Quality Remains Key for Steel Mills

The North American steel industry is showing great promise. The U.S. steel industry is flexing its production muscle. While the Asian economy is stumbling, U.S. steel producers continue to enjoy robust growth. Steel demand is growing, leading to better prices for the finished product.

At the same time, the changing role of the steel industry is reflected in the increased importance that the scrap processing side has in helping steel producers meet these new demands. Witness the significant increase in consolidation of the ferrous scrap industry. This move is due to increased attention to the supplier segment of the steel industry.

This consolidation is bringing increased attention on Wall Street to an integral, albeit fragmented portion of the steel industry. With the growth of large scrap processing operations comes concern about the ability of suppliers and consumers to continue their drive to deliver a quality product in a timely fashion.

Among the biggest beneficiaries of the improved landscape have been the electric arc steel mini-mills. These facilities initially were built to produce finished steel, primarily for the construction industry. These steel products typically did not compete with the more valuable, high end steel products. Because of this, the ferrous scrap needed was of much lower quality.

More recently, steel mini-mills are looking at producing much higher value steel. Steel products such as flat rolled steel require more stringent quality specifications for the raw material.

While these higher ticket items are resulting in intensified competition with traditional steel mills, the move is forcing mini-mills to ensure that the raw material, principally scrap, but also pig iron, hot briquetted iron and direct reduced iron, is of sufficient quality to meet consumer expectations.

With increased demands, quality continues to be a key point. The question is whether the scrap processing industry can meet these demands. For most steel mill purchasing officials, the answer is a resounding yes. According to Dick Jaffre, vice president of raw material purchases for Chaparral Steel, Midlothian, Tex., by and large the overwhelming majority of scrap delivered to the company’s Texas mill meets the quality specifications required by consumers.

One scrap processor says that mills don’t change their scrap specifications. Once the mills develop their specifications, they adhere to them fairly closely. This allows suppliers to come up with a firm understanding of what can be accepted. The consistency of what a mill can take in also lessens the chance of a scrap load being rejected.

Jaffree says his company spends a significant amount of time and effort to educate suppliers about what the mill can take in. “We don’t like surprises.” These surprises can include tramp elements or other, non-acceptable metals or other materials. And, with the finished product dependent on what type of raw material is used, the key is the quality of the material at the front end.

RELATIONSHIPS BUILT OVER TIME

In any business, developing a relationship between the buyer and seller is the key. It may sound like a cliché, but the ability of both the supplier and consumer to develop rapport is essential to an effective, smooth operation. As a Southern mill executive points out, “It is in fact essential for both supplier and consumer to have a clear understanding over what can and can’t be accepted.”

There are a number of ways consumers stay in close contact with raw material suppliers. Some mills opt to set up their own recycling facilities to supply a significant portion of the scrap metal required by the mills. Other companies, still recognizing the need to have someone intimately involved in this segment of the business, contract out the responsibility to a particular company or companies.

A number of mini-mill operators maintain a group of scrap metal facilities that are used to supply a large portion of the ferrous scrap to the mills. North Star Steel owns and operates a number of scrap metal yards which supply their operations with some raw material, as well as supplying other mills, both domestically and overseas. A spokesman for North Star says the company has a number of recycling yards that provide the company’s steel mills with a significant amount of the raw material needed.

The company, the second largest mini-mill steel producer in the United States and eighth largest U.S. steel maker, has electric arc furnace mini-mills in Kingman, Ariz.; Beaumont, Tex.; Monroe, Mich.; Wilton, Iowa; and Youngstown, Ohio. Additionally, the company has a steel rolling mill in Calvert City, Ky; a tubular goods end-finishing facility in Houston, Tex.; and a grinding ball plant in Duluth, Minn.

North Star’s scrap yards are located in Tampa, Fla.; Cedar Rapids and Wilton, Iowa; Monroe, Mich.; St. Paul, Minn.; Toledo, Ohio; and Beaumont, Tex. Combined, the facilities sort, shred and sell more than three million tons of scrap a year. North Star purchases more than three million tons of scrap a year through its subsidiary.

Commercial Metals Co.’s CMC Steel Group, in addition to operating four steel mini-mills, operates six metals recycling facilities. Commercial Metal’s recycling division operates a number of other scrap recycling facilities. The recycling segment is comprised of over 40 metal recycling plants. The recycled metals are sold to steel mills, specialty steel mills, high temperature alloy manufacturers, foundries, aluminum refineries and mills and other consumers.  These and other mills realize the importance of maintaining some presence in the scrap processing side of the metals business. There are a number of benefits to this approach. Several mills point out having scrap routed through their own yards allows for better control of the quality of the material. Another benefit is the ability to regulate the flow of material into the steel mills.

For some ferrous scrap consuming mills the most effective way to ensure quality is by contracting with a company to handle much of the front-end work. For Nucor Steel, the job of sourcing a majority of the scrap they use at its mills is handled by David J. Joseph Co., the Cincinnati-based scrap brokerage firm. Nucor, one of the fastest growing steel producers in the United States and the largest mini-mill company in the United States, operates a number of mini-mills producing bar products, as well as two mills which make high-end flat-rolled steel products. Nucor’s bar product mills are located in Darlington, S.C.; Norfolk, Neb.; Plymouth, Utah; and Jewett, Tex. The company’s sheet mills located in Crawfordsville, Ind.; and Hickman, Ark., both produce thin-slab flat-rolled steel.

Nucor also is building an additional structural mill to be integrated with its South Carolina mill that is expected to be operational by the end of this year. The company also is looking at possibly setting up a joint construction and operating agreement for a mini-mill in Brazil that would produce hot-rolled, cold-rolled and galvanized sheet steel.

The advantages of having a particular company handle a major portion of the raw material are many. According to Larry Roos, general manager of Nucor, having a company such as DJJ take care of the scrap handling taps into the scrap broker’s expertise. “They understand the market from a North American standpoint. They can react according to pricing trends. They also have their own rail cars.”

By allowing DJJ to handle its ferrous scrap intake, Nucor is able to rely on one source to ensure the material coming through their plants is of the quality needed. With DJJ being the largest ferrous scrap brokerage firm in the United States, the company has a firm grasp on the various issues affecting the metals industry.

Other companies prefer a split approach to ferrous scrap intake. Chaparral Steel takes in some ferrous from their own scrap facilities, while at the same time taking in material from outside sources.

By playing both internal and external sources, the company is able to maximize its collection of material at the best price. Jaffre feels this move is effective. “We are generally satisfied with our suppliers. Overwhelmingly we have good quality by our suppliers.” Further, he adds, there isn’t any concern with supply availability, including even the much cleaner grades of ferrous scrap. “We watch and inspect scrap very closely.”

Other steel mills feel their set up allows for enough flexibility to make sure that an adequate flow of the required scrap flows through their doors, whether through their contracted vendor, their own scrap yards, or through the open market.

While quality is the mantra scrap consumers preach, the steps toward achieving this goal are more than just recommendations. Contaminants, including radioactive material, can be extremely costly to a mill. With the onus of delivering exactly what the steel mill wants, scrap processors have to continually invest in equipment to ensure that what they are processing is what the mills require.

On the steel production side, carefully developed scrap specifications allow both parties to remain on the same page. Despite a wide range of steel products produced from the scrap, steel mills typically maintain consistent standards for their raw material.

According to Michael Coslov, CEO of Tube City, a Pennsylvania-based recycling and steel mill services company, most steel mills stay fairly constant with their specifications. “They are looking for the right specifications.”

David Sutherland, vice president and general manager of raw materials and coil processing for IPSCO Steel, a steel company headquartered in Regina, Saskatchewan, agrees that a close analysis of the inflow is essential to a well-run facility.

IPSCO, which makes a wide variety of steel products including flat rolled, plate and sheet grades, as well as pipe and tubular grades, has tight standards for their scrap ferrous.

For the company’s newly opened mini-mill in Iowa, the company is still using pig iron, although that plant also is expected to start using various ferrous scrap grades once the system is running at better schedules.

To protect the process, IPSCO has intensive communication with its suppliers. “Relationships have to be built. Communication between the two sides is very important,” Sutherland says. “There can’t be enough said about the relationship. Spending quality time is one way to ensure a quality scrap supply.”

Steve Rowan, vice president of materials and transportation for Oregon Steel Mills, Portland, Ore., agrees that quality and purity are keys for a successful operation. With their mills having different standards and specifications, depending on the type of steel product being manufactured, it is important to ensure that the scrap intake continues to meet quality standards.

To encourage a better understanding between suppliers and consumers, Oregon Steel encourages processors to visit their operations. “We have an open door policy. Processors should come and see what we do,” Rowan says.

By doing this, scrap processors will gain a better understanding of how the steel mill operates, and why certain standards are maintained, Rowan adds.

Another step in the quality direction most raw material buyers agree is to have steel mill officials visit their scrap suppliers. The officials are not only the personnel involved in purchases, but other people involved with the steel mill. This procedure sends a signal out to the supplier that the steel mill is taking an extra step to make the personal visit. This extra step is not just a one-way street. Both Jaffre and Sutherland point out the importance of scrap suppliers visiting steel mills. These visits aren’t limited to only meeting with the executives, nor are they only a courtesy call. Rather, the importance of meeting with the employees on the line and understanding the manufacturing process conveys the importance processors play in the mills’ success.

Visiting the plants also is a way to put a personality with the name, Roos points out. Both Nucor and D.J. Joseph do some of this, he says, although D.J. Joseph does more of it. “You have to have some trust built up between the two sides.” Taking the time to see the large and small suppliers helps to cement the relationship between the two sides,” he says. At the same time, Nucor welcomes visits by the suppliers to any of the company’s mills.

Bob Garvey, chairman and CEO of Birmingham Steel, Birmingham, Ala., feels the reality is that there is much more of an adversarial approach between suppliers and consumers. Scrap processors are trying to maximize their profits, while consumers are looking to keep the quality of the material entering a steel mill to a certain level. This is due to both sides being profit oriented enterprises.

As a way to maintain better control of the scrap flowing into the com-pany’s mills, Birmingham Steel operates four processing yards, and plans on adding other scrap yards to its complement.

“Our goal is to control 50 percent of our raw material,” Garvey points out.

Along with taking in a sizable amount of scrap, Birmingham is a partner in a direct reduced iron plant that is expected to supply Birmingham’s Memphis, Tenn., melt shop with some raw material, as well as further improve the control the company has over its raw material supply.

One complaint leveled against steel companies that operate extensive recycling divisions is the cost to operate these plants. Despite the fact that a large portion of the scrap yard’s processing material may be earmarked for the company’s mills, the cost of operating these facilities is expensive. Further, some question whether a scrap segment can be viewed as a profit center, and whether such companies will pay market prices if they supply material to their own mills.

As to critics who point out that running recycling yards takes away from the core business, Garvey stresses that Birmingham’s plants are strictly processing yards, and operate exclusively to supply the Birmingham’s steel mills. “We only look at the processing side,” Garvey points out.

Further, he adds, while purchasing equipment for an independent scrap facility may be a huge financial undertaking, for a large, integrated operation, the equipment is more like an incremental investment, and can be more easily absorbed by the parent company.

DANGEROUS MATERIALS

While a scrap load not meeting a certain specification is always a concern, issues such as radioactive materials are extremely damaging. The prevalence of this problem, though, is debatable. Tube City’s Coslov feels that radioactive contamination in a load of scrap is a “non-entity.”

Steve Steranka, president of Rad Comm Systems, a company manufacturing radiation detection systems based in Brampton, Ontario, says that while the chance of a damaging load of radioactive material entering a steel mill is minimal, the cost if a mill doesn’t catch material such as cobalt or other radioactive material could be significant.

Birmingham’s Garvey says that few in the scrap industry have installed systems that can detect radioactive material. In fact, Birmingham Steel was the site of one of the most recent incidents, where a sealed load containing radioactive material contaminated a steel plant. The cleanup cost was significant.

Steranka agrees. While many steel mills have radiation detection systems in place, very few scrap processors have detection systems.

While detection at the source would be ideal, according to some detection equipment is not as widely used by scrap processors, putting more of the onus on the steel mill to spot the radioactive material.

Gary Wascovich, senior sales supervisor for Bicron NE, a manufacturer of radiation detection equipment based in Solon, Ohio, feels a larger percent of the scrap processors do have detection equipment. Most of the scrap yards that don’t have the equipment are smaller facilities that typically are used as feeder yards for larger facilities, he adds.

The problem with this scenario is a load of ferrous scrap could be shipped without the processor having any knowledge of it containing radioactive material. Once it enters the steel mill, the detection system could flag the contaminated load.

One of two things could happen, says Wascovich. The mill could attempt to identify the source and remove it from the rest of the load, or it could reject the whole shipment. This could lead to a significant expense for the processor.

The prevalence of radioactive material is fairly well divided between the East and West, although detection is much higher in the East due to more radiation detection equipment being in place, according to Steranka.

Garvey notes that his company recently was found to have some radioactive material that came into a load. The cost to the company was more than $1 million. The cost to clean up from a radioactive load could easily climb past $15 million, depending on the extent of the damaged area.

According to Steranka, there have been more than 50 reported cases where radioactive material in sealed containers entered into a steel mill, causing extensive and costly cleanups. The result has been the need for suppliers and consumers to work closely together to ensure the chances of radioactive material in sealed containers does not enter the raw material stream.

ISO CERTIFICATION—BENEFIT OR HYPE?

A recent trend throughout the manufacturing world is the ISO certification process. This new certification proves that the standard and practices performed by a company meet a certain quality standard. Ostensibly, ISO certification indicates a company is adhering to standards of quality.

This trend is not lost on the steel industry. Most steel companies contacted said that at least several of their mills are either ISO certified or in the process of being certified. Will this trend trickle down to affect the suppliers of such a key raw material? Most feel that ISO certification is not as big an issue for scrap suppliers. While some companies have the certification, it has yet to take off and become a full-fledged trend in the recycling industry.

While this can be used as proof that the company is running an efficient and effective operation, does the same cache carry for suppliers of ferrous scrap?

Not necessarily, according to several mill buyers. One source points out that he has seen some iffy quality material and operations of some ISO certified companies, while he has seen high quality scrap by non-ISO certified companies.

Rowan agrees that ISO doesn’t guarantee quality is tops. In many ways, he points out, ISO isn’t necessary. He does agree that if the spirit of ISO policies is used, however, quality scrap should be the result. This move to ensure quality scrap can be developed both through purchases on the open market, or through purchases of scrap through the company’s own scrap operations. In Oregon Steel’s case, the company operates two scrap yards at their mill locations. In addition to being able to source their own material, having a yard at the front allows the mills to have another set of eyes to ensure that proper quality is delivered.

ISO certification is being performed at some Nucor mills. While a trend throughout the manufacturing industry, Roos does not feel this issue will translate totally to the scrap-processing segment of the industry. However, he adds, “Scrap suppliers will have to have some discipline.” This may entail scrap processors adopting some procedures that steel mills may have to follow to be ISO certified.

The notion of ISO may or may not become a big factor for scrap processors aiming to achieve preferred status with steel mills. Coslov does note that while some scrap suppliers are seeking to receive the certification, many larger scrap processors are seeking some type of procedural verification with their suppliers. This may not be ISO certification, but it hopefully will guarantee the steel mill or the processor that the material is of a consistent standard.

Despite the increased attention to ensuring a clean load of scrap is shipped on a timely basis, all executives contacted say that by and large scrap processors are delivering the goods in an effective fashion.

There are very few loads that are difficult, one purchasing official notes.

Even with constant visits between suppliers and consumers, problems do arise. However, many of these consumers are quick to point out rejections are not an oft-occurring situation. “We may reject or downgrade a car if it is not good,” Rowan points out.

Constant dialog between supplier and consumer can sharply reduce the chances of a shipment having problems. The lack of communication could cause a miscommunication that would create a rejected load. “At the end of the day if you have to set up more inspectors (for the loads), it costs money. Someone has to pay, and more often than not it will be the scrap supplier.”

With the majority of scrap processors delivering quality material, steel mills recognize that benefits should be extended. The steps that mills can take to continue a strong working relationship also are important. Recognizing companies that deliver quality material is essential, one mill buyer notes.

This is more than just idle talk about the delicate relationship between the two sides. The interdependence of both sides is such that problems with one side of the equation have a direct impact on the business end of the other side.

Sutherland says one step that can work to assist suppliers is to take in material in a timely fashion, as well as pay for the scrap in the allotted period of time. “We have to convey the message that they are an important aspect of our business.”

THE COST OF DOING BUSINESS

Quality, performance and availability are important aspects of the supply/demand network. The bottom line is that the biggest driving force for the scrap industry is the price of the material. Obtaining competitive prices for the raw material is a key to doing business. At the same time, steel mills understand that price changes could very well dictate the availability of scrap.

Another factor is that with many mills seeking to make more expensive steel products, a higher grade of scrap will be required. With this, scrap demand will change, specifications will tighten, and the demands for scrap processors will grow. The need for cleaner grades such as bushings and shredded scrap often result in a premium being assigned to the material. Steel mills realize that the tradeoff is necessary if they are to reach the desired finished product designation.

Another opportunity to maintain some price stability, according to Oregon Steel’s Rowan is through substituting other materials such as pig iron, hot briquetted iron or other materials, whenever prices start to climb too high.

Direct reduced iron, another substitute material for ferrous scrap is a growing segment of the steel industry. Nucor recently built an iron carbide plant in Trinidad to ensure a clean supply of raw material. The goal of the product is to act as a substitute for ferrous scrap. Once it reaches full capacity the plant should produce around 320,000 tons of iron carbide annually.

Other companies have stepped up and begun building scrap substitute facilities. Steel Dynamics, a division of CMC, is building a DRI plant in Indiana, and is setting up an arrangement to take in more than 300,000 tons per year of iron carbide from another facility, this one owned by Qualitech.

Birmingham Steel, along with Georgetown Steel, is building a DRI facility on the Gulf Coast to provide raw material for its finished product. The new plant should help Birmingham in its goal to increase the amount of raw material the company handles internally, reducing its exposure to the open market.

DRI, along with other scrap substitutes, is available and is becoming a more popular material, especially for mills looking to manufacture much higher grades of finished steel. The popularity of DRI, HBI or pig iron should work to keep ferrous scrap prices from climbing too high, and prevent any concerns about shortages of high quality scrap from taking hold.

MAINTAINING A PROPER INVENTORY

A tricky situation presently is keeping an adequate supply of raw material on hand. With a large portion of the raw material coming via rail, the recent problem with moving material on this mode of transportation is becoming trickier.

The much publicized difficulties the rail industry, and the Union Pacific in particular, is going through, is resulting in extended delays in shipments, including difficulties in obtaining gondola cars to move material.

On the West Coast the situation is most acute. Rowan notes Oregon Steel leases a fleet of around 600 gondola cars to ensure there is enough material coming in a day. “We saw the problems coming several years ago.” Even with a sizable fleet of gondola cars, the company tries to work with more than seven to ten days of inventory on hand. Train derailments, among other problems, do arise, which can create problems for mills that work too closely to a just-in-time inventory.

For Nucor, one of the selling points for using DJJ is their wide fleet of rail cars, which provides greater security to the steel mill requiring sizable shipments of ferrous scrap.

Other companies also are taking steps to ensure they have enough gondola cars to prevent any acute shortages from cropping up and leaving them unable to keep an adequate amount of scrap on hand.

Tube City’s Coslov says mills are interested in on-time delivery, a point several steel mills agree with. “When we buy a load, we would like to have it shipped that month,” a steel mill executive points out.

WHERE THE INDUSTRY STANDS

Lately the ferrous scrap market has been on a downswing. The problems with a host of Asian economies are resulting in a decline in the export of ferrous scrap. With more material being turned back onto the North American and Mexican markets, prices have been slipping. The situation should continue as long as Asian mills struggle with obtaining hard currency to buy the raw material.

While a number of steel mill operators see this situation as a positive, the continued problems of Asian economies could generate some unfavorable pricing for steel products. The inability of many Asian mills to sell their finished steel in Asia will translate into more finished steel being dumped in the United States, which is likely to soften prices for North American steel.

Despite these negatives, Garvey expects a strong market for U.S. steel producers. Order books are strong, which translates into better operating rates at domestic mills this year.

 Whether or not the relationship between suppliers and consumers is adversarial or close, there is the recognition that mills should seek to reward those suppliers who consistently deliver quality material. Simple steps to do this would include making sure payments for loads delivered are made in a timely fashion.

“You have to convey the message to your suppliers,” Sutherland says. “Communication is important. There can’t be enough said about the relationship.”

The author is senior editor of Recycling Today magazine