Electric arc furnaces versus blast furnaces
Mini-mills, which use electric arc furnace (or EAF) technology, produce ~60% of US steel. Mini-mills use scrap metal to make steel, and they have performed better than blast furnace operators on average.
Blast furnaces (or BF) have higher fixed costs and less flexibility to respond to market changes in the short term to medium term.
Shift from BF to EAF
In an average steel price scenario, companies that use EAFs do better than their BF peers. Currently, some big steel producers are also transitioning to EAF from BF. This transition could result in the decreased use of iron ore pellets, which are used in blast furnaces.
However, this transition could be a protracted process. Cliffs Natural Resources (CLF) estimates that a large portion of the domestic steel market is still unserved by them.
To take advantage of this segment, Cliffs Natural Resources has been selling DR-grade pellets to new clients over the past two years. The company is currently preparing for the next phase of expansion.
CLF’s CEO, Lourenco Goncalves, noted during the 1Q17 earnings call, “With the significant cash flow we expect to generate over the next couple years, we are currently in the process of evaluating the best course for a more substantial entry into this market.”
Cliffs Natural Resources made a cash offer of $100 million for Essar Steel Minnesota’s assets. The competing offer from Chippewa Capital Partners was $350 million. During the question-and-answer session, Lourenco doubted Chippewa Capital Partners’ ability to finish the project.
Lourenco added that the change in direction for Cliffs Natural Resources would involve setting up a first DRI facility. He noted that the facility would total ~1.5 million tons per year.
CLF’s CEO stated although factors such as the location, capital, and demand for this facility are being considered, “We are not going to spend any meaningful capital this year, because time is passing and we are already pretty much in May, and we are not going to break ground just before snow comes to the ground. So, I don’t see how we are going to spend money on that project in 2017.”
In the final part of this series, we’ll see how analysts are reacting to Cliffs Natural Resources 1Q17 earnings miss and outlook.