Analysis: Steelmakers eye gas to cut costs, drive exports

By Steve James

NEW YORK (Reuters) - America's steel industry, for decades a symbol of industrial decline, is betting on natural gas to make it more competitive against foreign producers.

U.S. Steel Corp and Nucor Inc, the two largest U.S. steel producers, are changing their traditional manufacturing processes as relatively cheap domestic natural gas supplies become more plentiful.

Some experts believe the new techniques will not only allow steelmakers to cut costs and lower selling prices at home, but also give U.S. companies a chance to compete with Japanese, South Korean and European rivals for a slice of the export pie.

"Gas is very positive for steel; it really lowers the cost of the product," said Michael Locker of Locker Associates, a consultant for steel companies.

U.S. Steel Chief Executive John Surma said in an interview that using natural gas in some stages of production can cut the use of more expensive coking coal by some 10 percent.

He estimated that factoring in costs such as labor, energy and transportation, the overall savings would be $6 to $7 per ton of steel. U.S. Steel produces 23 million tons per year.

Christopher Plummer, managing director of Metal Strategies, an industry consultant in West Chester, Pennsylvania, said the global average cost of producing a ton of steel is about $600 to $700. Russian steelmakers produce at the bottom of the cost curve, averaging about $500 per ton. Americans are in the middle at about $625 to $675 per ton. The most expensive are the Japanese and Koreans, at $650 to $750 per ton.

While a savings of about 1 percent may not sound like much, every little bit counts for companies in an industry that has been struggling with steep rises in raw material costs, such as coking coal, iron ore and scrap metal.

"You do an analysis of our costs and they are much higher than five years ago," said Surma, whose company posted a net loss of $226 million for the fourth quarter -- its fifth in the last eight quarters. "The capital cost to increase our ability to inject greater quantities of natural gas into our blast furnaces is minimal, but the potential savings certainly start to add up when you are producing 20 million tons or more of steel every year."

A GAME CHANGER

With natural gas prices at 10-year lows because new fracking technology has opened up huge deposits in the Northeast United States, most domestic steelmakers are looking to use more of it.

"There is a new focus on natgas," said Larry Kavanagh, president of the American Iron and Steel Institute'sAdidas Yeezy