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U.S. Steel to enable scrap melting by building electric arc furnace

| Wednesday, Sept. 16, 2015, 10:54 p.m.

U.S. Steel Corp. is trying something it hasn't done in a while.

For the first time in many years, the company is planning to make steel by melting scrap — a method some of its more-profitable competitors adopted years ago.

The move to build a $230 million electric arc furnace at the Fairfield Works near Birmingham, Ala., which is expected to open in the second half of 2016, gives the company a more cost-effective way to make the metal during a time of sluggish demand, and it should help CEO Mario Longhi's long-term plans to boost profitability.

But it's not a panacea for U.S. Steel's problems, analysts warned.

“I don't think this is the salvation of U.S. Steel,” said John Tumazos, analyst and owner of Tumazos Very Independent Research in Holmdel, N.J. “But it's their best solution for a tough situation.”

Since its founding in 1901, U.S. Steel primarily has made steel in blast furnaces by heating iron ore, coke and limestone. The process makes high-quality steel, but the furnaces need to run at or near capacity to be profitable.

“When we've had high utilization rates, that favors the operation of a blast furnace,” said Andrew Lane, an analyst at Morningstar Inc. in Chicago.

But periods of weak demand, such as the one the industry has been mired in for the past year because of a flood of cheap imports and falling orders from oil and gas industry customers, favor electric arc furnaces, said Philip Gibbs, an analyst at KeyBanc Capital Markets in Cleveland.

“An (electric arc furnace) gives you a lot of flexibility, because you don't have to run it at 80 to 90 percent (capacity),” Gibbs said. “You can run it at lower capacity and turn it on and off easily.”

The blast furnace at Fairfield Works was further hindered by its location, Lane said. It's far away from U.S. Steel's iron ore mines in Minnesota, which added to costs of running the facility compared with blast furnaces in Illinois, Indiana, Michigan and the Mon Valley.

It's surrounded by competitors, such as Nucor Corp., that since the 1990s have built cheaper electric arc furnaces, also known as mini-mills, in many southern states.

“There's been a whole array of non-union mini-mills encircling Fairfield,” Tumazos said. “It amazes me that U.S. Steel managed to output steel there the last 20 years.”

As U.S. Steel eked out a profit of $102 million last year — its first since 2008 — Nucor posted net income of $713.9 million for 2014.

Fairfield was due for a major maintenance project that would have cost U.S. Steel about $150 million, Lane said.

“The new (electric arc) furnace cost was modest compared with the cost for maintenance of the blast furnace,” he said.

The change allows U.S. Steel to reduce some of its steel-making capacity, which the company has been cutting this year by temporarily idling blast furnaces around the country, to lower costs and align with falling demand.

The blast furnace at Fairfield Works had an annual capacity of 2.4 million tons of steel, or 12 percent of its total U.S. production. The electric arc furnace will be able to produce about 1.6 million tons a year.

“They're downsizing and taking a chunk of fixed costs out of the operation,” Gibbs said.

Labor costs remain a question, however. U.S. Steel announced last month that it will idle the Fairfield blast furnace in November — at least seven months before the electric arc furnace opens — and lay off 1,100 of the facility's 1,500 workers.

How many of them will return to work is the subject of negotiations between the company and the United Steelworkers union, spokeswoman Sarah Cassella said.

“We will work with the United Steelworkers under the terms of the collective bargaining agreement to address the transition in staffing needs associated with the implementation of EAF technology,” she said.

The two sides are in talks on a new labor pact to replace an agreement that expired Sept. 1.

“We are discussing the future and anticipated staffing needs at the newly announced operations, as well as the remaining operating facilities and the potential addition of new operations, at the Fairfield Works,” union International Vice President Tom Conway said.

U.S. Steel likely will have higher labor costs at Fairfield than its competitors at the many non-union mini-mills in the South, Tumazos said.

It's not clear that the market for Fairfield's steel — pipe for the oil and gas industry — will recover anytime soon, he said.

But the company may indirectly create an advantage with the Fairfield electric arc furnace as a new and significant purchaser of scrap steel in the southern U.S. market, he said.

“The biggest return they may get from that shop is if it drives the price of scrap up,” he said, which would force other steel producers to raise prices.

“If Nucor pays more for scrap and has to raise prices, that helps U.S. Steel,” he said. “That's another nuance.”

Alex Nixon is a Trib Total Media staff writer. Reach him at 412-320-7928 or

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