Why mini mills are changing their raw material strategy

Mohit Oberoi, CFA - Author

Nov. 27 2019, Updated 2:14 p.m. ET

Raw material requirements 

In the last part of the series, we discussed how steel producers—like ArcelorMittal (MT) and U.S. Steel Corp. (X)—have been hit hard by decreasing iron ore prices.

Now, we’ll see how mini mills—like Nucor (NUE) and Steel Dynamics (STLD)—are impacted by decreasing iron ore prices. These mini mills produce steel through the electric arc furnaces (or EAF) route.

EAF uses steel scrap to produce steel

STLD and NUE mainly use steel scrap as the raw material to produce steel. To fulfill their raw material requirement, they have subsidiaries. The subsidiaries help them source steel scrap for their business. They’ve acquired steel scrap brokers to gain self-sufficiency in their raw materials.

Steel Dynamics acquired OmniSource in 2010. OmniSource is one of the largest scrap and secondary metal processors and distributors. Steel dynamics fulfills almost half of its steel scrap requirements through OmniSource.

Nucor acquired David J. Joseph Company

The David J. Joseph Company is engaged in scrap metal brokerage, ferrous and non-ferrous metal recycling, and transportation services. Nucor acquired it in 2008. It has over 70 scrap recycling facilities—including 17 shredder locations. It’s a world leader in scrap metal brokerage.

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Along with steel scrap, EAF can also produce steel through direct reduced iron (or DRI). DRI is produced by heating iron ore. STLD and NUE increased their focus on DRI. The previous chart shows Nucor’s new DRI facility. This is one of the biggest plants globally. It has an annual capacity of 2.5 million tons. With DRI, mini mills are also exposed to iron ore prices.

In the next part of the series, we’ll analyze why mini mills changed their raw material strategy.

Investors can also gain access to the steel industry through the SPDR S&P Metals and Mining ETF (XME).


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