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Conference Report: CRU North America

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CRU North American Steel Conference 'Why Build Another Steel Mill?' Big River Steel’s Mark Bula responds to the “big question” and makes his case for why the United States needs another minimill. By Dan Markham, Senior Editor Mark Bula, chief commercial officer for Big River Steel Corp., gets this question wherever he goes: “Why build another steel mill?” Speaking at CRU’s North American Steel 2014 Conference last month in Chicago, Bula addressed that question and attendees’ concerns that more steel capacity could lead to oversupply and weaker prices. Big River Steel, now under construction in Osceola, Ark., plans to produce its first product in February 2016. Bula and company founder John Correnti believe the U.S. market can easily absorb another steel mill. “The U.S. imported 1.2 million tons of steel in October. We’re a 1.6 million ton per year mill. Those facts don’t lie,” said Bula. Initially, the first phase of the minimill will produce hot-rolled, cold-rolled and galvanized products. The second and third phases, to be built simultaneously, would add a silicon plant, plus a second electric arc furnace and a second caster. When complete, Big River Steel’s capacity would grow to 3.5 million tons. “I think if we build Phase 1 on time and on budget, we will quickly get additional money for additional growth,” Bula said. Big River doesn’t plan to position itself as just another minimill. Tapping into the latest technological advancements in steelmaking, the company is targeting the electrical steel and advanced high-strength steel markets, as well as pipe and tube. “We see an opportunity globally to get involved in the electrical steel business. Our investors are very interested in that marketplace, with fully processed grain-oriented and non-grain-oriented steel a couple of years down the road,” he said. In fact, Bula champions Big River as an energy play, rather than just another steel mill. “We’re going to help people drill and explore for gas and oil, and then transmit that oil and gas. We’re going to go into power plants and help generate electricity. Finally, we’re going into vehicles that utilize that energy.” Company executives believe Big River will be able to meet the higher quality demands of these niche products by utilizing the latest steelmaking techniques. The project will include an RH degasser, induction furnace, and runout tables with coiling capabilities beyond what was available in the past. At the outset, service centers will be the company’s largest target market, though distribution will become a smaller piece if the facility meets all of its targets. “We will go with the marketplace where we need to once we start up, but our breadth of products and capabilities is very large,” Bula said. The company recognizes that Big River will not be able to meets its lofty objectives overnight. It anticipates investing heavily in research and development and working through above average rejection rates as it begins producing higher grades of steel. That’s all part of the process of becoming more than just a minimill making commodity-grade steel, Bula said. “We’re an innovative cost structure making integrated products. Sixty to 70 percent of what we will make is more of an integrated product. It’s just the evolution of steelmaking in the United States.” U.S. the Best Market for Flat-Roll The United States remains the best market for flat-rolled steel, a trait that brings both opportunities and challenges for the supply chain. Steel demand will increase in 2015, but the price of the material is likely to decline, said Josh Spoores, principal consultant for steel at CRU, in his remarks at the conference. CRU forecasts that steel sheet demand will increase by 4.1 percent next year, after seeing 3.9 percent growth in 2014. Of the major consumers of flat-rolled steel, automotive led the increase in 2014, followed by manufacturing and construction. CRU expects that to flip next year, with construction showing gains of more than 5 percent, followed closely by manufacturing. Auto steel is still expected to grow, but by just 1 percent. Overall, North American steel shipments grew by 4.6 percent this year, though that number came with an inventory buildup of 7 percent from 2013. Steel inventories may increase further in the coming months as the healthy U.S. economy attracts more imports. Indeed, imports have already started to put pressure on steel prices, Spoores said. Pricing spiked in mid-2014 due to a combination of strong domestic demand and some early-year production issues that tightened supply. The price of hot-rolled coil peaked at $658 per ton in 2014, exceeding CRU’s forecast. Analysts expect the price to slip back to $625 in 2015, the result of lower-priced imports. While North American prices increased 7 percent in 2014, China’s price fell 10 percent and Germany’s price dropped 6 percent. Such price spreads invite greater import penetration. “When you look at importing steel, you really have no risk now with the price spread at $150 over Europe and $200 over China,” Spoores said. “Prices here could drop quickly and you’d still be sitting pretty well, as long as the steel comes in quickly and with the necessary quality.” Steelmakers can also survive a dip in prices, as their raw material costs remain almost $100 below the price of hot-rolled coil, he added. Such a dip is likely. Flat-rolled steel imports are up an astounding 64 percent in 2014, compared to the average of the preceding three years, Spoores said. His group expected to see imports peak in mid-summer, but each succeeding month kept producing new highs. “October may be the peak, but imports will remain uncomfortably high going forward.” The domestic industry has responded by filing various trade cases and more are likely in the future. The threat of trade action is starting to have an effect, prompting more imports of value-added steel products. “We’re already hearing of some OEMs bringing in processed slit coils from Europe,” Spoores said. The threat of antidumping cases, plus the effects from recent mill consolidations, will work to prevent pricing from slipping too much, Spoores said. He believes the shakeup in the North American mill scene—including ArcelorMittal and Nippon Steel’s purchase of TK’s Calvert, Ala., plant, Nucor’s acquisition of Gallatin, and Severstal’s sale of its assets to Steel Dynamics and AK Steel—will be felt more strongly in 2016. “I think 2015 is going to be more of a transition year for this consolidation,” he added. Steel Looking Up on the West Coast USS-POSCO’s market is vast, covering 11 western states or 45 percent of the contiguous United States. Yet all that territory is home to just 8 percent of the market for flat-rolled steel. From California’s tech industry to Washington’s lumber market to Colorado’s financial services, the western region is simply not a major manufacturer of steel-intensive goods, said Michael Obermire, USS-POSCO director of sales, who delivered the view from the West Coast to conference attendees. Nonetheless, business is looking up for the western suppliers of flat-rolled product, which includes USS-POSCO, California Steel Industries and Steelscape. “The view of the marketplace in the West is encouraging. Growth on the West Coast, Far West and Rocky Mountains has been greater in 2014 than just about any place in the country, and we see more in 2015 moving forward. There is good economic growth,” Obermire said. The construction market, particularly hard hit by the recession, is finally rebounding in a significant way. California expects a 5 percent increase in permits for new homes in 2015, with further growth in 2016. “There is big demand for new housing after a long time with no building,” he said. The nonresidential story is similar. Spending on commercial building in the region’s largest state will grow from $19.8 billion this year to $20.8 billion next year, all the way up to $23 billion in 2016. What demand there is for flat-rolled steel in the region comes from construction, pipe and tube makers, service centers and container builders to support the sizable agriculture industry. For flat-rolled producers, the biggest concern is the container market. The massive drought hitting California agriculture makes projections nearly impossible. If the drought continues, Obermire said, it’s going to affect all market segments, not just ag. The small size of the flat-rolled market in the West doesn’t immunize it from import penetration. In fact, Obermire said, the threat may be greater due to its size. The supply of cold-rolled annealed and tin plate already exceeds demand in the region, while demand for hot-rolled and hot-rolled pickled and oiled exceeds the capacity of the producers in the area. Supply-demand for galvanized is mostly in balance. However, the press of imports has distorted the cold-rolled annealed and galvanized markets. Imports represent 47 percent of the total cold-rolled annealed market out West, compared to just 17 percent nationally. For galvanized, imports hold a 26 percent market share compared to 19 percent nationally. “We don’t have a demand problem, we have a supply problem,” Obermire said.