Cleveland.com: Steel

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Heat back on steel makers

02/26/04

Peter Krouse

Plain Dealer Reporter

Up until a few months ago, the planets were aligned for the U.S. steel

industry.

Demand and prices were going up. A weak dollar was keeping steel

imports at bay. Restructured companies such as International Steel

Group Inc. were primed to take advantage of an economic recovery.

Now a shortage of raw materials threatens to disrupt the harmonic

convergence while adding to the costs of manufacturers and

consumers.

For minimill producers such as Nucor Corp. that use electric arc

furnaces, the big expense has been the rising cost of steel scrap, the

main ingredient in their finished product. The minimill industry and some

of its customers may ask the U.S. Department of Commerce to limit

scrap exports from the United States, in an attempt to keep the domestic

supply high and reduce prices.

For ISG and the other integrated steel makers those who produce steel

from scratch a lack of coke is a greater worry.

"We have an unprecedented world shortage of coke," said Mike Locker,

an industry analyst with Locker Associates. "And the price has gone to

unprecedented levels."

What U.S. steel makers paid about $110 a ton for a year ago now

commands $350 to $400 a ton, Locker said. To protect their profits, the

companies have tacked steep surcharges onto their finished steel,

passing on the pain to their customers.

And some of those customers - manufacturers - are trying to pass the

added costs along to their customers. An early February study by the

Precision Metalforming Association, a group of steel users, said 31

percent of its 1,200 members were trying to recover steel surcharges.

And PMA President Bill Gaskin said a third of that group have been

passing along 75 percent to 100 percent of the added cost.

Contributing to the coke shortage: Several coke batteries have closed in

recent years, victims of a depressed steel industry, said Andrew Aloe,

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Heat back on steel makers 

02/26/04 

Peter Krouse 

Plain Dealer Reporter 

Up until a few months ago, the planets were aligned for the U.S. steel 

industry. 

Demand and prices were going up. A weak dollar was keeping steel 

imports at bay. Restructured companies such as International Steel 

Group Inc. were primed to take advantage of an economic recovery. 

Nowa shortage of raw materials threatens to disrupt the harmonic 

convergence while adding to the costs of manufacturers and 

consumers. 

For minimill producers such as Nucor Corp. that use electric arc 

furnaces, the big expense has been the rising cost of steel scrap, the 

main ingredient in their finished product. The minimill industry and some 

of its customers may ask the U.S. Department of Commerce to limit 

scrap exports from the United States, in an attempt to keep the domestic 

supply high and reduce prices. 

For ISG and the other integrated steel makers those who produce steel 

from scratch a lack of coke is a greater worry. 

"We have an unprecedented world shortage of coke," said Mike Locker, 

an industry analyst with Locker Associates. "And the price has gone to 

unprecedented levels." 

What U.S. steel makers paid about $110 a ton for a year ago now 

commands $350 to $400 a ton, Locker said. To protect their profits, the 

companies have tacked steep surcharges onto their finished steel, 

passing on the pain to their customers. 

And some of those customers - manufacturers - are trying to pass the 

added costs along to their customers. An early February study by the 

Precision Metalforming Association, a group of steel users, said 31 

percent of its 1,200 members were trying to recover steel surcharges. 

And PMA President Bill Gaskin said a third of that group have been 

passing along 75 percent to 100 percent of the added cost. 

Contributing to the coke shortage: Several coke batteries have closed in 

recent years, victims of a depressed steel industry, said Andrew Aloe, 

SteeJ 

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Cleveland.com: Steel Page 2 of 3

president of Shenango Inc., an independent coke producer that owns a

battery on Neville Island in the Ohio River near Pittsburgh. Aloe said the

U.S. capacity for coke production has gone down about 15 percent

since 2002.

Exports, especially from China, have helped make up the difference. But

with Chinese steel production surging, those exports have declined

considerably, from 15.2 million metric tons in 2000 to 13.3 million in

2003 and an estimated 8.7 million in 2004, according to research and

consulting firm World Steel Dynamics.

Closer to home, a mine fire in West Virginia shut a major source of

coking coal used by U.S. Steel Corp. at its Clairton coke batteries near

Pittsburgh. U.S. Steel sells a considerable amount of coke to other steel

producers, including Weirton Steel Corp. in Weirton, W.Va., Rouge Steel

Co. in Dearborn, Mich., and WCI Steel Inc. in Warren.

U.S. Steel told its customers to expect diminished shipments as a result

of the mine fire. Weirton and Rouge curtailed steel production as a

result, while WCI has used natural gas to fill the gap.

Coke is made from coal that is heated at extremely high temperatures to

burn off certain compounds and form a dense material that's more than

90 percent carbon. At integrated mills, the grey, lava-like coke lumps are

added to iron ore and other ingredients in a blast furnace to produce

molten iron. The coke serves as fuel and as a means to extract

impurities from the iron ore. It also provides a sturdy but porous base

inside the oven, so air can freely pass through to feed the fire.

The liquid iron the blast furnace produces is poured, along with scrap

(although much less scrap than a minimill uses), into a basic oxygen

furnace to make steel.

The rising cost of coke has cut into the advantage integrated mills

enjoyed while steel scrap prices were on the way up.

They could get that advantage back - the coke shortage could resolve

itself as fast as it arrived, if China slows its economic expansion.

If not, solutions are harder. The industry can't easily build new plants;

they are expensive and must meet strict environmental guidelines. Sun

Coke Co. of Knoxville, Tenn., is building a plant along the Ohio River in

Haverhill, Ohio, but the technology differs from traditional coke ovens.

Besides making coke, the plant will burn off residual gases and use the

excess heat to create steam for a neighboring plant.

"This will be the cleanest, highest-performing coke plant in the world,"

said Mike Dingus, Sun president.

Environmental concerns could haunt the industry for some time, said

Chuck Bradford, an analyst with Bradford Research/Soleil Securities.

Coke reacts with oxygen in the blast furnace of an integrated mill to emit

three times as much carbon dioxide as the minimills, according to

Bradford.

"It puts sort of a cloud over investment," he said.

The Haverhill plant should start making coke in little more than a year.

The first phase of 550,000 net tons is already under contract to ISG,

which also gets coke from another Sun plant in southwest Virginia.

ISG has said its steel production has not been curtailed because of a

lack of coke. The company has its own batteries in Warren and Burns

http://www.cleveland.com/indepthlsteel/index.ssf?/indepthlsteel/more/ 10777917l6314950.html 8/8/2005

 EE-RM/STD-00-550 COMMENT 86

Cleveland. com: Steel 

president of Shenango Inc., an independent coke producer that owns a 

battery on Neville Island in the Ohio River near Pittsburgh. Aloe said the 

U.S. capacity for coke production has gone down about 15 percent 

since 2002. 

Exports, especially from China, have helped make up the difference. But 

with Chinese steel production surging, those exports have declined 

considerably, from 15.2 million metric tons in 2000 to 13.3 million in 

2003 and an estimated 8.7 million in 2004, according to research and 

consulting firm World Steel Dynamics. 

Closer to home, a mine fire in West Virginia shut a major source of 

coking coal used by U.S. Steel Corp. at its Clairton coke batteries near 

Pittsburgh. U.S. Steel sells a considerable amount of coke to other steel 

producers, including Weirton Steel Corp. in Weirton, W.va., Rouge Steel 

Co. in Dearborn, Mich., and WCI Steel Inc. in Warren. 

U.S. Steel told its customers to expect diminished shipments as a result 

of the mine fire. Weirton and Rouge curtailed steel production as a 

result, while WCI has used natural gas to fill the gap. 

Coke is made from coal that is heated at extremely high temperatures to 

burn off certain compounds and form a dense material that's more than 

90 percent carbon. At integrated mills, the grey, lava-like coke lumps are 

added to iron ore and other ingredients in a blast furnace to produce 

molten iron. The coke serves as fuel and as a means to extract 

impurities from the iron ore. It also provides a sturdy but porous base 

inside the oven, so air can freely pass through to feed the fire. 

The liquid iron the blast furnace produces is poured, along with scrap 

(although much less scrap than a minim ill uses), into a basic oxygen 

furnace to make steel. 

The rising cost of coke has cut into the advantage integrated mills 

enjoyed while steel scrap prices were on the way up. 

They could get that advantage back - the coke shortage could resolve 

itself as fast as it arrived, if China slows its economic expansion. 

If not, solutions are harder. The industry can't easily build new plants; 

they are expensive and must meet strict environmental guidelines. Sun 

Coke Co. of Knoxville, Tenn., is building a plant along the Ohio River in 

Haverhill, Ohio, but the technology differs from traditional coke ovens. 

Besides making coke, the plant will burn off residual gases and use the 

excess heat to create steam for a neighboring plant. 

"This will be the cleanest, highest-performing coke plant in the world," 

said Mike Dingus, Sun president. 

Environmental concerns could haunt the industry for some time, said 

Chuck Bradford, an analyst with Bradford Research/Soleil Securities. 

Coke reacts with oxygen in the blast furnace of an integrated mill to emit 

three times as much carbon dioxide as the minimills, according to 

Bradford. 

"It puts sort of a cloud over investment," he said. 

The Haverhill plant should start making coke in little more than a year. 

The first phase of 550,000 net tons is already under contract to ISG, 

which also gets coke from another Sun plant in southwest Virginia. 

ISG has said its steel production has not been curtailed because of a 

lack of coke. The company has its own batteries in Warren and Burns 

http://www.cleveland.com/indepthl steel/index. ssf? lindepthl steel/morel 1077791716314950 .html 

Page 2 of3 

8/8/2005 
Cleveland.com: Steel

Harbor, Ind ., and gets more coke through contracts of a year or more,

but it also must buy some on the open market.

ISG Treasurer Brian Kurtz declined to comment specifically on the

company's coke situation, but said it will likely be a topic of discussion

today when ISG meets with stock analysts to discuss the company's first

earnings report since it became a publicly traded company late last year.

The one U.S. steel company least affected by the shortage is U.S. Steel,

because it can make all the coke it needs. Even so, it buys coke for

logistical reasons to supply a distant plant in Alabama.

To reach this Plain Dealer reporter:

pkrouse@plaind.com, 216-999-4834

© 2001 The Plain Dealer. Used with permission.

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http://www.cleveland.comlindepth/steel/index.ssf?/indepth/steel/more/ 1077791716314950.html 8/8/2005

 EE-RM/STD-00-550 COMMENT 86

Cleveland. com: Steel 

Harbor, Ind., and gets more coke through contracts of a year or more, 

but it also must buy some on the open market. 

ISG Treasurer Brian Kurtz declined to comment specifically on the 

company's coke situation, but said it will likely be a topic of discussion 

today when ISG meets with stock analysts to discuss the company's first 

earnings report since it became a publicly traded company late last year. 

The one U.S. steel company least affected by the shortage is U.S. Steel, 

because it can make all the coke it needs. Even so, it buys coke for 

logistical reasons to supply a distant plant in Alabama. 

To reach this Plain Dealer reporter: 

pkrouse@plaind.com, 216-999-4834 

© 2001 The Plain Dealer. Used with permission. 

The Best Local Classifieds: Jobs I Autos I Real Estate I Place An 

Ad 

PLUN DRt\I.ER Receive 2 weeks FREE delivery of The Plain Dealer! 

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8/8/2005