Will Cheap Natural Gas Prices Provide Any Hope To The Steel Industry? (SLX, UNG, X, NUE)

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January 17, 2013 2:06pm NYSE:SLX NYSE:UNG

steel-beamTony Daltorio: While natural gas prices are up 50% from their 2011 lows below $2 per 1,000 cubic feet (million BTUs), they’re still cheap at just over $3.

Lower-priced natural gas has helped a number of industries, like chemicals and utilities, cut costs, as Money Morning Global Energy Strategist Dr. Kent Moors pointed out in his 2013 natural gas price outlook.

Now there’s another U.S. industry that hopes cheap natural gas can revive its flagging performance.

I’m talking about steel.

Troubled Times for U.S. Steel

The steel industry saw robust growth between 2004 and 2006 when global steel prices rose by more than 20% a year.

But since 2009, steel producers have been lucky to see any price increases at all due to chronic overcapacity in the industry.

According to the American Iron and Steel Institute, the U.S. steel industry capacity utilization rate is at 74%. Industry profit margins are particularly vulnerable any time this rate is below 80%.

Before the financial crisis in 2008, domestic capacity utilization in the steel industry was at a robust 91%, but the steel business has not seen a good earnings period since.

According to Bloomberg News, the country’s largest steel producer, United States Steel (NYSE:X), is forecast to post its fourth consecutive annual loss when it releases earnings Jan. 29. Bloomberg says steel producer Nucor Corp. (NYSE:NUE) will have $504 million in net income for 2012, less than one-third of what it was in 2008.

The industry remains in survival mode in much of the globe.

But a technology in steel production that takes advantage of cheap natural gas will start to play into the steel industry recovery. Here’s how.

Cheap Natural Gas Prices to the Rescue

Steel producers are using natural gas for direct-reduced-iron technology, or DRI.

DRI heats iron ore – the main ingredient in steel – to a temperature high enough to burn off the carbon and oxygen content but retain the iron.

This is instead of using coal-power blast furnaces to heat and thereby separate or “reduce” iron from the other minerals found in iron ore. According to the World Steel Association, this method accounts for 94% of global iron output.

Nucor says by using DRI iron can be produced for approximately $324 a ton. That is about $82 a ton, or 20%, less than using a conventional blast furnace to reduce iron.

DRI also makes smoother, stronger steel.

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

If Applebaum is correct, good news lies ahead for the domestic steel industry.

There are five plants in the works that would substitute natural gas for coal to reduce iron.

Nucor is building a plant in Louisiana, which it plans to start-up in mid-2013. In addition, Austrian steelmaker Voestalpine AG said last month it may build a $660 million mill here in the United States to take advantage of cheap natural gas. India’s Essar Global is also eyeing such a plant in Minnesota and Australia’s Bluescope Steel and Cargill plan one in Ohio.

Looks like thanks to low natural gas prices, a new day is dawning for the U.S. steel industry.

Related: Market Vectors Steel ETF (NYSEARCA:SLX), Natural Gas ETF (NYSEARCA:UNG).

Money MorningWritten By Tony Daltorio From Money Morning

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