How Iron Ore, Scrap & Other Steelmaking Costs Affect Steel Prices
Mar / 01 / 2010 - How Iron Ore, Scrap & Other Steelmaking Costs Affect Steel Prices
Explanation of impact of higher steelmaking inputs on finished steel prices
How changes in raw material input costs affect final pricing
We received an email on Friday from one of our readers asking SMU to explain or provide more details regarding the impact of increased raw material costs such as iron ore, scrap and metallurgical coke will have on the domestic (North American) steel producers and ultimately how it will impact flat rolled steel prices?
Not being a metallurgist or a financial analyst reviewing the steel industry SMU turned to a couple well-known steel analysts to provide more “color” as they like to call it – regarding steel input costs.
As part of our question to this analysis we mentioned we are aware of an increase in scrap buying by the Korean integrated mill Posco. SMU has learned from our international sources Posco has recently changed their melt mix to include a higher percentage of scrap. We were able to confirm from international scrap sources Posco is a buyer of scrap at this time. We have not been able to confirm (or deny) the changes in the melt mix. As part of the answer to our question one analyst brought the Posco situation up:
Analyst #1:
Analyst: “It's not so simple [there is no easy formula to determine costs to produce steel]. To a great extent it is like baking a cake and the ratio of raw materials depends both upon the cost, but also the quality of the product that you want to produce. In the U.S. traditionally the BOF is charged with about 25% scrap and 75% pig iron. Usually 10 to 15% of the 25% scrap is revert (home) scrap generated from yield loss and 10 to 15% is purchased. Keep in mind that scrap is relatively cheap in the U.S. compared to pig iron, but also some of the mills are short blast furnace capacity and put HBI/DRI into the mix to boost output.
I should also… mention that the making of coke and the usage of scrap are also like cake making with the mix of ingredients depending upon price and quality issues.
Traditionally, the major Asian steelmakers have used less scrap in their BOF vessels. First of all, their yield loss is much less than in the U.S., but by using 93-94% pig iron in their BOFs, they have a better knowledge of what will be in the steel and don't need to do as much testing as in the U.S. Whenever, scrap is introduced, residual elements can impact the quality of the steel produced.
Posco may be trying to reduce their iron ore usage due to a blast furnace reline or to influence the iron ore negotiations….
Even the raw materials used to make the pig iron can vary depending upon costs and quality. For example, PCI grade coal can be used to a certain extent instead of coke. Chinese domestic (as well as imported iron ore from Australia) is usually high in alumina and silica and needs to be blended with Brazilian ore, but at the same time, nearly all Brazilian ores are fines and blast furnaces need either sinter, lump or pellets, all of which cost more than fines. This is to some extent the beauty of the Messabi Nugget plant in Minnesota that Steel Dynamics has built. It used iron ore fines and coal to make a pig iron equivalent (maybe even higher grade) at much lower capital cost.”
Analyst #2
Analyst: “For mini-mills scrap is either 100% of their mix, for long products, or about 70-80% with the remainder coming from pig iron or HBI/DRI. About 1.2 tons is needed per ton of steel produced but scrap for some reason is quantified in metric tons so every $10 hike in scrap prices raises costs about $11.
For the integrateds, I can quote you directly from US Steel's 2008 10K:
This comes from US Steel's 2008 10K: The amounts of such raw materials needed to produce a ton of steel will fluctuate based upon the specifications of the final steel products, the quality of raw materials and, to a lesser extent, differences among steel producing equipment. In broad terms, U. S. Steel estimates that it consumes about 1.4 tons of coal to produce one ton of coke and that it consumes a little less than 0.4 tons of coke and over 1.2 tons of iron ore pellets to produce one ton of raw steel. We also consume approximately 4,500 MMBTU’s of natural gas per ton shipped.”
SMU hopes this helps those wanting to understand more about how steelmaking input costs affect the price of the finished product. As many of you already understand, if scrap goes up by $10 per ton – not all mills are affected in the same way and prices can increase (or not move at all) depending on the ability of the market to absorb the cost and – from SMU’s perspective – if momentum is on the side of the domestic steel mills. Right now it appears momentum is on the side of the domestic steel mills (due to lack of alternatives) and if steelmaking input costs (like scrap) increase in March we should anticipate further increases out of the domestic steel mills.
That’s our opinion – we welcome yours!
