Vertical Integration At Mills

With an additional 10 to 15 million tons of additional steel capacity expected to come on line over the next few years in the United States, minimills are using a variety of approaches to assure they will have a steady supply of raw materials at a reasonable quality and price. Some mills are buying or starting their own scrap yards. Others are investing – either singly or in joint ventures – in plants to produce alternative iron units such as direct-reduced iron or hot briquetted iron. Still others are forming strategic partnerships with scrap processors, leaving the scrap purchasing and processing to them.

Although vertical integration of steel mills is not necessarily a trend, there is definitely a move toward greater involvement in scrap collection and monitoring, according to John Jacobson, president of Jacobson & Associates, Rochester, N.Y.

"Every smart steel producer – and you have to be smart to stay in business these days – is looking closely at the quality of the scrap, as they do the quality of all incoming raw materials," says Jacobson. "It’s possible there will be more vertical integration. But the definite thing to me is greater involvement, greater investment, more time by management and by companies themselves really focussing on this issue and rolling up their sleeves and doing something about it."

It comes down to a trade off between control versus area of expertise, he says. "Steel companies specialize in making steel and getting it to their customers and they don’t always have the expertise in the scrap area. To get involved in scrap, you’ve got to develop some expertise in-house, which will cost some money. But for that you get a little more control, perhaps, over the operation itself."

Ultimately, whether or not to vertically integrate is a plant by plant, company by company, CEO by CEO decision, says Jacobson. Some mills, including North Star Steel, Minneapolis; Schnitzer Steel Industries Inc., Portland, Ore.; Commercial Metals Co., Dallas; and Birmingham Steel, Birmingham, Ala.; have been vertically integrated for some time. Many others have close relationships with large scrap processors such as The David J. Joseph Co., Cincinnati, Luria Bros., Cleveland, or Tube City Inc., Glassport, Pa. "Those scrap firms have to be reckoned with in the decision-making process," says Jacobson.

Scrap processors often have five or ten year contracts to operate service yards connected to steel mills, purchasing and processing all the mills’ scrap for them, and the mills are generally satisfied with this division of labor, adds Dr. Richard Burlingame, a Cleveland-based steel industry consultant.

"They do such a good job that the steel mill really has no interest in trying to get in there," says Burlingame.

The Timken Co., Canton, Ohio, for example, purchases about 800,000 tons of scrap annually between its two melting plants. The company has not chosen to buy a scrap yard and operate it, according to Randy Ehret, manager, strategic sourcing, steel, preferring to invest instead in the company’s core business areas.

"Our upper management has not said ‘no, we’d never do that,’ but certainly we believe that the people who know the scrap industry could run a yard better than we can," says Ehret.

Although the company follows the alternative iron market, Timken officials have not chosen to invest in DRI or HBI facilities, either. "At this point, alternative irons do not make economic sense for Timken," he says. "Again, if you look at the opportunities we have to use our money, that would be lower on the consideration list than some of our core business areas. For example, we’ve announced at our Harrison plant that we’re putting in a $50 million rolling mill, which will make us one of the most competitive in that particular market. That’s where we’ll tend to spend our money."

However, Ehret says, control of raw materials is an important issue. Timken has a concept called portfolio management in which the company has established relationships with scrap suppliers, under firm, conditional and spot purchases.

"We have a fairly large percentage of our scrap purchases under contractual basis with various scrap yards, and frankly, we think they can do a better job than we can in running a scrap yard," he says. "We get the benefits of controlling scrap, while allowing people to handle it that can do it more efficiently than a big steel company."

Other mills feel that directly controlling raw materials through ownership of scrap yards and DRI plants is the best course of action. Birmingham Steel Corp., for example, just completed a joint venture to operate two former Hiuka America scrap export facilities in Long Beach, Calif. The company already owned scrap yards in Vancouver and Jackson, Miss.

"I’m a firm believer that you need to control 30 to 50 percent of your metallics to effectively control your overall costs," explains Bob Garvey, president of Birmingham.

The company is also part of a joint venture with Georgetown Steel to build a 1.5-million-ton DRI plant in Convent, La., which is currently under construction and targeted for startup in January 1998. The combination of the DRI from this facility and scrap from its scrap yards should give Birmingham control of about 30 percent of the raw material input for the company’s five steelmaking facilities and its rolling plant. Birmingham’s total capacity is currently 4 million tons.

Although his company is enthusiastic about vertical integration, it is less of an industry-wide trend and more of a company-specific choice, according to Garvey. "I think it’s a specific strategy for a few companies," he says.

Another vertically integrated company, North Star Steel, acquired North Star Recycling, then Magnimet Corp., in 1980 in order to control its raw materials. North Star Recycling now has facilities both at the company’s mills and distant from them, including scrap yards in Monroe, Mich.; Tampa Fla.; Toledo, Ohio; Wilton, Iowa; a feeder yard in Cedar Rapids, and a scrap processing unit in St. Paul, Minn.

"At all of those locations, with one exception, all the scrap they process or take in and do anything with is passed on to the North Star Steel mills," explains Mike Coleman, president of North Star Steel. "North Star uses more scrap than those locations process, so the rest of the scrap that we use is bought on the open market, and North Star Recycling buys that scrap. They have buyers located at each one of the North Star Steel mills."

Officials at North Star Steel are also strongly in favor of controlling raw materials directly. "When you look at the electric arc furnace industry, the raw material that we’re most dependent upon for our process is scrap, and we feel pretty strongly that we have to be involved in that business to make sure that we get the scrap in the quantity – and particularly in the quality – that we need," says Coleman.

While he admits that other steelmakers, even though they may not choose to own their own scrap yards, also impose their presence strongly in their transactions with scrap processors, Coleman feels companies owning their own scrap yards will be in a better position in the future.

"If you look at all the additional EAF capacity coming on line, those people who are in a position like we are of owning and being able to expand the company that is taking care of their scrap needs are going to better be able to control their own destinies," he says.

As time goes on, other steel companies may follow suit, especially in lieu of the consolidation taking place in the scrap industry, limiting the pool of companies from which to buy scrap.

"At this point, it varies from company to company, but as time goes on and the steel companies continue to observe the consolidation of scrap companies, there will probably be more steel companies that feel they need to have an ownership presence in the scrap business," says Coleman. "You as a steel company have to make absolutely certain that your most important raw material is going to be delivered to your furnace. It has to be the proper quality and it has to be delivered on time, and that’s why I think minimills will get more and more involved in the scrap business."

Like Timken, North Star Steel is watching the various types of scrap alternatives such as DRI and HBI with an eye toward possibly investing at some point. "There are a lot of options in terms of the type of process and the degree of involvement," he says. "But at this point, we think it might be a little bit premature to make any commitments."

Vertical integration in the steel business is also occurring in the finished direction, Coleman adds. "You see a lot of the wire rod producers getting into the wire drawing business, bar producers getting into cold finishing – Nucor has been vertically integrated on the finishing end for quite a long time," he says.

Vertical integration in the steel industry usually brings to mind steel mills buying scrap yards. But Schnitzer Steel went about it a different way. The company started as a scrap processor – and still is a very sizable scrap processing business – and then bought steel producing operations in order to provide a guaranteed market for scrap. This is consistent with Schnitzer’s operating philosophy, according to Tom Zelenka, a public relations officer for Schnitzer. He tells a colorful story to illustrate that philosophy.

"Schnitzer was started around the turn of the century by a one-man operation pulling a cart by hand, collecting recyclables," he says. "As he got enough financing, he got a horse, and then later some land."

Seeing that scrap exports were important, the company became involved in that area. At that time, says Zelenka, people were hesitant to ship scrap, and there was difficulty getting ships, so the company got into the shipping industry.

"Similarly, the company recognized that steel mills were important and acquired a steel mill in 1984 in Oregon," he says. "Incrementally over the years, things were added on as part of a normal business operation in terms of owning land, doing real estate, getting into industrial gas production and distribution, getting into actually doing manufacturing, getting into shipping. It has been a very logical progression for the family. This culminated a couple years ago in the steel and scrap company going public."

The other businesses the entities that the family has interest in remain privately held and family owned. Schnitzer Steel Industries Inc. is comprised of the scrap operations and the steel manufacturing arm, Cascade Steel Rolling Mills Inc., which has a facility in Oregon and two warehouse depots in California. Since 1990, the company has spent more than $100 million in modernizing and expanding the mill.

Zelenka explains the scrap company’s unusual foray into steel producing by describing the family that owns Schnitzer Steel. "This family has had a strong entrepreneurial spirit since the beginning," he says. "They are strong willed, entrepreneurial folks who are competitive and know the value of the dollar and how to make what the customer wants."

Cascade Rolling Mills is able to obtain all of its scrap melting requirements from internal sources. This gives the company the flexibility to respond to market conditions and market opportunities in terms of both the availability and price of scrap. The company’s scrap yards supply scrap to other domestic mills, as well, and also does some exporting. Cascade consumes approximately 40 percent of Schnitzer’s scrap volume.

Schnitzer recently acquired Proler International Corp., which includes a number of joint ventures in scrap processing concerns both on the West Coast and on the East Coast. "In making that acquisition, Bob Phillip, president of Schnitzer Steel, indicated that the company would continue to evaluate selected acquisitions, recognizing that getting close to the source of scrap and making selected acquisitions was part of the company’s growth strategy," says Zelenka.

Another scrap processing company that vertically integrated into the steel manufacturing business is Commercial Metals Co., Dallas, which in 1963 acquired a majority interest in Structural Metals Inc., a steel manufacturer and fabricator based in Seguin, Texas. The merger was completed in 1968, resulting in a company able to process, trade and distribute metals and raw materials as well as manufacture steel and fabricate steel-based products. Among other businesses, CMC has subsidiaries operating a number of scrap processing plants, three steel minimills and a rail re-rolling mill.

"CMC-owned scrap facilities currently sell about 1.5 million tons of ferrous scrap annually and SMI steel mills consume about the same, so theoretically, CMC could supply all the needs of the SMI mills if desired," says Monty Parker, vice president of raw materials for the CMC Steel Group. "I think the trend will be for mills to own more of their supply, but I don’t expect that trend to be a detriment to scrap suppliers as a whole. Mills will continue to rely on quality scrap suppliers for their raw material needs as long as quality, reliability, quantity and price are each attractive alternatives to doing it themselves."

SMI doesn’t have a routine program for purchasing scrap substitutes, says Parker, but has used them on a trial basis in the past. It’s possible the company might consider participating in or owning a scrap substitute venture at some point in the future. 

With the increased demand not only for scrap, but for low-residual scrap to properly supply minimills in their excursions into higher-quality steel products, some mills are looking into alternative iron units as a way to offset rising scrap prices.

Georgetown Steel, Georgetown, S.C., got involved in this trend long before anyone else in the industry, giving it a unique approach to vertical integration. In a move that many questioned at the time, the company built a direct reduction plant in 1971. The facility was closed in 1981 when DRI was significantly more expensive than scrap. But it was reopened in 1984 after the mill began to focus on higher-quality wire rod products. Today, the Georgetown DRI plant produces more than 500,000 metric tons of DRI annually – more than half of the mill’s raw material requirements. For years, this plant has been the only DRI plant in the U.S., although several more are now under construction.

Two DRI modules are being relocated from Hunterston, Scotland, to Mobile, Ala., near the TRICO steel mill project, a joint venture between British Steel, Sumitomo Steel and LTV Steel. The facility will supply DRI to both TRICO and Tuscaloosa, a subsidiary of British Steel, according to David Wood, communications manager for Midrex Direct Reduction Corp., Charlotte, N.C. "The plant is expected to be operational the third or fourth quarter of this year," he says.

LTV is also vertically integrating into scrap substitutes, says Wood. "LTV has invested in a new technology that’s going to be in Trinidad, along with Cleveland Cliffs and Lurgi – the developer of the technology. The technology is called Circored, and it’s a gas based reduction technology that uses iron ore fines. It’s currently under development, if not construction."

In addition, Tondu Corp., Houston, an industrial projects development company with interests in oil and gas, is building a DRI plant in south Louisiana, to be called the Louisiana Iron Works. With plans to begin construction this spring, the plant will produce up to 1.5 million metric tons per year of DRI. "They will be looking for steel producers to make equity investments in the projects and be partial owners, for guaranteed offtake," says Wood.

Nucor Corp., Charlotte, N.C., led the way in investing in a newer form of scrap supplement, iron carbide, when it built a plant to produce the material in Trinidad a few years ago. However, the plant does not appear to be producing the high quality needed at a very fast rate, and John Correnti, president of Nucor, was recently quoted as saying that the company has cut back its iron carbide production from 6,000 tons per week to 4,000 tons per week in order to get a higher-quality product. So far, the material does not appear to have supplied a significant part of Nucor’s iron unit requirements.

But despite this, several sources say that Qualitech is about to begin construction of an iron carbide plant in Corpus Christi, Texas, that will supply their future location in Indiana, along with the Steel Dynamics mill in Butler, Ind.

Overall, there is definitely a trend toward steel mills investing in scrap substitute plants, says Wood. "There are a number of mills looking at investing in scrap supplements."

The author is editor of Recycling Today.