Cheap Gas Lets Factory Rise Again On Bayou
Abundant Natural Gas Allows Steelmaker to Bring Production Back
to U.S.
Wall Street Journal
31 January 2013
By John W. Miller
CONVENT, LA—In 2004, steelmaker Nucor Corp. bought a plant next to
alligator-infested Louisiana wetlands, took it apart and shipped
it to Trinidad on ocean barges. This summer, after almost two
years of construction, it will open the same type of plant at the
same site at a cost of $750 million.
Why? Natural gas, which is critical to these Nucor plants, was
cheap in Trinidad. Now, it is suddenly plentiful and relatively
cheap in the U.S. due to hydraulic fracturing technology, or
fracking, a process that has unlocked natural gas from massive
shale formations, driving prices down. Fracking remains
controversial due to concerns it could pollute underground water.
The Environmental Protection Agency hasn't yet ruled on the issue.
Lower-priced natural gas has energized many parts of the country
and the economy. Chemical and fertilizer companies, which use gas
as both a feedstock and energy source, say lower prices have
reduced costs and made the U.S. a more competitive manufacturing
location. Dow Chemical Co. and Chevron Phillips Chemical Company
LLC have announced plans to build multibillion-dollar chemical
plants in Texas, Louisiana and other states. Energy-intensive
industries, such as glass and aluminum makers, can cut costs,
while companies that make pipes and drills are benefiting from new
domestic demand.
Abundant natural gas has also made certain processes, considered
uneconomical a few years ago, now doable and profitable.
Nucor's Louisiana project, next to a bayou town of 700 set among
protected wetlands and chemical plants, is one example. The plant
uses natural gas to strip oxygen from iron ore to make high-purity
pellets. Those pellets, called direct-reduced iron or DRI, can be
combined with scrap and melted to make steel—at lower cost than
using scrap alone. At current gas prices, DRI can generate iron
pellets at a cost of $260 to $280 a ton. Scrap steel is currently
trading at around $390 a ton.
When completed, the plant will mark the return of this type of
manufacturing—the last DRI plant left the U.S. in 2009—and be the
second largest such facility in the world, behind a plant in Iran.
Nucor's Louisiana DRI plant will process 2.5 million tons of DRI
pellets a year, compared with well below 2 million tons at most of
the roughly 100 DRI plants around the world (The plant in Iran has
3.2 million ton capacity).
"This is bigger than anything we've ever seen in the U.S.," said
Chuck Bradford, an analyst with Bradford Research Inc. "It's a
huge bet on gas."
Others are making similar bets. Midrex Technologies Inc., which
makes DRI furnaces, said two to three more plants are being
planned in the U.S. U.S. Steel Corp. CEO John Surma said Tuesday
the company was studying its options for building a DRI plant.
"It's possible we might have something to talk about this year,"
he said.
Current DRI global production is around 73 million tons, up from
45 million tons a decade ago. The technology is widely used in
countries where natural gas was cheap, such as the Middle East.
Originally part of a conglomerate that included the maker of the
first Oldsmobile, Nucor makes steel in electric arc furnaces,
which are giant melting pots, and uses scrap steel from cars and
rail tracks as the main ingredient. This can make it more
vulnerable to fluctuations in scrap prices than rivals like U.S.
Steel and ArcelorMittal, which make steel by melting raw
materials, such as iron ore, coal and limestone.
Nucor has managed to operate a leaner company than the traditional
makers, thanks in part to high productivity and a smaller,
nonunionized workforce. Earlier this week, Nucor said it turned a
quarterly profit of $136.9 million, or 43 cents a share. U.S.
Steel and AK Steel Holding Corp. both lost money.
When scrap prices surged in the early 2000s as the global economy
boomed, Nucor bought the Louisiana DRI plant to reduce the overall
amount of scrap needed. It moved the plant to Trinidad, where it
would be cheaper to operate.
"We dismantled everything and put it on 13 oceangoing barges,"
said Lester Hart, general manager of the new Louisiana plant, who
used to manage the Trinidad location.
Shortly before the 2008 financial crisis, U.S. natural gas prices
topped $12 per million British Thermal Units. After the crisis,
they fell below $5 per MBTU. "We knew we'd be foolish not to get
in on this," said Dan DiMicco, Nucor's then-CEO, who retired at
the end of 2012.
The new plant will employ about 150 highly-skilled workers. The
average salary will be $75,000, which the company said is twice
the median income in that part of Louisiana.
Nucor officials tout the plant's location on the Mississippi,
where barges can easily hook up to 4,600-foot long conveyor belt
erected 25 feet above ground that whisks raw iron ore into the
plant. "We get the best of both worlds here, with the Gulf and the
shale gas from the fracking," said Johnny Jacobs, a plant
logistics manager. After processing, the barges will ship the DRI
to mills in the South.
And what if gas prices rise?>
Last year, Nucor announced a 20-year gas supply agreement with
Calgary-based Encana Oil & Gas Inc. It won't use that gas
directly for its plants. Instead, it will sell that gas itself to
cover its cost of buying gas in Louisiana, as a kind of hedge in
case the price suddenly spikes.
A version of this article appeared Feb. 1, 2013, on page B1 in
some U.S. editions of The Wall Street Journal, with the headline:
Cheap Gas Lets Factory Rise Again On Bayou.