This group of produced feedstocks is normally referred to by those in the scrap business as scrap substitutes and is used mainly in areas where scrap is in short supply or as a complement to scrap in the EAFs of mini-mills or integrated mills. “Complements” or “alternate irons” to the steel making process are terms that the makers of these feedstocks like to use instead of “scrap substitutes.”

“It’s really all relative,” says John Kopfle of Midrex Direct Reduction Corp., Charlotte, N.C. “Isn’t scrap simply a substitute for iron ore? So, we really don’t like the name scrap substitutes. If mills had a choice they would use more virgin materials anyway, but the bounty of scrap makes it more economical to use scrap. Scrap has tramp elements and the mill is always working to control those impurities when they use scrap.”

Scrap substitutes have been coming on strong in the last two decades. Despite a poor year last year and some production setbacks, scrap substitutes seem to be poised for continued growth in the market. In fact, based on published reports, worldwide production of scrap substitutes is expected to nearly double in the next five years.

 MAKING MOVES

Midrex has been one of the most active scrap substitute companies in recent years. The company mainly produces direct reduced iron, but has ventured into several other processes that make feedstock out of steel mill wastes, coke and even coal. To date, Midrex has built 50 plants in 17 countries.

DRI is iron that has been produced from the iron ore in a reducing environment. During the process, most of the oxide in the ore is converted to metallic iron. Most DRI is made using a gas-based reduction process, with some DRI produced using a coal-based process. DRI is sold in the form of briquettes or pellets. When it is made into briquettes, DRI is referred to as HBI.

Production of the commodity has increased steadily during the past  quarter century, according to Midrex, up from 2.6 million metric tons in 1970 to 37 million metric tons in 1998. Some 45 million tons are projected to be produced this year.

Last year, due to market conditions, Midrex delayed several expansion plans, but the company says it’s now getting back on track with those moves. Recently, Midrex signed a deal with Kobe Steel in Japan for a plant, and start-up plants are under construction in Egypt, South Africa, Qatar and Trinidad. In addition, an expansion of a plant in Venezuela is moving forward after delays, and the company indicates it is presently in discussion with several mills in the United States to make deals.

The company is also employing a new production method called Fastmet that will deliver DRI at 1300 degrees Fahrenheit directly into the mini-mill furnace, thus saving electricity costs. Instead of having two heatings – one to make DRI and another to make the steel – hot DRI is added directly to the furnace and raised to the temperature needed to make steel.

Other companies, such as North Star Steel Co., Minneapolis, are using a similar process that delivers liquid pig iron from an adjacent mini-smelter to the furnace. The process being tested by North Star was developed by Tecnored of Brazil. “We hope that the first full-scale plant (100,000 tons per year) will start up in Brazil within the next 18 to 24 months,” says North Star’s Greg Lauser. “We believe molten iron in electric arc furnaces (EAFs) is the next major breakthrough on the horizon for EAF producers,” he notes.

Somewhat more ominously, perhaps, Lauser adds, “Down the road, it potentially could replace several million tons of scrap, if the processed products remain price competitive with scrap.” North Star’s research, Lauser says, “indicates that the practical limitation for using molten iron in EAF heats is between 30% and 35%. We think refining the process and application of molten iron across the entire EAF industry will take years, if not decades.”

Steel Dynamics Inc., Butler, Ind., also began operating a liquid pig iron plant in 1998, and other companies are using the process, too.

“These processes called Fastmelt, Tecnored and others are what I refer to generically as mini-smelters,” says Dr. Richard Burlingame, a scrap and steel industry consultant and metallurgist based in Cleveland. “The process is certainly not new; in fact, this idea of using mini-smelters dates back to the early 1960s. It’s just that the economics of steel making during the 1960s did not dictate that this technology be used.”

 WELCOME TO THE NEW  MILLENNIUM!

With mini-mills popping up like McDonald’s throughout the U.S., and creating a low-profit-margin-steelmaking climate that has engulfed the industry, Burlingame predicts a significant shift toward mini-smelting.

“The economics are going to dictate this shift,” he says. “About a decade ago steelmaking took around two to three hours tap to tap. The mini-mills then brought that down to about one hour. Now we are seeing 45 to 50 minutes tap to tap and mills are pushing to go lower. In order to go to faster steelmaking, the mills have to start off with some percentage of molten material, and that’s where the mini-smelters that use DRI come into play.”

Mills simply are trying to pinch every penny of profit out of a batch of steel, and due to the potential energy cost savings, using a mini-smelter looks like one of the keys to better profitability.

“This is our next target,” claims Kopfle. “We are setting our sights on the U.S. market and the potential growth with these mini-mills.”

Burlingame agrees that this is a smart move for Midrex. “They have a bright future if they go after it [the market],” he says.

So what does this mean for domestic scrap processors? Initially, not a lot, but four to five years down the road there could be significant changes. For one, Burlingame suggests that lower grade scrap, such as #2 heavy melt, may become so undesirable to the mills that they simply will not take it anymore. “There will come a time when the mills will begin to reject #2 scrap no matter how cheap it is. Scrap yards won’t be able to give it away. That’s because the mills will not be able to afford all the impurities of that grade because of the higher quality steels being produced.”

But all may not be lost for the future of #2 scrap. Burlingame points to the late 1950s, when auto hulk bundles suffered the same fate. “No one wanted the bundles because they couldn’t afford the impurities anymore,” says Burlingame. “But I was fortunate to be one of the pioneers of the auto shredder technology. Between 1957 and 1960 Proler built the first three auto shredders in the industry, then Luria Brothers followed with its own design. Now we have more than 200 of these beasts nationwide. The auto shredder solved the auto hulk bundle problem. So, if #2 scrap starts piling up when the mills don’t want it, I am confident the scrap industry will find a way of processing that will increase the quality.”

SOME SETBACKS

Scrap substitute production hasn’t been a boon for everyone. Nucor Corp, Charlotte, N.C., pulled the plug on its costly iron carbide plant in Trinidad after many years of proclaiming that it would provide the mini-mill company with a quality and reliable feed stock. Iron carbide is a dry, granular, processed iron ore product, made by converting iron ore fines using natural gas in a fluid bed reactor. Iron carbide is safer to handle than DRI because it will not spontaneously combust, its advocates contend.

The iron carbide plant was completed in 1994, but did not begin to ship iron carbide on a consistent basis until 1996. Its capacity was rated at 880 tons per day, however, the plant never reached that level.

“Iron carbide is dead, as far as I am concerned,” says Burlingame. “It’s just not profitable, and Nucor’s flop in Trinidad makes that more convincing.” A statement from the company on the future of the operation could not be obtained for publication.

Back in the U.S., it seems that Steel Dynamics Inc., Butler, Ind., hasn’t hit a home run as expected with its Iron Dynamics Inc. (IDI) subsidiary’s mini-smelter that converts DRI into liquid pig iron and then charges it into SDI’s electric arc furnace. The company, which was founded in 1993, began operations in 1996 with its new, state-of-the-art flat-rolled steel mini-mill, and the mini-smelter began operations in 1998. The company makes about 2.2 million tons of steel annually.

It appears that Iron Dynamics is still working the bugs out of the process that has been in the works for a couple of years. A recent write-up by a stock analyst with McDonald & Co., Cleveland, cites SDI executives admitting that the Iron Dynamics mini-smelter has some inadequacies, and the system has contributed to a drain on the company’s bottom line for the last two quarters. IDI officials could not be reached for comment, but statements from the company’s November 1999 quarterly report acknowledge that problems with the plant are being addressed.

Iron Dynamics has begun to achieve stable operating results, but these results are currently at significantly lower-than-expected volumes due to “certain problems” at the furnace, according to the report. “We have identified the necessary modifications to correct the problems, which includes some redesign and replacement of equipment.”

IDI now estimates that the necessary redesign will be completed by the middle of 2000, and anticipates operating in a reduced mode until that time.

The mini-smelter was expected to produce about 520,000 metric tons of pig iron annually.

According to Burlingame, IDI’s process is still in the prototype phase, and he cautions not to get too down on the recent news. “Sometimes these things take a while to iron out.”

SDI states that the principal elements of its production costs are alloys, electricity, natural gas, oxygen, argon, electrodes, depreciation and labor, but that steel scrap and scrap substitutes represent the most significant component of its cost of goods sold.

For the first nine months of 1999, the company’s cost of goods sold as a percentage of net sales decreased 5% compared to the same period in 1998. This decrease was primarily attributable to lower scrap costs during 1999 as SDI’s yielded net scrap cost was $112 per net ton compared to $148 per net ton for each period, respectively. SDI officials say that as IDI begins supplying them with liquid pig iron again as a scrap substitute, they anticipate even further cost savings.

Finally, Cliffs and Associates, a subsidiary of Cleveland Cliffs Inc., Cleveland, in conjunction with LTV Steel, Cleveland, has begun limited production at its Trinidad DRI site despite moving the opening date back many months. Construction of the $160 million plant began in early 1997. The DRI plant employs the Circored fluidized-bed technology developed by Lurgi AG of Germany. The facility is rated at 500,000 metric tons of reduced iron annually, with room to triple capacity.

“With any plant start-up there are always problems,” says David Gardner, director of public relations for Cleveland Cliffs Inc. “Our problems have been with equipment, not the Circored technology. So, we are still in a stand-up mode, and we expect to be producing about 400,000 metric tons in 2000.”

In addition to the Trinidad project, Cleveland Cliffs is also investigating other international and domestic reduced iron ventures, including making pig iron at an existing facility to be revamped at Silver Bay, Minn., in conjunction with its North Shore Mining Co. Cleveland Cliffs is expecting a facility that will produce 700,000 tons of pig iron annually and will employ a German technology called Redsmelt.

The pig iron is aimed mainly at the mini-mill segment of the industry. “We see the growth in mini-mill production and we are looking to meet that demand,” says Gardner.

STEPPING OUT

Last year was a difficult year for the steel industry, and therefore, for the scrap substitutes market, as well. Everyone was feeling the pain. “When the industry turned down at the end of 1998 and beginning of 1999 the severity of the down turn was unexpected,” says Kopfle. “The Asian flu was the biggest factor and it effected everything else. I would say it caused a 50% drop in the use of DRI.”

Now the healing is beginning. “We are definitely in a recovery mode,” says Kopfle. “Prices have rebounded about $30 a ton for DRI and other feedstock, and I think they will continue to recover as we go into the winter months and spring. Scrap is harder to get during these months, so prices historically rise.”

And production of scrap substitutes continues to rise, too. In 1998 the industry saw a 2.5% increase and a similar increase is expected to be revealed for 1999. Because of the continued growth, Kopfle and others see scrap substitutes not only as an alternative to scrap, but as an important hedge to prices, as well. “Because scrap substitute production is now at a significant level, we feel that DRI and pig iron, especially, have become a true hedge to soaring scrap prices,” says Kopfle. “When scrap starts approaching $150 a ton, then you see more DRI and other materials flowing in because you can make DRI for about $125 a ton.”

“We think scrap substitutes will be competitive in most steel markets,” says North Star’s Lauser, noting that factors influencing that include relative scrap supplies, the products being made and relative freight, capital and operating costs. “DRI/HBI producers are willing sellers when prices are equal to or greater than $100 per metric ton including cargo, freight and insurance costs to New Orleans,” he says. “In most markets, this is a competitive price; however, when scrap is at $79 per ton like it was [last year], that certainly curtails demand for replacements.”

DRI and pig iron are the top dogs of scrap substitutes, according to Burlingame. “I would say that pig iron is definitely the best, and domestic mills would use more of it if it were available. You can get a 98% melting yield with pig iron. But most comes from Russia and Brazil – there isn’t a whole lot produced here in the U.S. After pig iron, I would rank HBI as the next best substitute, although  HBI will only give about an 87% yield.”

Although historically scrap substitute-making plants have found footholds in countries that have low scrap generation levels, Kopfle feels that the U.S. is prime for significant increases in scrap substitute usage.

Within another year or two, 50% of the steel capacity in the U.S. will be from EAF mini-mills, according to Kopfle. And these mills are going to be producing more and more higher quality steels that are going to require a higher quality feedstock that the scrap substitutes can provide. “So, we are poised for even more growth, as these mini-mills increase their intake of our material,” he says.

So what does this all mean for the scrap processor? For one, increased demand for high-quality raw materials necessary to produce the steel that is being demanded will continue to stress the long-term supply of #1 scrap. This demand also continues to fuel the growth of scrap substitutes.

Two, as more steel production comes on line overseas (where scrap may not be as plentiful as it is domestically), scrap substitutes will be needed to fill the gap.

And, three, high quality scrap is getting harder to find, as auto hulks now entering the yard are containing a higher percentage of contaminants, such as coated sheets and alternate materials.

Does all of this worry scrap processors? The answer seems to be yes. “Anytime you have a product that is interchangeable with another, there will always be a threat,” says Stuart Simms, of Parkwood Iron & Metal, Cleveland. “I like to use the analogy of aluminum and plastic in the container wars – there have been some very good high-grade plastics that have taken market share away from aluminum, for instance.”

Simms says that the threat to scrap is real and especially to the higher grades. “When the cost of high-quality scrap and scrap substitutes are comparable, then I think scrap substitutes have the advantage because they give a cleaner [melt],” he says. “That’s when it concerns me.” Not everyone would agree with Simms regarding melt quality or yield, but there is a preference by some raw materials purchasers to favor the substitutes for the sake of consistency, whereas scrap shipments can be more like snowflakes—no two are identical.

Although many in the industry acknowledge that these observations are valid, Kopfle says that a stronger recovery in the steel industry is still needed to get everyone back on track. “The steel industry has been flat for so long that we need a good, long upturn.”  

The author is a Recycling Today contributing editor based in Parma, Ohio.