Will Cliffs’ New HBI Plant Generate Real Growth?
New HBI plant
Cliffs Natural Resources (CLF) issued a press release on June 15, 2017, to announce Toledo, Ohio, as the site for its first HBI (hot briquetted iron) production plant. The plant will have a nominal capacity of 1.6 million tons of HBI annually.
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Cliffs’ Chairman Lourenco Goncalves stated: “Today’s announcement marks a very important strategic milestone for Cliffs as we begin to implement our plans to be the sole producer of high-quality HBI for the EAF steel market in the Great Lakes region. We look forward to the strong margin and earnings potential this new product will generate for Cliffs shareholders.”
Ambitions in the DRI market
Cliffs has been talking about entering the EAF (electric arc furnace) market for a long time. Its CEO (chief executive officer) mentioned during the 1Q17 earnings call that the company is in the process of evaluating the best course for entering the DRI (direct reduced iron) market. HBI is a premium form of DRI that has been compacted for ease of handling and storage.
This venture, Cliffs believes, is the next leg of growth for the company. Mini-mills using EAF technology produce ~60% of US steel. They use scrap metal to make steel, and on average, this method has performed better than blast furnace operators.
Steelmakers using EAFs
Steel Dynamics (STLD) and Nucor (NUE) use EAFs to produce steel, while U.S. Steel (X) and ArcelorMittal (MT) mainly use iron ore for steel production. Notably, Nucor makes up about 2.6% of the Materials Select Sector SPDR ETF (XLB).
In the next part, we’ll discuss Cliffs’ HBI plant and the funds required to finance it in more detail.