LONDON — Voestalpine, the Austrian steel and components maker, said Wednesday it would invest in a so-called direct reduction plant somewhere in either the United States or Canada, hoping to take advantage of low North American energy prices to compete with lower-priced rivals.
Direct reduction uses natural gas to turn iron ore into iron sponge or iron briquettes. These would be then used as a substitute for iron ore pellets in Voestalpine’s European steel plants to bring down their costs, according to Wolfgang Eder, the chairman of the company’s management board and chief executive.
Mr. Eder said in an interview that Voestalpine was operating “in a high-cost region in a high-cost country in Austria” and was in danger of losing its competitive position to rivals in Turkey, Ukraine and Russia. He said that taking advantage of cheap North American gas was one of the few options open to address the situation.
“We have to do it in one of the cheap shale gas areas around the world,” he said of building the new plant.
European industrialists have long complained about the high costs of environmental and employment legislation, but high energy prices are now emerging as another drag on European economic activity.
“This is a really serious issue not just for the steel industry but also for a lot of other industries,” Mr. Eder said. In Europe, he said, “the cost of oil and gas and electricity is structurally higher than in all other parts of the world.”
Natural gas prices in the United States are one-third those of Europe, and electric power prices in the United States are also much lower. Energy prices in Canada are closely linked to those in the United States.
The iron briquettes or sponge iron produced by the direct reduction plant will be exported to Europe for use at the company’s steel making sites, Mr. Eder said.
“In my mind, this announcement reinforces the view that the European steel industry faces difficult growth prospects in its traditional market,” said Jeff Largey, an analyst at Macquarie Securities in London.
“In order to grow, European steel makers will need to look outside Europe and in the case of Voestalpine, look” to increase the size of their steel processing and engineering business, Mr. Largey said.
He added that Voestalpine’s move was similar to a recent decision by another European steel maker, Thyssen Krupp, to focus more on its engineering divisions.
Like other European steel makers, Voestalpine has felt the pinch of reduced demand because of the European economic slowdown, although Mr. Largey said the company remained relatively well-positioned as a supplier of premium-quality components to high-end auto makers like Audi and BMW. It also has access to low-cost iron ore pellets from Ukraine, Mr. Largey said.
Mr. Eder said that the raw iron produced in North America would be substituted for 10 percent to 15 percent of the pellets used in Voestalpine’s blast furnaces.
Over the longer term, he said, Voestalpine would consider building mini-mills that can also use iron briquettes as their raw materials instead of scrap. In a research note, Michelle Applebaum of Steel Market Intelligence said that cheap gas would greatly improve the economics of mini-mills which use electric arc furnaces to make steel from scrap in contrast to so-called integrated mills which make their steel from iron ore.
Voestalpine said that European financial crisis had “left its marks” on the company but that it was “using this difficult phase to refashion the group.”
For the six months through September the company reported a 22 percent decline in profit, to €270 million or $356 billion, on €5.9 billion in sales.
The company said it planned to rapidly increase the size of its special steel, metal engineering and metal forming divisions, which produce more stable revenue streams than basic steel making. Ten years ago, steel making accounted for 55 percent of the company’s revenues; now it amounts to just 30 percent.
The company also said it planned to triple the amount of revenue it makes outside of Europe to €9 billion by 2020. It intends to increase activities in China, Southeast Asia, South America, and “niche segments” in the United States and Canada.
Currently, more than 70 percent of the company’s revenue comes from Europe.
Article source: http://www.nytimes.com/2012/12/20/business/global/20iht-steel20.html?partner=rss&emc=rss