained uncollected and when prices got better, then hulks and other grades started to flow from smaller to bigger yards and on to end markets." And even though markets continue to fluctuate, "the overall posture is certainly much improved and we expect to see improved recycling rates posted for 1999." But who sets the price in the scrap industry is not the maker of the product, as in most business settings, notes Crawford. "Normally in business, someone who produces the product sets the price. But in scrap purchasing the price is not set by the seller, but the buyer." And mills did not bid up the price of steel scrap much at all during extended portions of 1998 and early 1999. Trickett says both North American and European steel consuming markets remained strong even though there was somewhat of a slump. But when European and Asian countries began exporting materials to North America, problems began. "I think the North American and European markets were still strong and all the companies were exporting and delivering (materials) to Japan when those markets collapsed. They [Europe and Japan] sent material to North America. This was the only market in town so everybody sent their steel there." Japan, Russia and Korea were the top exporters of steel to the United States, accounting for about 80% of the 7.92 million net tons of steel imported to the U.S in 1998, according to the Steel Manufacturers Association. There was a 162% increase in imports of steel to the U.S. from Japan between 1997 and 1998. Capacity rates of steel mills dramatically dropped in early 1999 from year-ago 1998 rates. In 1999, rates of capacity utilization were hovering around the high 70 to low 80% capacity range, while in 1998 the majority of mills were at a high 80 to mid-90% range. For example, in January of 1998 mills were operating at a rate of about 94% capacity, while just 12 months later mills were operating at about 78% capacity. But after the scrap markets experienced record lows in 1998 and early 1999 as a result of steel and scrap imports from the former Soviet Union, Asia and Brazil, prices recovered and slowly improved, Crawford says. "The effect was that scrap that had been waiting in inventory will began to flow through the system as the economy improved."CREATING SOME SOLUTIONS
Lawmakers tried to create solutions to import problems through legislation, but few official agreements were reached. "Suspension agreements, at least what I can see at this point, have started to affect the supply. Little to any Russian hot band is coming in," said Jon Ruth, executive vice president with North Star Steel, Minneapolis, in the summer of 1999. But, Ruth warned, the industry was not out of the woods yet. "We’re seeing signs of a lot less imports, certainly in the hot band side, but it is still a very competitive environment," he noted. Fortunately, steel consumption remained very strong in nearly every industry sector in North America despite the economic woes existing in other parts of the world, Ruth noted. "Consumption in the auto sector is very strong and the construction sector. I expect that to continue." While orders for steel in the oil and gas segment were "significantly down" as of summer, Ruth notes now that an upturn has started to occur. Trickett agrees that while the steel industry went through a rough stretch, consumption remained strong. "The steel industry went through a very bad 12 months," Trickett says. "The interesting thing is that the steel consumption remained strong. The U.S. economy was still very strong, although European economic growth was paltry."OVERSEAS COMPETITION TAKES ITS TOLL
While steel product consumption remained strong in most areas, industry-wide mini-mill capacity rates took awhile to head back toward the highs they reached in 1997 and early 1998, when 90% to 95% rates at mills were common. After reaching weekly averages in the 79% range, steel mill capacity in the U.S. was back up to 91.7% as of the week of February 12, 2000. The former situation had put mini-mills in a strong negotiating position with scrap dealers. [Although mills had to cut the prices of their steel products, their profit margins benefited from being able to buy scrap feedstock for their EAFs at a much lower price.] Crawford says that, despite the events of the past two years, North American mini-mills are situated to compete well. "What we’ve seen in the steel mill industry in North America is they were meeting demand and operating near capacity before the slump in the last year, given the fact that a certain portion of the consumption was already being met with imports." North American companies can compete well in an open trading environment, says the SMA’s Stuart. If that has been re-established, then mini-mills should be ready to ramp up production. "We believe our members compete very well in an open trade area. We can compete with anyone. But when there is unfair trade they can’t compete. Whenever you have foreign dumped steel you have problems because it is unfairly traded," says Stuart. But, Crawford says, it must be kept in mind that mini-mills were operating at or near full capacity before the slump, and during that time demand was met by a combination of North American and import suppliers. "Now as the imports waned, then certainly the North American steel mills have begun to resume earlier market share," he says. North American steel makers do have some advantages over facilities in other countries, some observers note. They are the most modern worldwide and among the lowest cost-producers, so if the demand for the products is there, they will be very competitive both domestically and internationally.A LOOK TO THE FUTURE
The steady improvement of most markets is keeping some people in the industry optimistic about the future. Stuart says while the future of steel markets is uncertain, improvement could be coming. And what is good for the EAF steel industry is almost always good for the ferrous scrap industry. "It’s good news as the market continues to improve and we’re watching scrap prices go up," says Crawford. "It actually goes a step further because in some cases the scrap simply doesn’t come in to the processor or the dealer. When market prices are down [peddlers] simply stop coming in." Crawford sees the current situation improving if prices continue to increase. The price points that bring out larger amounts of ferrous scrap were finally hit in the summer of 1999. As an example of the former lack of scrap flow, Crawford says, "there may be a smaller auto dismantler in a given location who continues to salvage various components of a car, but normally after they dismantle a car it will be flattened or crushed. And then those go to the auto shredder. When the price is down, then the going rate is not enough for an auto hulk to make it justifiable to send those hulks on." When mini-mills began working through existing stocks of ferrous scrap inventories, scrap substitutes continued to play a more prominent role with some steelmakers. "Traditionally, most mills will always consume a larger amount of scrap. Most of the alternative scrap used is to reduce residual levels," says North Star’s Ruth. North Star Steel has been adjusting some of its purchasing of scrap substitutes because of the recent market situation. "In terms of North Star, we use under 10 % of a virgin iron source. There’s been a lot of capacity coming on stream, in particular for HBI or DRI pellets. Because of that new capacity and the world economy, we’ve seen iron processing drop significantly over the past year and a half, especially with pig iron. If pig iron prices rise we will go back to using DRI," Ruth says. Some EAFs are becoming involved in the scrap substitute portion of business in order to exert more control over feedstock, says Stuart. "Some (companies) are getting involved with scrap substitutes to make sure they have an adequate feedstock, but they’re never going to completely displace the scrap broker." It is hard deny that there is some competition between scrap and scrap substitutes for market share though, says Crawford. "I think you’ll find that scrap substitutes must compete in the open market with scrap. And what the market requires is quite sophisticated." He also adds, "Scrap prices compete with what it would cost to make it straight from iron ore instead of scrap. They do compete in the marketplace and they each have their respective roles." Whatever percentage of scrap or pig iron they are melting, if mini-mills can produce at higher operating capacities, it will be good for both the alternative iron and scrap industries. For now, steelmakers and industry observers remain optimistic about the future of markets as things slowly begin to improve. "Everyone will be looking to see what future conditions take place in the economy overall," Crawford says, "as a result of what the future interest rates may be and other things that influence business conditions." Trickett says he thinks things are on their way back to normal. "Certainly, steel deliveries picked up. If Japan starts to recover, that would be nice as well. We are on the way up and the fundamentals are looking OK." RT The author is assistant editor of Recycling Today.
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