Steelmakers dive into junk business to feed new mills

Nucor Corp., the largest producer of steel in the U.S., Cleveland-Cliffs Inc. and North Star BlueScope Steel spent more than $1 billion for steel scrap processors in 2021 as millions of tons of annual production capacity are being added to the domestic steel market in response to rising demand. Steel Dynamics Inc. in 2020 bought a Mexico-based scrap company to help supply a newly completed mill in southwest Texas.

Indiana-based MetalX LLC began supplying North Star BlueScope with scrap from a yard that opened across the street from North Star’s Delta, Ohio, mill in early 2019. North Star in November agreed to buy the Delta yard and the rest of MetalX’s steel-scrap processing operations in Indiana for $240 million. Mark Vassella, chief executive of Australia-based BlueScope Steel Ltd., told employees in a Dec. 20 message that the purchase “helps underpin North Star’s supply chain and competitiveness…by bringing in-house part of North Star’s scrap collection."

MetalX Chief Executive Danny Rifkin said North Star’s consumption of scrap is expected to increase as it completes the expansion of its steelmaking capacity next year by about 40% to 3.3 million tons a year.

“The landscape has changed," Mr. Rifkin said. “Companies like BlueScope are going to need the ability to have a meaningful percentage of their scrap requirement covered by their own supply."

Record high prices for steel and a nearly 20% increase in U.S. steel production over the past year have encouraged steel company executives to expand. About 10 million tons a year of new capacity for making flat-rolled steel are expected to enter service by the end of 2024, on top of the 8 million tons already added during the past two years.

The new mills make steel by melting scrap or processed iron in electric furnaces, a production process that now accounts for about 70% of the steel made in the U.S. It is a lower-cost process with reduced carbon emissions compared with making steel from iron ore melted in a coal-heated blast furnace.

But the process is putting more pressure on the U.S. scrap market. Steelmakers’ scrap purchases in 2021 through October were up 17% from the same period last year, according to Metal Strategies, a Pennsylvania-based consulting firm.

The average spot market price for a ton of shredded obsolete scrap, generated from junked cars and old appliances, finished 2021 up 26% from the end of 2020, according to World Steel Dynamics, a market data and consulting firm in New Jersey. The price of prime scrap—a clean, uncontaminated grade mostly harvested from metal stamping plants and machine shops—rose 34% in 2021 to $540 a ton.

“Prime scrap is what will become increasingly scarce as steel mills add to their electric furnace capacity," said Philipp Englin, chief executive of World Steel Dynamics.

Cleveland-Cliffs said rising prices for prime scrap and a mostly stagnant supply of it in recent years motivated the company to acquire Detroit-based Ferrous Processing & Trading Co. in November. At a price of $775 million, it was the most expensive purchase of a scrap processor in a dozen years, industry analysts said.

Ferrous Processing, a major collector of prime scrap from automotive-related manufacturers, operates 22 scrap sites in the U.S. and Canada, with most of them located in southeast Michigan and northern Ohio. The company accounts for 15% of the U.S. prime market, according to Cliffs, which uses scrap to make stainless steel and specialty steels for electric-vehicle motors and transformers.

Cliffs CEO Lourenco Goncalves said he expects Ferrous Processing to give Cliffs an advantage in securing prime scrap.

“We have a big beast for Cleveland-Cliffs to put our hands around as much prime scrap as we can," Mr. Goncalves told analysts shortly after the deal was announced.

Cleveland-Cliffs is the largest supplier of steel to the automotive industry. Mr. Goncalves said he envisions using those sales to bolster the company’s prime scrap supply by negotiating scrap purchase contracts with Cliffs’ automotive customers and using Ferrous as its collection and processing agent.

“We are going to reclaim our scrap that comes from our steel," he said. “That’s a closed loop."

Nucor and Steel Dynamics, which have operated scrap businesses for more than a decade, are fortifying their own scrap-collection loops as they expand steel production.

Nucor’s scrap subsidiaries this fall acquired Garden Street Iron & Metal Inc. in Fort Myers, Fla., and Grossman Iron and Steel Co. in St. Louis. Terms of the deals weren’t disclosed. Nucor operates 65 scrapyards. The latest acquisitions give Nucor scrap sites in areas where the steelmaker is building new mills or expanding existing plants.

Grossman Iron has access to the Mississippi River, allowing Nucor to ship scrap to its mills in the region by river barge, including a mill under construction along the Ohio River in Brandenburg, Ky.

“One of the key things about scrap is the cost of where you move the scrap to," said Doug Jellison, Nucor’s executive vice president for raw materials. “Grossman fits in a great place to support a large percentage of our growth."

Steel Dynamics in 2020 bought Monterrey, Mexico-based Zimmer S.A. de C.V., to supply its new mill in Sinton, Texas. Steel Dynamics also is increasing its use of obsolete scrap, which is cheaper and more readily available than prime, because the quality of obsolete scrap improves with better shredding and processing equipment.

MetalX’s Mr. Rifkin sold his OmniSource Corp. scrap business to Indiana-based Steel Dynamics 14 years ago in a cash-and-stock deal worth about $1 billion. He started MetalX about five years later. Now that he’s selling a portion of that business, he said he has no interest in coming back to the steel scrap market for a third time.

“The opportunities for independent scrap dealers are going to be more limited," he said. “I’m not keen on coming back in five years and trying again."