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Is Steel “Steel”?: Examining Substitutability

A relatively recent development in the steel industry is the introduction and proliferation of the Electric Arc Furnace (EAF). This method is particularly useful as it recycles scrap steel into new steel products. However, as the only input is low-quality scrap steel, minimills are unable to produce high value-added products. Substitutability is nonexistent, as the quality demands of higher value-added products are beyond the capabilities of the EAF producers.

Electric Arc Furnace at Nucor Steel
Electric Arc Furnace at Nucor Steel

Due to their limitations, EAF minimills have used the competitive advantages of their simpler and cheaper process to carve out a dominant market share of low quality steel products. Some examples of these products include rebar for construction and wire mesh for roads.

Laying wire mesh for reinforced concrete
Laying wire mesh for reinforced concrete

These products do not undergo any sort of gratuitous stress levels, so quality specifications are quite lax.

On the other hand, there are high-grade products that are held to very rigid performance standards by the consumer. Often these products make up the backbone of the most essential infrastructure, especially buildings and bridges, where structural flaws can have catastrophic results.

In essence, the market for steel can be separated into two separate markets; low-grade and high-grade products. Substitutability does not exist between these two markets, so it follows that the maximum market share that either of these producers can realistically reach is limited by the demands of industry at that particular time.


Warrian, Peter. A Profile of the Steel Industry: Global Reinvention for a New Economy. Kindle Edition. Business Expert Press, 2012. Print. (photo) (photo)


  1. mikesmitka mikesmitka

    To whom do EAF producers sell outside of the construction market? Does their presence mean that integrated producers such as USSteel or ArcelorMittal cannot profitably sell into that market?

    • Jier Qiu Jier Qiu

      Note that in the UK and many other countries, EAFs are used to produce not only lower quality steels but also special quality steels. Other metals are added to the steel during the melting process to grant it the required chemical composition to form steel alloys. Products vary from stainless steel to steels developed to sustain the environment of nuclear reactors and steels used in aerospace.

      The presence of mini-mills in different levels of markets posts threats to larger steel firms such as U.S. Steel, which still does not have any EAFs. Plans were made for the company to move forward in terms of its technology. U.S. Steel announced an EAF project in January 2014; however, in December 2015, U.S. Steel called off its to build an EAF in Alabama, which was intended to diversify the integrated company into the mini-mill market. Although EAFs are cheaper and more responsive to different market conditions than traditional blast furnaces are, U.S. Steel claimed that it postponed the project to combat volatile energy markets.


  2. Joe Beninati Joe Beninati

    This is an interesting distinction between high-grade and low-grade steel markets. SAE International is a standards organization which seems to create the most common steel-grading metric. I wonder if high-grade steel that was initially used by non-EAF processes is often recycled for secondary use in EAF furnaces. This would be a sustainable cross-over between the two, as you argue, independent markets.

    • Walker Helvey Walker Helvey

      Generally speaking, EAF production tracks steel scrap availability closely.

      High-grade steel stock is frequently used in and represents a key driver for EAF production. As existing steel stock reaches the end of its life, the amount of scrap available for secondary use in EAF production increases and drives EAF output to higher levels. Increases in scrap availability also have a tendency to displace demand for iron ore and met coal that are used in traditional blast furnace production.

      This pattern is reflected in the path taken by the U.S. steel industry. As steel stock in the U.S. reached end of life during the previous century, EAF production grew from 0 to 30% of total steel production in 20 years. This trend is expected to accelerate as high and low grade steel scrap from long-lived construction structures, such as buildings, make their way into the recycling process.

  3. rhynew rhynew

    Because you mention that there is no substitutability between high grade and low grade steel, it would seem then that the steel market would eventually reach an equilibrium (though this will too fluctuate with market conditions) between the two different qualities. If this is the case, would EAF steelmaking have more market share than BOF steelmaking? In the States, this could be considered the case as Nucor has overtaken U.S. Steel in terms of market share. However, U.S. Steel could certainly blame more of its demise on the growth of the foreign BOF market than its American competitor Nucor. This makes me wonder about the future of both companies. Given the foreign competition, could Nucor and U.S. Steel benefit from a merger that allows the companies to simultaneously take advantage of both steel markets to avoid the substitutability issue?

  4. As Jier points out, specialty steels use EAFs, starting with relatively high-grade steel slabs [which may come from a traditional mill] but then with all sorts of alloying compounds added. Stainless steel is one such example.

    Scrap can be [is!!] sorted into higher and lower quality grades, but there are limits to that – there are many types of steel in a car, while sorting the odd piece of chromed steel out of the stream of stuff isn’t readily done. A bit of aluminum creeps in. And so on. Nevertheless, the boundary between what “traditional” integrated steel can produce but EAF can’t has shifted over time.

  5. ruffingk18 ruffingk18

    Since EAF steelmakers commonly use scrap high grade steel from non-EAF producers, I would be curious to see how susceptible the EAF market is to price changes within the high grade steel market. If steel prices increase do the companies attempt to sell the scrap steel at a higher value to these EAF producers? If so how does this volatility affect the EAF market.

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