Why direct reduced iron facilities could be a key driver at Nucor

Nucor recently started production at its DRI plant in Louisiana.

Mohit Oberoi, CFA - Author

Jul. 28 2014, Updated 9:00 a.m. ET


What is DRI route of steel making?

Direct reduced iron (or DRI), also known as sponge iron, is an alternate way of steel making. While blast furnaces use iron ore as their key raw material, steel scrap is used for an electric arc furnace (or EAF). The supply of steel scrap is limited compared to larger global reserves of iron ore. The main issue for blast furnaces is the high capital requirement for setting up of plants. DRI falls somewhere between the two methods and uses iron ore as an input through an EAF. The technology uses natural gas as its other major raw material.

Why Nucor is investing in DRI facilities

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Nucor recently started production at its DRI plant in Louisiana. You can see the layout of the facility in the previous photograph. This is one of the largest global plants with an annual capacity of 2.5 million tons. Iron ore prices have been falling globally and the trend isn’t expected to reverse anytime soon. The slowdown in demand and fresh supplies are expected to keep a tab on iron ore prices. DRI provides operational flexibility to Nucor with its low cost environment. It will enable Nucor to use iron ore as an input without large capital expenditures of setting up a blast furnace. DRI plants have low operating costs. They’re more energy efficient because they operate at a lower temperature compared to blast furnaces.

Many competitors like ArcelorMittal (MT) and the U.S. Steel Corporation (X) were acquiring iron mines to secure raw material supplies for their plants. They were hit by the fall in iron ore prices. In contrast, Nucor was saved from blocking its capital into mining because of the process it uses. In the next section we’ll discuss how Nucor (NUE) has been working on securing raw material supplies for its plants.

Investors looking to invest in the steel industry can also consider the SPDR S&P Metals and Mining ETF (XME) and Reliance Steel & Aluminum (RS).


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