By Stuart Burns
Much of the raw steel produced in Asia, and in China in particular, is made via the blast furnace route. In the rest of the world, steel makers split between blast furnace and electric arc furnace steel making, depending on local scrap supplies, the cost of capital and the demands of the local markets. Although historically enjoying some economies of scale today, blast furnace steel makers face a number of challenges, which will become greater over time.
The first is the cost of raw materials. Due to China’s phenomenal rise to become the world’s largest steel maker, the price of iron ore and coking coal have risen to unprecedented levels. Although many Western steel makers do not buy on the spot market, their long-term supply contracts have been, and increasingly will be, driven by what is happening to prices in Asia. Iron ore is in relatively plentiful supply. Even if the scale and location make project developments long-term propositions, the world is not short of iron ore.
Coking coal, however, is a different matter. Good-quality coking coal is nowhere near as abundant as thermal coal, as evidenced by the disparity in prices; this week, import prices for seaborne supplies into China were $101 a ton CIF for thermal coal, but $217 a ton for coking coal, according to our local office. Constraints in coking coal supplies will ensure this remains a thorn in the side of the blast furnace steel makers’ cost profile in the future.
The second challenge has been the high capital cost of conventional blast furnaces relative to their more nimble EAF brethren. The sheer scale of a modern blast furnace, which gives them economies of scale in good times, is a major obstacle when demand fluctuates and, as we have seen since 2008, mill capacities have to be managed to maintain prices. Unlike EAF mills, a blast furnace is largely all or nothing.
The third (but not final) challenge is environmental. Although EAF mills use huge amounts of electricity, they still consume much less energy to produce a ton of steel than a blast furnace does. Post-Kyoto, in a world where carbon emissions are becoming a real cost factor, conventional blast furnaces are going to find their CO2 emissions an increasingly expensive factor, hence the lobbying in Europe for steel mill exceptions and free credit handouts in recent years.
Although it is not really a new technology, a development in Brazil called Tecnored could hold the answer to the blast furnace steel makers’ woes. Backed by 130 million real ($70 million) of Vale’s (NYSE:VALE) cash, Tecnored Desenvolvimento Tecnológico near Sao Paulo has started a demonstration pig iron production plant using a technology first discovered 35 years ago, but developed in recent years as a route to substantial cost savings. Vale believes the technology will enable it to reduce steel making costs by 30 percent, to use low-grade iron ore fines, cheap energy sources and reduce environmental emissions.
According to a Reuters article, Vale expects to cut emissions by up to 5 percent for carbon, a reduction of about 85 percent in particulate matter production and a 95 percent cut in nitrogen oxide emissions. The use of previously unusable or low-value iron ore fines (often dumped in tailings ponds because it has so little value) and thermal coals instead of coking coal opens up vast new supply sources at much lower cost than is currently the case. The process is so flexible in its energy sources that trials suggest it will work economically using biomass or petrochemical waste, such as Green Petroleum Coke, according to a Brazilian research paper.
An article in Mining Weekly reports the process uses much less energy and yields liquid pig iron in 30 minutes, compared to 8 hours for a conventional blast furnace. The smaller size of Tecnored furnaces has other benefits too. Banks of furnaces would be constructed rather than one massive blast furnace, making adjustment of production to demand much more flexible. Also, the smaller furnace size reduces the charge weight dramatically by removing the physical requirements of the fuel to withstand huge pressure yet retain their lump shape for gas flow, as current coking coal has to achieve.
Clearly, Vale has high hopes for the technology. As the world’s second-largest miner and one of the big three iron ore suppliers, its fortunes are inextricably linked to the iron ore trade and steel making. By investing in this technology and in the domestic steel mills that hopefully will one day adopt it, Vale is looking to ensure its long-term future remains secure.