The Irving, Texas-based Commercial Metals Company (CMC) has announced the construction of a new micro mill in Durant, Oklahoma, approximately 100 miles north of Dallas.
For most of the last two centuries, steel production has required major investment in massive blast-furnaced operations which in turn were fed by ship-load quantities of iron ore and metallurgical coal for coke. As a result, steel mills were historically located on major waterways and at one time defined the economies of states like Wisconsin, Michigan, Ohio and Pennsylvania.
Then came mini mill technology. Mini mills use electric arc furnaces to re-melt, refine and alloy scrap steel in smaller, lower-cost operations that are independent of traditional supplies of iron ore and coke.
CMC’s miniature-sized micro mill will use that electric arc furnace technology, integrating continuous casting and hot rolling technologies to produce long goods cost-effectively and with less energy.
The Oklahoma micro mill, utilizing Danieli technology and equipment, is expected to be commissioned in the fall of 2017 and to create approximately 300 jobs in the Durant area. The direct and indirect investment is expected to be in excess of $250 million. CMC expects that its investment will be funded from internally-generated capital.
Now, it’s particularly interesting that the new Durant operation will be capable of economically producing commodity steel products like rebar. Especially considering how global steel prices are seriously depressed due to overproduction globally.
U.S. Steel has reported a quarterly loss and Japan’s Nippon Steel & Sumitomo Metal Corporation predicted an 18 percent decline in profits over the first half of 2015 due to waning Chinese demand. This problem is a catch-22: Chinese demand drops and, as a result, Chinese mills look to export markets to absorb the excess capacity, further harming prices.
So how can small steel producers like CMC thrive in a failing industry? From the looks of it, by sticking with their micro mill strategy.
Traditional steelmaking operates profitably by leveraging large economies of scale: the bigger the mill, the more efficient. However, CMC’s mini and micro mill operations aren’t tied to bulk transportation networks for raw materials. The firm’s steel products are heavy and expensive to transport, so the ability to put in a mini or micro mill almost anywhere lets the company optimize both sides of the logistics problem: getting raw material in and finished goods out to customers.
In my opinion, it seems CMC’s mini and micro operations are going to generate a profit in making low-value commodity steel products like rebar. This suggests a very high level of cost control and advanced technology. It’s easy to make money during a boom, but to open new plants and run them profitably despite excessive global supply is impressive.
If this trend continues, we may see smaller steelmaking operations following their manufacturing customer base rather than the traditional reverse. Big winners will likely be Southern, right-to-work states, accelerating the shift of manufacturing from the Rust Belt to more corporate-friendly jurisdictions.
It’s a trend worth watching.