When petroleum prices took their first
quantum leap four decades ago, it triggered a commodity crisis
affecting metals like steel and many of the raw materials used
to make them.
The U.S. steel industry also suffered a
severe coronary back in the 1970s and underwent the equivalent
of a quadruple bypass. Old steel mills were closed, coke ovens
and blast furnaces were torn down and thousands of workers lost
their jobs. The 1973 oil embargo was not the direct cause of
the steel industry's problems, but it helped to expose how
inefficient some steelmakers were in those days.
A decade or so later, when mini-mill
technology was on the rise in the United States and around the
world, if you asked some mini-mill executives if they needed to
own scrapyards, they pooh-poohed the idea. In some ways, they
were like today's drivers who keep buying oversized suburban
assault vehicles-better known as sport utility vehicles-or
high-powered diesel trucks with four-wheel drive for trips to
the local mall. "There's no gasoline shortage," these people
will tell you, "just a bunch of greedy oil companies gouging us
for all they can get."
There were no ferrous scrap shortages either,
some mini-mill executives said back then. There was plenty of
scrap-a vast national pool of millions of tons of obsolete
scrap-and hundreds of scrap dealers were ready to sell them
whatever they wanted. The mine above ground, some called it in
those days. The $173-a-ton factory bundles and similar high
prices for shredded and heavy melt scrap in the 1970s were an
anomaly, they said, unlikely to be repeated.
Companies like Commercial Metals Co. were in
both steelmaking and scrap processing. But CMC had already been
in the scrap business and it traded all sorts of commodities,
not just scrap and steel. When Chaparral Steel Co. built a
structural steel mill in Midlothian, Texas, and added a
megashredder, some of its mini-mill rivals wondered why. Others
attributed the move to the mill's location in central Texas,
where processed scrap was not in abundance.
If ferrous scrap prices rose or supplies were
tight, there were alternatives like pig iron and direct-reduced
iron (DRI). Some steel mills even had their own DRI plants, but
abandoned them later-not because of the high price of iron
units, but because natural gas prices were rising and made them
uneconomical except in a few countries where gas was
Fast forward two decades, and the current
generation of steel executives has made a 180-degree turn from
those old beliefs. Was it simply that the previous generation
of steel leaders were near-sighted? They built mini-mills into
the powerhouses they are now, and rebuilt what was once seen as
a dying industry in this country. But perhaps they were a bit
short-sighted on this front.
Today's steel executives started out as young
engineers and managers in those companies. These successors
face a new challenge today-obtaining adequate raw materials.
The current focus on today's stratospheric ferrous scrap prices
masks the more pressing issue. Sure, some ferrous scrap prices
are close to $800 a ton in the U.S. market and even higher in
several scrap-importing nations. But finished steel prices have
risen just as steeply and scrap surcharges have ensured
profitability for many steelmakers.
Price is not the main issue. It never was.
Ask any scrap buyer at a steel mill what will happen if he pays
too much for scrap. The boss will howl, he might say, but he'll
be looking for a new job if he lets the meltshop run out of
Ferrous scrap is a limited resource. Nobody
makes scrap as a new product, like cars or plastics. Scrap is a
by-product of manufacturing processes and our lifestyles, the
waste materials that are not discarded in a landfill because
there is still some value that can be extracted from them. We
junk cars and discard washers and dryers after they are no
longer usable. Each year, the growth of the steel industry's
mini-mills has drained away more and more of that supposed
never-ending stream of junk cars and old appliances. Many
manufacturing plants have moved overseas, and with their
departure the flow of industrial steel scrap has slowed.
And now, thanks to our own spendthrift
financial ways, overseas steel mills see U.S. processed scrap
as a cheap raw material. Scrap from other offshore sources like
Russia and Ukraine? That's gone or, so we are told, soon will
be. Archaic Soviet steel mills have been modernized and they
want all of their domestic scrap.
And lastly, those seemingly abundant supplies
of pig iron and DRI are not as readily available as once
thought. The growth of China's steel industry and its use of
the basic oxygen process has taxed the world's iron supplies.
Compounding that supply problem has been the consolidation of
the world's iron mining industry into a 21st-Century version of
the Big Three.
Oil and steel price and supply problems were
not unrelated 40 years ago. Nor are they today. Higher
petroleum prices are financing a building boom in the Middle
East, the region that supplies much of the world's gasoline.
That construction binge, in turn, is demanding more steel and,
to the chagrin of many U.S. mills, more raw materials like iron
and scrap needed by mills there-and here.
Sure, you can turn corn into ethanol and add
it to gasoline, but how many millions of acres of spinach will
we have to grow to help make enough cold-rolled sheet?