Producing steel requires a good deal of iron ore. Steel production firms that use Electric Arc Furnaces (EAF) in their steel production process have traditionally fed their EAF’s with scrap iron or smelted pig iron. However, due to the rising price of high quality scrap iron and the high capital expenses of smelting, firms have began to look for alternative iron sources.
Nucor in particular has had success in finding a cheaper alternative by building direct reduction iron plants. Direct Reduction Iron (DRI) is produced by the reduction of iron oxide using hydrogen gas and carbon monoxide derived from natural gas. Due to the large quantities of natural gas used in this process, Nucor has strategically built plants in areas that produce plentiful natural gas. Nucor first built a DRI plant in Trinidad in 2006 and experienced significant cost savings in producing two million tons of iron pellets a year. Then in 2011, Nucor broke ground on another (DRI) plant in Convent, Louisiana and began producing iron pellets in 2014.
These new DRI plants have changed Nucor’s business model significantly by creating another option for producing the iron that feeds their Electric Arc Furnaces. In 2013, a year before the opening of Nucor’s Louisiana DRI facility, the cost of scrap iron was about $390 a ton. However the cost of producing iron pellets in a DRI plant was only about $280 a ton. These lower production prices have also allowed Nucor to see profit margins that are much greater than those of their competitors. Direct Reduced Iron may be the way of the future in steel production, and it wouldn’t surprise me to see DRI plants popping up wherever there are large amounts of cheap natural gas.