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Shale gas sparks new steel plants

Cost to purify iron ore down 20%

– The U.S. shale-gas revolution, which has revitalized chemicals companies and prompted talk of domestic energy self-sufficiency, is attracting a wave of investment that may revive profits in the steel industry.

Austrian steelmaker Voestalpine last month said it may construct a $659 million factory in the United States to benefit from cheap gas. Nucor Corp., which has northeast Indiana operations and is the most valuable U.S. steelmaker, plans to start up a $750 million Louisiana project in mid-2013. They’re among at least five U.S. plants under consideration or being built that would use gas instead of coal to purify iron ore, the main ingredient in steel.

“That technology has been around 30 years, but for 29 years gas prices in the U.S. were so high that the technology was not economical,” said Michelle Applebaum, managing partner at consulting firm Steel Market Intelligence in Chicago. “This is how steel will be built moving forward.”

The new capacity may signal a turnaround for an industry that has suffered from overcapacity since the financial crisis and collapse in commodity prices four years ago. U.S. steelmakers have struggled to stay profitable amid sluggish domestic demand, depressed prices and competition from Chinese imports. While global steel output has grown by 14 percent since 2008, U.S. production has shrunk 3.4 percent.

The newest group of steel projects are so-called direct-reduced iron plants, which account for the first stage of steelmaking. DRI technology produces iron for about $324 a ton, Nucor said in a November presentation. That’s 20 percent cheaper than using a conventional blast furnace, the steelmaker said.

Foreign competitors are now following Nucor’s lead. A joint venture between Australia’s BlueScope Steel and commodity trader Cargill plans to build a DRI plant in Ohio, Biliana Pehlivanova and Shiyang Wang, analysts at Barclays in New York, said in a recent report. India’s Essar Global Ltd. plans one for Minnesota, Barclays said.

Nucor may announce a second DRI plant this year, bringing the company’s domestic iron-making capacity to 5 million tons per year, according to Aldo Mazzaferro, a steel analyst at Macquarie Capital USA Inc. in New York. Nucor agreed in November to pay Canadian energy company Encana Corp. $3 billion over two decades for a joint venture that will develop gas wells to supply its DRI capacity.

No one at BlueScope and Essar responded to messages seeking comment on the DRI projects. Lisa Clemens, a Cargill spokeswoman, declined to comment about any iron-making expansion at the company’s North Star BlueScope joint venture. Katherine Miller, a Nucor spokeswoman, declined to comment about a possible second DRI plant.

Hydraulic fracturing of shale rock formations from Texas to West Virginia has boosted supplies of gas and sent prices plunging by as much as half in the past two years. Gas futures reached a decade low of $1.91 per million British thermal units in April in New York trading.

“The shale revolution is triggering an avalanche of industrial expansion plans,” Barclays’ Pehlivanova and Wang said. At the same time, there’s no guarantee that steel demand in the U.S. will improve.

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