Raw material costs still low as percentage of steel price, says BHP Billiton
An issue often raised is whether the steel industry can afford to absorb the gar- gantuan increases in the prices of the main steel raw materials, in view of iron-ore going up 382% in the past eight years, metallurgical coal 599% and manganese 486%. But BHP Billiton, which supplies all three of the raw materials, finds that the steel mills are doing “pretty well”, thank you.
Although raw material inputs for steelmaking have soared, they are still low as a percentage of the steel price, says BHP Billiton CE: ferrous metals Marcus Randolph.
Randolph finds that the hot-rolled coil (HRC) price – the steel product chosen for the calculation – has outrun the raw material costs fivefold in the same eight years.
The raw material cost has remained at 30% to 35% of the steel price over that period.
“How are the steelmakers doing? They are doing pretty well,” says Randolph.
BHP Billiton CEO Marius Kloppers says that it is constraints on steelmaking capacity that have driven steel prices very high, and not raw material costs.
Says Kloppers: “We live in unprecedented times and I am very happy to be in this business, but I probably wouldn’t have been that unhappy if I were in the steel business at the moment as well.”
BHP Billiton also points out that of the two methods of making steel, there is a strong trend towards the blast furnace-basic oxygen furnace (BF-BOF) route rather than the electric arc furnace (EAF) route.
This is because the EAF method requires ferrous scrap, which is in short supply, and is not fed with iron-ore or metallurgical coal.
Miners of iron and coking coal thus benefit when steel is made by the BF-BOF method.
BHP Billiton reports that 1 600 t of iron-ore, 600 t of metallurgical coal and 7 t of manganese are required to make a ton of steel and finds that currently two-thirds of steel is made using the BF-BOF method and only a third via the EAF route, which is grist to the mill of miners.
The company says that 84% of Chinese steel is made using the BF-BOF process and the evolution towards large furnaces has brought along with it the need for high-quality raw material inputs.
For example, iron-ore needs to be largely consistent when it arrives at the blast furnace, while the metallurgical coal differs substantially.
The iron-ore and coking coal go into the BF-BOF at the front end and pig iron comes out of the BF and into the BOF, at which point manganese is introduced to deoxidise, desulphurise, strengthen and harden the steel.
When production takes a rapid step-up, as is now the case, there is generally insufficient scrap in the system to feed into EAFs, which creates increased demand for pig iron and metallurgical coal because the BF-BOF takes the raw material route rather than being dependent on scrap.
BHP Billiton’s coking coal business is by far the largest seaborne producer in the world, its manganese ore business the largest in the world and it is third in seaborne iron-ore.
It is interesting to note that BHP Billiton’s metallurgical coal production is actually larger than its iron-ore production and that all three of its steel material businesses, including manganese, are largely Australia-based, and with Asia the market, Australia is an advantaged production source from a proximity viewpoint.
Eighty per cent of its metallurgical coal is hard coking coal and is able to supply a full suite of blending requirements, but there are port constraints and ships queue off the eastern coast of Australia.
“We have a situation now where the metallurgical coal industry and the coal industry in Australia are generally constrained by the availability of port,” says Randolph.
BHP Billiton is bigger in metallurgical coal than it is in iron-ore and is thus leveraged towards metallurgical-coal-short Indian steel growth, with long-life low-cost top-tier assets.
BHP Billiton intends trebling its iron-ore production in seven years and has increased its Western Australian iron-ore resources by 3,7- billion wet metric tons, to 11,7 billion tons.
Steelmaking materials will contribute 41% of BHP Billiton’s overall growth in the next five years, the highest and ahead of energy at 38% and nonferrous at 21%.
BHP Billiton manganese president Peter Beaven has seen to it that manganese has won a fair price.
“The globalisation of the manganese ore market has led to the accurate, fair pricing of high-grade manganese ores. There has been a fundamental shift to value-in-use pricing,” he says.
The addition of the relative value-in-use differential to pricing has created a much steeper cost curve and a combination of these changes has led to the higher prices and the increased profitability of the manganese business, given its position on the cost curve.
“You have seen the big run-up in manganese prices recently and the message that you should take is that price run-up has been driven by the high-quality product that we have,” says Randolph.
It is a story that says that the demand for the higher-quality end of the product, as in coking coal, is very strong in manganese and has resulted in those abnormally high price increases.
“A 46% increase in resources is an indication of the future potential of these assets,’’ says Randolph.
The company also raised the manganese resources at the Samancor unit and its Sam-ancor joint venture in South Africa’s Northern Cape.
BHP Billiton’s resource base is large enough to support production for more than 50 years in all three of the steel raw materials.
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