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ADOPTION OF NEW

STEELMAKING TECHNOLOGIES

Steve Labson Peter Gooday Gavan Dwyer Andrew Manson

ABARE RESEARCH REPORT 94.1

e ABARE

O Commonwealth of Australia 1994 This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARE. ISSN 1037-8286 ISBN 0 642 20154 4 Labson, S., Gooday, P., Dwyer, G. and Manson, A. 1994, Adoption of New Steelmaking Technologies, ABARE Research Report 94.1, Canberra.

Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601 Telephone (06) 272 2000 Facsimile (06) 272 2001 ABARE is a professionally independent economic research organisation.

Cover photographs: Ben Wrigley Photography ABARE project 42.008

Foreword The development and adoption of new steelmaking technologies have had, and are likely to continue to have, an important impact on the steelmaking industry worldwide. Producers that are able to adopt cost cutting technologies quickly are likely to be well placed to compete in the global marketplace. Because new technologies use inputs such as iron ore and coking coal more efficiently, they will have a significant impact on the markets for steelmaking raw materials. As a major exporter of these raw materials for steelmaking, Australia will be directly influenced by the adoption of various new steelmaking technologies. This study is part of ABARE's continuing research program into the global iron ore and steel economy, in which Australia plays a major role.

BRIAN FISHER Executive Director, ABARE February 1994

Acknowledgments Much of the material contained in chapter 2 of this report was previously published in an article by Gooday and Labson (1993). Portions of an article written by Dwyer and Muir (1992) are reproduced in chapter 4 of this report. As such, the authors would like to acknowledge Donald Muir's contribution. The authors would also like to thank Bill Curran, Roger Rose, Terry Sheales and Tom Waring for their helpful comments on a previous draft of this paper.

Contents Summary

1 Introduction 2 Electric arc furnace technology Electric arc furnaces The scrap steel market Forecasting future electric arc furnace use Summary

3 Adoption of continuous casting technology Casting methods Diffusion of the technology Forecasting future continuous casting rates New developments in casting techniques

4 Pulverised coal injection PC1 technology Economic factors influencing PC1 use A case study - the Japanese steel industry Summary

5 Innovations in ironmaking Limitations of the blast furnace process Direct reduction processes Direct smelting technology Conclusions

6 Implications of new steelmaking technologies

-

--

Appendixes A A model of technological diffusion B Application of the diffusion model to electric arc furnace production C Regression results - continuous casting D Regression results - pulverised coal injection

52

References

59

54 56 57

Boxes 1 2 3

Modelling the adoption of a new technology The blast furnace process Forecasting the adoption of PC1 in Japan

17 31 39

Figures A B C D

Steelmaking processes Electric arc furnace production Ingot and continuous casting methods Blast furnace and direct smelting ironmaking routes

Tables 1 2

Deliveries of steel, by product type, 1990 Percentages of total steel output produced in electric arc furnaces, 1990 3 Consumption of scrap steel 4 Net imports of scrap steel 5 Projected share of crude steel output produced in electric arc furnaces 6 Shares of crude steel produced by continuous casting 7 Projected percentage of crude steel produced by continuous casting 8 Selected Australian-Japanese contract prices for coking coal and coke 9 Japanese steelmills' coal mixes 10 Company injection rates in Japanese fiscal year 1991 11 Forecast values of Japanese PC1 mix

9 10 21 44

Glossary Basic oxygen furnace (oxygen converter): Steelmaking vessel in which molten iron is converted into steel using gaseous oxygen to oxidise unwanted impurities. Blast furnace: Furnace in which iron ore is reduced to molten iron. The heat for this process comes primarily from the burning of coke within the furnace. Coal sulphur: Occurs in three forms -organic sulphur which is an integral part of the coal matrix and cannot be removed by conventional physical separation; sulphate sulphur which is usually negligible; and pyritic sulphur which occurs as the minerals pyrite and marcasite. Coke: Made from bituminous coal (or blends of bituminous coal) from which the volatile constituents are driven off by heating in an oven in the , that the fixed absence of air at temperatures as high as 1 0 9 4 ' ~( 2 0 0 0 ° ~ )so carbon and ash are fused together. Coking coal or metallurgical coal: Black coal with a quality that allows the production of coke suitable for blast furnace use. Cold rolling: Hot rolled steel is often cold rolled to give thinner gauges, tighter tolerances, and better surface finish. Continuous casting: Continuous forming of semifinished steel sections for example, slabs, blooms and billets - direct from molten steel, thus eliminating primary rolling operations. Direct reduction: Any process which extracts iron from iron ore without going through a molten stage. The product, direct reduced iron, is used as a scrap substitute. Direct stripcasting: Continuous casting of molten steel into strip, eliminating the extensive hot rolling operations that reduce cast slabs (200-300 mm thick) to strips (1.2-1.5 mm thick). vii

Flat products: Sheet, strip and plate are all flat rolled steel products -the primary form of flat products is slabs. Gangue: Undesired minerals associated with ore, mostly non-metallic. Hardgrove grindability index: A measure of the energy required to grind or pulverise coal. Hot linking:Conservation of heat energy endowed in cast steel by removing steel from the continuous caster at as high a temperature as possible and minimising the heat loss before rolling in a rolling mill. Hot rolling: Rolling of semifinished steel at temperatures between 800° and 1200°c, in order to deform the shape of the semifinished steel to a dimension closer to that of the finished product. Ingot: Solid steel shape cast by the traditional method of pouring molten steel into moulds and allowing it to solidify. Iron ore fines: Small particles of iron ore, usually below 10 mm in diameter, normally requiring agglomeration (sintering or pelletising) before use in a blast furnace. Iron ore lump: Unbeneficiated ore, usually between 10 and 30 mm in diameter, which can be fed directly into the blast furnace. Integrated steel mill: A mill which contains all of the major production stages, including the processing of raw materials, their conversion to steel and the basic processing of that steel. Ladle furnace: Secondary steel making vessel in which steel is further refined to the required chemical composition. Link casting: Continuous casting of dissimilar grades of steel in the same sequence by inserting a divider plate which links the old strand with the new strand. Long products: Structural shapes, rails and bars long products is billets and blooms.

- the

primary form of

Pelletising: A process which agglomerates iron ore fines into rough ball shaped pellets. Pulverised coal injection: Generally semisoft or soft coking coal which is ground into a fine powder and injected into the base of the blast furnace to partially replace coke in the steelmaking process.

PC1 coals: These have quality specifications which relate to operational aspects associated with coal grinding, high combustion efficiency and interaction of mineral matter with the furnace slag. Generally coals having low total moisture, ash and sulphur, high specific energy and good combustion performance which can reduce plant costs. Refactories: Heat resistant materials used to line furnaces and ladles. Rolling mill: Semifinished steel products are deformed into more usable flat and long products by rolling the steel between driven rolls. Slag: Produced by the chemical combination of the flux and the impurities removed from the metal in iron and steelmaking. Sintering: A process which agglomerates iron ore fines. Smelting reduction: A method of obtaining metal iron by direct reduction of iron ore in a molten state. Steaming coal or thermal coal: In Australia includes bituminous coal, anthracite, that is not classified as coking coal and sub-bituminous coal, used in boilers to produce steam. Thin slab casting: Direct casting of thin slabs approximately 50 mm thick, compared with traditional slabs of 200-300 mm thickness. Tundish: Liquid metal reservoir and distribution system from which steel is fed to the continuous caster.

Summary Roughly 70 per cent of world steel production relies on the blast furnace, in which raw steelmaking materials are transformed to iron, the primary component of steel. The blast furnace route is a cost efficient means of producing large volumes of high quality steel. This method of steelmaking, however, has several drawbacks. The blast furnace route to steelmaking requires operation on an extremely large scale to achieve production economies, entails extensive preparation of raw materials and produces some hazardous byproducts.

Most steel is produced through the blast furnace route

To overcome these drawbacks and improve competitiveness, steelmakers are continuously improving steelmaking techniques. These developments will have an important effect on the competitiveness of the steelmaking industry against an increasing range of substitute materials, as well as on the demand for steelmaking raw materials such as iron ore and coking coal for each unit of steel produced. As a major exporter of iron ore and coking coal, Australia will be directly influenced by the adoption of these new steelmaking technologies.

New steelmaking techniques will affect demand for raw materials

In this study, factors affecting the adoption of four general steelmaking technologies -the electric arc furnace, casting technologies, pulverised coal injection, and smelting reduction processes - are examined.

Four new technologies are considered

The electric arc furnace (aided by new casting techniques) and smelting reduction processes are technologies which bypass the traditional blast furnace route and so change the input mix of steel production. Pulverised coal injection techniques are, in effect, aimed at enhancing the efficiency of

Two technologies bypass the blast furnace; one enhances it

p

p

p

p

-

Adoption of new steelmaking technologies

... but there are drawbacks

the blast furnace to make it more competitive with these alternative steelmaking techniques. Cost and quality aren't the only factors to be considered

The adoption of new steelmaking technologies is unlikely to be based on lower costs or improved product quality alone. Capital constraints faced by steel producers, the age of existing capital, the structure of the world steel industry and the risks associated with adopting relatively 'new' technologies are all factors which are likely to affect adoption decisions.

The electric arc furnace Production from electric arc furnaces is increasing

Over the past three decades, production of steel by electric arc furnaces has become an increasingly important means of bypassing the blast furnace altogether. Electric arc furnaces melt scrap steel into usable metal. When combined with modern casting techniques, electric arc furnaces appear to offer considerable advantages in the production of certain types of steel. At present, electric arc furnaces account for around 28 per cent of world crude steel production.

These furnaces are likely to increase their share of output from 28per cent now to 31 per cent in 2000

Until recently, the electric arc furnace sector has been largely unable to service a significant portion of the steel market because of the economies of scale in downstream rolling processes, and the generally inferior quality of output from scrap based electric arc furnaces. A statistical model of technological adoption, which reflects these constraints was used to project growth in electric arc furnace production. The findings suggest that continued growth in electric arc furnace production will result in production from this sector accounting for roughly 3 1per cent of total steel production by the year 2000. This relatively minor growth in electric arc furnace production on its own is not likely to have a large impact on demand for raw materials during this time period.

2

ABARE research report 94.1

However, new developments in steel casting techniques coupled with electric arc furnaces may significantly change the market position of electric arc furnaces compared with the traditional integrated steel mill. Specifically, recent innovations in thin slab casting, if proven to be commercially viable, will greatly enlarge the product market in which electric arc furnaces can compete. The portion of the steel market currently denied to electric arc producers (flat products) represents roughly 40 per cent of total steel production. At this time, it is impossible to determine just how much of this market will be captured as a result of this innovation, but the potential exists for a significant increase in the share of steel produced by electric arc furnaces. The commercial use of this combined technology is still being developed, and it is likely to be some time until fully adopted. When fully adopted, however, it is likely to become a significant constraint on the growth in demand for iron ore and coking coal.

... but this share could be greater if innovations in casting techniques are applicable to electric arc furnaces

... which would affect demand for raw materials

Casting technologies I

I

Continuous casting techniques, developed in the 1950s, greatly improved the productive efficiency of steelmaking. However, some important steelmaking regions have been slow to adopt this technology. The most notable cases are the United States, China and Eastern Europe.

Adoption of new casting techniques has been slow in some regions

It is generally agreed that the competitive performance of a steelmaker is directly related to the use of continuous casting. As such, further adoption of continuous casting by these late adopters as they become increasingly integrated into world markets should increase their competitiveness in those markets. In particular, such a process could serve to eventually reverse the recent recession in the US steel sector, re-establishing it as a competitive force

... but should

Adoption of new steelmaki~zgtechnologies

improve their competitiveness when introduced

within the world steel market. Model based projections indicate that the United States will achieve continuous casting rates similar to those in Japan by the end of the decade. Recent developments are likely to enhance electric arc furnaces' competitiveness

In addition, recent developments in casting technology have the potential to further increase the competitiveness of electric arc furnaces. As noted above, innovation in thin slab casting techniques will allow electric arc furnaces to move into the production of certain flat steel products. The opening of this segment of the market could significantly increase electric arc furnaces' share of total steel production.

Pulverised coal injection PC1 technology has reduced blast furnace costs

A more recent innovation in blast furnace technology has been the development of pulverised coal injection techniques. This technique involves the direct injection of pulverised coal into the blast furnace. The direct injection of coal allows for partial substitution away from relatively expensive fuel oils and hard coking coals toward less costly soft coking coals. The adoption of coal injection techniques may extend the competitive life of traditional blast furnace technology and act as a bridge to entirely new ways of producing steel.

... and is being

Japan is currently the world leader in pulverised coal injection. A statistical model was employed to project the proportion of injected coal to total coking coal consumption by Japanese steelmakers. The modelling exercise indicates that injected coals will represent slightly over 16 per cent of total coking coal consumption by Japanese steelmakers by the year 2000, up from roughly 10 per cent at the start of the decade.

increasingly applied in Japan

As steelmakers increase coal injection levels, demand for lower quality coking coals will increase 4


at the expense of high quality coking coals. Australia has abundant supplies of both, and is well placed to accommodate the changing demand for coking coals; however, the price premiums enjoyed by the higher quality hard coking coals are likely to be diminished.

PC1 is likely to reduce thepremium for hard coking coals

Innovations in ironmaking technology At present, there are considerable research and development efforts underway into smelting reduction ironmaking methods which are aimed at competing with the blast furnace in the medium term, and entirely replacing it in the long term. These methods appear to have potential advantages over the blast furnace, as they do not involve the separate, and costly, processing of raw materials, and can operate efficiently at much smaller scale than blast furnace based steelmills.

New smelting reduction techniques are likely to be more efficient than blast furnaces

Smelting reduction techniques also generally allow the steelmaker to use lower quality coals, rather than the high quality coking coal currently used in the blast furnace. As such, the adoption of smelting reduction will have a depressing effect on demand for coking coal. However, the commercial viability of these technologies is still uncertain, and it is unlikely that these technologies will have a significant impact on the industry in this decade, at the very least.

... and use lower


quality coals

5

Introduction Traditionally, steel has been produced by reducing iron ore to pure iron, then combining it with other elements such as carbon, manganese and nickel to give the metal varying degrees of hardness, resistance to corrosion, and machinability. The semifinished product then undergoes various stages of rolling, shaping and coating before it reaches its end use in the construction, consumer durables and shipbuilding industries, to name a few. Until the 1960s, steel was produced mostly in large, integrated plants which performed the primary stages of steelmaking referred to above. The processing of raw iron ore to semifinished steel generally requires extremely large plant scale, which can cost over US$4 billion. A large integrated plant can produce over 4 million tonnes of steel a year. Given these large scale economies, the steel industry of the past tended to be fairly concentrated. This large, concentrated structure was significantly altered with the development of the minimill - a combination of electric arc furnace and continuous casting technology used primarily to produce long products, used mostly in the construction industry. Electric arc furnaces melt steel scrap into a product which can then be reshaped and used again. The primary advantage of electric arc furnaces is that it bypasses the costly reduction of iron ore to the pure metal. It was the development of continuous casting techniques, however, which led to the wide scale adoption of electric arc furnaces and minimills. The essential aspect of the new casting techniques was that they allowed for a significantly smaller scale of production in rolling the crude steel into semifinished products ready for shipping. This smaller scale in the rolling mill made electric arc furnaces an attractive steelmaking route, since electric arc furnaces generally gain full scale economies at a fraction of the size of blast furnace based steel production. Still, integrated production of steel by blast furnaces continues to be an efficient means of producing high quality steel, particularly useful in final products such as automobiles and white goods. To further the competitive performance of the blast furnace, new technologies have been developed, based around the more efficient use of raw materials. Arguably, the most important of these developments has been in the injection of pulverised coal

6


into the blast furnace. This technology, commonly called pulverised coal injection, or PCI, allows for the use of relatively inexpensive soft coking coals, rather than the more expensive hard coking coals traditionally used in the blast furnace, when reducing the iron ore to pure iron. Furthermore, PC1 allows for the direct use of coal, rather than the costly processing of coal to coke, following the more traditional method. The development of PC1 is still relatively new; however, it appears that it will become increasingly important to the integrated sector's competitive performance in the coming years. In the longer run, steelmaking technologies, generally classified as direct reduction technologies, may entirely change the nature of steelmaking. These reduction technologies are aimed at more efficiently reducing raw steelmaking materials, bypassing the blast furnace, while producing high quality steel within a relatively small scale of production. If direct reduction technologies are successful on a commercial basis, the large integrated plant could be a thing of the past, and demand for raw inputs to steelmaking particularly high quality coking coal - would be significantly altered. However, new steelmaking technologies are not often quickly adopted, regardless of their apparent advantages. The large capital costs involved in steelmaking often prohibit the immediate adoption of new technologies. Existing plant and equipment is often built to function efficiently for thirty years or longer. In many cases, the benefits of new technology, in terms of operating cost savings over the installed technology (over the lifespan of the installed technology), do not offset the costs of the new technology. Given such constraints, the dynamics of the technological adoption process may be of as great importance as the innovation itself. The purpose in this study is to examine the innovation and adoption of four important steelmaking technologies -the electric arc furnace, continuous casting, pulverised coal injection, and direct reduction processes. The continued development and adoption of these steelmaking technologies will undoubtedly have an important influence on the nature of the world steel economy, as well as the demand for raw inputs to steelmaking. As a major exporter of raw steelmaking materials, such as iron ore and coking coal, Australia's trade performance will be directly affected by the adoption of these technologies.


7

Electric arc furnace technology World steel production has increased quite markedly over the past two decades. In 1970 world crude steel production totalled 595 million tonnes; by 1990 it had reached 770 million tonnes. This increase came from two different types of steelmaking technologies -integrated steel works, using basic oxygen or open hearth steelmaking methods with iron ore, coking coal and limestone as major inputs, and electric arc furnaces which use steel scrap as the major input. Of the increase in world steel production between 1970 and 1990, 75 per cent was accounted for by electric arc furnaces and 25 per cent by the more traditional processes. The proportion of crude steel produced using electric arc furnace technology has important implications for the world's iron ore and coal exporters. Increased steel production from electric arc furnaces has the potential to displace production from integrated steelworks. The resultant decrease in demand for iron ore and coking coal could be significant for iron ore and coking coal producers in the longer term.

Electric arc furnaces The process of producing steel by the electric arc furnace route is quite different from the process used in integrated steel mills. As illustrated in figure A, the steelmaking process within an integrated steel mill requires extensive preparation of raw materials and several processes to change iron ore (largely an oxide of pure iron) to the pure metal. The production process in an electric arc furnace requires considerably fewer steps. Steel scrap is fed into electric arc furnaces which melts the scrap into molten steel. The molten steel is then separated from the slag and transferred to a ladle furnace for further processing. In the ladle furnace alloys are added to produce the required quality of steel. The molten steel is then fed through the continuous caster and processed into billets or blooms (semifinished steel products) which are then processed in the same way as steel from integrated mills.

8


A

Steelmaking processes

EABARE

The adoption of electric arc furnace technology The commercial production of steel by the electric arc furnace route started as early as 1899 but has only recently become widespread. The increasing importance to the world steel industry of electric arc furnace technology is illustrated in figure B. The increase in production from electric arc furnaces has come primarily from the development of the minimill - a combination of electric arc furnace and continuous casting technology used primarily to produce long Adoption o f new steelnzaking technologies

9

B

Electric arc furnace production

products, which are used mostly in the construction industry. Although electric arc furnaces also produce large amounts of special forgings and stainless steels, production of these types of steel has not contributed greatly to the increased adoption of electric arc furnace technology. Relative to the increase in output of long products, the increase in production of special forgings and stainless steels in electric arc furnaces has been slight.

Cost advantages Minimills appear to have an advantage over integrated mills in that they can produce long products at lower per unit costs than integrated plants. As shown in table 1, long products account for a significant proportion of total steel deliveries. Barnett and Crandall (1986) calculated that at 1985 operating costs a representative US integrated mill could produce wire rod at a cost of US$339/t whereas a representative US minirnill could produce the same product for US$244/t. Another advantage of minimills over integrated plants is that because they are economic at a much smaller scale, the startup cost of a minimill is considerably less than that of an integrated plant. A modern integrated plant with capacity of 3 million tonnes a year requires an investment of around US$4.5 billion (Cusack 19921, whereas BHP's Sydney minimill with a capacity of 250 000 tonnes a year required an investment of around $A300 million (US$220 million using 1992 average exchange rates) (BHP 1992). It should be noted that smaller scale in itself offers an advantage because minimills are able to be located close to specific end user markets, whereas 10

ABARE research repord 94.1

I

Deliveries of steel, by product type, 1990 Percentage of total deliveries

Long products

Flat products

%

%

30 31 49 59

59 61 46 30

Western Europe a United States Japan China

a Western European data only available for France, western Germany, Portugal, Sweden and the United Kingdom. Source: International Iron and Steel Institute (1991).

integrated plants are usually located near substantial port facilities because of their large raw material requirements. Electric arc furnaces also have an advantage over integrated plants in that they tend to have less impact on the environment. The electric arc furnace consumes scrap steel which would be difficult and costly to dispose of otherwise and does not produce many of the undesirable byproducts which integrated steel plants produce. The coke ovens, blast furnace and basic oxygen furnace of an integrated plant produce significant amounts of carbon dioxide, carbon monoxide and other undesirable emissions. Apart from noise pollution, which can be controlled, the electric arc furnace process does not produce any more pollution than most manufacturing processes. As a result, electric arc furnace operations have been located in suburban areas with minimal impact. It should be noted, however, that the electricity used in the electric arc furnace process involves an environmental cost, and this cost will depend on the fuel used in the electricity generation process. The upstream environmental costs of operating an electric arc furnace, however, would appear to be small relative to the direct environmental costs of operating an integrated steel plant. Minimills are, however, somewhat limited in the proportion of the market they can capture because of the limited variety of products they produce. Minimills are still largely unable to produce flat products because of the limited availability of scrap with low enough residual impurities to make the production of flat products economic (International Iron and Steel Institute 1983a). However, recent advancements in casting technology are - -

Adoption of riew steelmaking technologies

enabling some minimill producers to enter the lower quality end of this market. Nucor in the United States and Tokyo Steel in Japan are two such producers. The flat product market makes up a significant proportion of the total steel market; for example, flat product deliveries accounted for around 60 per cent of total steel deliveries in the United States in 1990 and for around 46 per cent in Japan.

Regional aspects One aspect of the adoption of electric arc furnace steelmaking technology has been the variation in rates of adoption between regions. As shown in table 2, electric arc furnace production accounts for a significantly higher proportion of total production in the United States than in Western Europe and Japan. It is also evident that the shares of total steel production accounted for by electric arc furnaces in Eastern Europe (Bulgaria, the former Czechoslovakia, the former East Germany, Hungary, Poland, Romania and the former Soviet Union) and China are significantly lower than those in Western Europe, the United States and Japan. The relatively low rates of electric arc furnace adoption in Eastern Europe and China can be attributed to a number of factors. Because of the centrally planned nature of these economies the growth in electric arc furnace technology is likely to have been subjected to different economic constraints than in other regions, and as a result the competitive advantages of electric arc furnace technology may not have been realised. As these economies become more market based, the factors underlying the adoption of electric arc furnace technology can be expected to change, and their rates of adopting this technology can be expected to approach those of other regions. Percentage of total steel output produced in 2 electric arc furnaces, 1990 percentage United States Western Europe

Japan China Eastern Europe World

28.1

Source: International Iron and Steel Institute (1991).

12


The severe capital constraints facing many of the Eastern European economies, combined with the significant overcapacity which presently exists in their steel industries, may suggest that, over the next ten to twenty years, growth in the electric arc furnace sector will be slow. In the long run, as the large capital outlays required for major restructuring and modernisation of current plant and equipment become available, the electric arc furnace share of steel production in Eastern Europe may approach that in the rest of the world's industrialised steelmaking regions. In China the electric arc furnace share can be expected to grow somewhat faster because of strong growth in steel demand. However, the rate of growth in electric arc furnace production in China will also be constrained by the availability of the necessary capital, scrap supply and competition from the quickly growing integrated sector. Continued growth in electric arc furnace production will have an impact on regional iron ore and coking coal demand, particularly in Japan and Western Europe which are major iron ore and coking coal importers, and in China which is emerging as a large importer of iron ore.

The scrap steel market The market for scrap steel is an important factor determining the competitiveness of electric arc furnace steel producers. These producers require a steady, reliable supply of scrap steel. The availability and price of scrap are possible constraints facing minimill producers because scrap is a major input into the electric arc furnace steelmaking process. The cost of scrap has been estimated to contribute around 35 per cent of the total costs per tonne of a representative minimill producer in the United States (Barnett and Crandall 1986). While there have been short term shortages of quality scrap on the market from time to time, it appears as though minimill producers have been able to cope with this volatile market. Problems related to the availability of high quality scrap can be partially overcome through careful scrap sorting and screening or through corrective measures at the main furnace or the ladle furnace (Metal Bulletin Monthly 1992). Electric arc furnaces are not the only consumers of scrap steel. Integrated steel mills feed significant amounts of scrap into the basic oxygen furnace. However, nearly all of the scrap consumed in integrated mills is 'in house' Adoption of new steelmaking technologies

13

or 'circulating' scrap - that is, scrap which is generated in the steel production process. Integrated steel mills are not large consumers of 'purchased' scrap. Once the use of circulating scrap has been accounted for, the basic oxygen furnace of an integrated plant relies on purchased scrap for something less than 5 per cent of the charge, or in some cases none of the charge (International Iron and Steel Institute 1983b). Electric arc furnaces rely almost exclusively on purchased scrap as the major charge source.

Supply of scrap Purchased scrap can be split into two main categories -obsolete scrap and process scrap. Obsolete scrap is sourced from the scrapping of capital equipment -such as machinery, ships, automobiles, buildings and bridges -which has reached the end of its useful life. As the average life of a steel product is fifteen years (International Iron and Steel Institute 1983b), it is steel consumption of over a decade ago which largely determines the current availability of obsolete scrap. Industrialised countries which have been consuming large quantities of steel for several decades can be expected to have large supplies of obsolete scrap. However, newly industrialised countries, which have only just begun consuming significant amounts of steel are not likely to have a large scrap supply base. Alternatively, process scrap is salvaged from the production processes of large steel consumers, thus the supply of process scrap is directly related to the current level of steel consumption. An estimated 15 per cent of finished steel consumption returns to the scrap consumer as process scrap (International Iron and Steel Institute 1983b). The largest source of process scrap is the automobile industry. As steel consumers improve their production processes the generation of process scrap for a given level of steel consumption can be expected to decline. There is a substitute for scrap in both the basic oxygen furnace and the electric arc furnace. Direct reduced iron is iron ore which has been reduced to iron in a solid state and can be fed directly into electric arc and basic oxygen furnaces in the same manner as scrap (International Iron and Steel Institute 1983b). While growth in world production of direct reduced iron over the past decade has been impressive (7.8 million tonnes in 1981 to 18.9 million tonnes in 1990), it still accounts for only a very small proportion of 14


the steelmaking raw materials market. A more complete discussion of this technology can be found in chapter 3.

Scrap consumption and trade The scrap industry tends to be very localised, with the majority of scrap collection and processing taking place close to consumption centres (International Iron and Steel Institute 1983b). This is largely because of the relative abundance of scrap steel at such locations and the transport cost savings that are available from collecting and processing scrap near consumption centres. The major scrap consuming countries and/or regions are shown in table 3. Eastern Europe is the world's largest consumer of scrap steel, most likely due to their abundant scrap base which has developed from that region being the world's leading consumer of steel over the past thirty years. It is important to note, however, that Eastern Europe's scrap consumption does not reflect high levels of electric arc furnace steelmaking, but is a result of high levels of open hearth furnace production (47 per cent of total crude steel production in 1990) which uses large quantities of scrap (up to 60 per cent of the feed in some cases) as an input. The proportion of crude steel produced by way of open hearth furnaces is minimal in the other major scrap consuming centres. In the other major scrap consuming regions, most purchased scrap consumption is in electric arc furnaces. In the United States and Western Europe the proportion of total crude steel production from open hearth furnaces was around 5 per cent in 1990. There is currently no steel produced in open hearth furnaces in Japan.

3 Consumption of scrap steel Western Europe Eastern Europe United States Ja~an

79.0 59.1 a 74.9 33.4

80.9 75.3 b 74.7 34.2

79.0 81.6b 81.0 43.8

81.2 114.7 64.0 44.1

75.6 109.7 63.4 48.2

a Soviet Union total for blast and open hearth furnaces only. b Soviet Union total for open hearth furnaces only. Source: International Iron and Steel Institute (1991). --

-


4 Net imports of scrap steel Western Europe Eastern Europe United States Japan Other Asia a Latin America

3.0 -1.6 -5.4 2.2 1.2 0.5

4.0 -1.2 -8.4 3.0 1.5 0.8

5.4 -1.1 -9.6 2.8 4.8 1.1

4.9 -2.5 -8.4 3.1 4.2 0.8

3.7 -2.1 -10.3 0.6 6.8 0.4

a Other Asia does not include China or India. Source: International Iron and Steel Institute (1991)

The major importers and exporters of scrap are shown in table 4. Imports of scrap contribute only a small proportion of scrap consumption in the United States, Japan and Eastern Europe. Although Western Europe as a whole is largely self-sufficient in scrap, intraregional trade in scrap is significant. One aspect of the scrap trade has been the recent increase in imports into Asian economies such as South Korea, Taiwan, Indonesia, the Philippines, Singapore, Malaysia, Thailand and Hong Kong ('Other Asia' in table 4). These countries have experienced high rates of growth and do not have large domestic bases of obsolete scrap to use as a source. Therefore, they import scrap. It is worth noting that small domestic supplies of scrap have not hindered the adoption of the electric arc furnace in these countries. The proportion of crude steel produced from the electric arc furnace route was 3 1 per cent in South Korea in 1990, 42 per cent in Taiwan, 92 per cent in Malaysia and 100 per cent in Indonesia, Thailand and Hong Kong.

Forecasting future electric arc furnace use In order to develop a forecast of future electric arc furnace market shares, a statistical model of technological adoption was constructed (see box 1 and appendix A for details). In this instance, the model was used to estimate the quantity of steel produced in electric arc furnaces as a proportion of total crude steel production (electric arc furnace production shares) for Western Europe, the United States, Japan and for the world as a whole. The type of model used has been successfully employed by researchers in estimating rates of adoption of a wide range of technologies, and allows forecasting of transitional and long run electric arc furnace market shares. 16



17

5 Projected share of crude steel output produced in electric arc furnaces Western Europe

United States

Japan

World

Trend growth in electric arc furnace production shares can be estimated using the estimated adjustment coefficients of the growth model (table 5). (See appendix B for the regression results). Following the projected trend, electric arc furnace production shares in Western Europe are projected to increase to roughly 34 per cent by the year 2000, with the shares for the United States and Japan being nearly 40 per cent and 35 per cent respectively. For the world as a whole, electric arc furnace production share is projected to reach around 3 1 per cent by the year 2000. As mentioned earlier, the electric arc furnace sector is currently constrained by the steel products which it can efficiently produce, and is presently limited to producing lower quality products for the construction industry. The projections reflect this constraint, and imply fairly modest growth in electric arc furnace market share to the year 2000. However, the further innovation and adoption of thin slab casting technology (discussed in chapter 3) will have a significant effect on the sector. Electric arc based minimills will be able to produce steel sheets of varying quality, and may eventually compete in the market for high quality flat products used, for example, in the automobile and white goods industries.

Summary The electric arc furnace has become an increasingly important steelmaking technology, particularly over the past two decades. The cost advantages and

18


flexibility offered by electric arc furnace technology has allowed for a partial displacement of the larger, traditional integrated steelmill, based on blast furnace production. An analysis of trend electric arc furnace growth indicates that, under current technology, electric arc furnace production share is unlikely to continue to grow at the rapid pace observed over the past two decades. However, in the medium term, innovations in casting techniques, combined with the electric arc furnace, are likely to have a significant effect on the sector, and as the product range of the electric arc furnace expands, growth in electric arc furnace production will increase substantially. This growth would come at the expense of blast furnace based steel production. Thus demand for the raw inputs of iron ore and coking coal could be affected. At this time, it is impossible to predict the full effect of innovation in the electric arc sector. Furthermore, there are some additional factors which have the potential to influence electric arc furnace production shares which have not yet been discussed. These factors include more efficient use of the blast furnace and the development of smelting reduction steelmaking processes. Because the development of these technologies is at a relatively early stage, it is impossible to say with any certainty what implications they will have for the world steel industry. Although the widespread adoption of these technologies does not appear likely in this decade, they may have an important influence into the next century. Some of these technologies are examined in the following chapters.

Adoption of continuous casting technology Since its inception in the late 1950s, continuous casting has superseded ingot casting as the most efficient method of casting molten steel. Savings in energy and labour, combined with higher yields and i~npmvedproduct quality have led to the wide scale adoption of this casting technology. The innovation and adoption of continuous casting has also had a particularly important influence on the electric arc furnace sector, since the casting technique allows for a smaller efficient scale of production, which has been an important component of its success. Still, the apparent advantages of continuous casting, whether coupled with the electric arc furnace or within an integrated mill, have not as yet led to the complete adoption of the technology. The percentage of world crude steel produced by continuous casting grew from 4 per cent in 1970 to 63 per cent in 1991. However, there have been large differences in the rate of adoption of continuous casting between steelmaking regions. I11 1991, Japan and Western Europe led the major steelmaking regions, with continuous casting rates of 94 per cent and 90 per cent of total steel production respectively. The proportion was 75 per cent in the United States, and only 18 per cent in Eastern Europe and 27 per cent in China. Not only has there been strong growth in the adoption of continuous casting, but the technology itself has advanced dramatically. Early casters were limited in the forms in which they could cast the molten steel. Whereas today, virtually all semifinished products can be commercially produced using continuous casting. The technology is now advancing toward net shape casting, where the cast steel is of a closer dimension to the finished steel product, hence reducing costly rolling operations.

Casting methods In the making of steel, whether by the integrated or the electric arc process, molten steel must be tapped from the furnace to a ladle. From the ladle, molten steel is cast into solid steel by either ingot casting or a continuous casting method. The semifinished steel can then be rolled into more usable products such as rods, bars, sheet and plate. The closer to a finished product

20


in dimension and quality is the cast steel, the greater is the opportunity to reduce costly downstream processes such as reheating and numerous rolling operations.

Ingot casting Ingot casting is an energy intensive, labour intensive and time consuming process relative to continuous casting processes. The ingot casting process involves molten steel being teamed (poured) from the ladle into cast iron ingot moulds and then allowed to solidify in the form of an ingot. These ingots can vary in weight from about 1 tonne to in excess of 30 tonnes. After cooling, which can take up to 24 hours or more, the mould is broken. The ingot is then reheated to a sufficient temperature for rolling. This reheating to temperatures of up to 1 2 0 0 ' ~takes several hours and is energy intensive. The steel ingot is then rolled in a primary mill to produce a semifinished steel product such as a billet, the larger bloom, or even larger slabs.

Continuous casting With continuous casting technology, molten steel is directly cast into semifinished products and hence the forming of ingots, subsequent cooling, reheating and primary rolling of ingots is eliminated (figure C). The molten steel from the furnace is poured from the ladle into a tundish. Steel pours through the tundish into a mould that initially has a durnmy bar covering the bottom end. As the mould fills, the steel cools and begins to solidify. The dummy bar is then withdrawn and a continuous strand of partially

Ingot and continuous casting methods --

Molten steel from furnace


Semifinished steel product

21

solidified steel emanates. This strand of steel is directed by a set of rollers that support and shape the still solidifying steel as it passes through a set of water sprays for further cooling. The steel strand is then cut into desired lengths by gas torches or mechanical shears, producing semifinished steel shapes such as billets, blooms or slabs. The steel produced by these casting machines solidifies as a continuous strand of steel and hence this method is known as continuous casting.

Advantages of continuous casting Large energy savings are derived from continuous casting semifinished steel directly, as ingots require reheating prior to primary rolling. The primary rolling of ingots into semifinished steel is also bypassed with continuous casting. An estimated 15 per cent less energy is required to produce semifinished steel using continuous casting rather than the older ingot casting method (United Nations 1983). An additional advantage of continuous casting is that it increases the yield of usable metal for a given amount of inputs. Significant scrap wastage occurs with the cropping or trimming of ingots, as well as with the primary milling of the ingot steel. Continuous casting reduces the generation of internal scrap by about 50 per cent, from a level often accounting for 25 per cent of molten steel output (International Iron and Steel Institute 1983a). The yield of usable semifinished steel produced from a given amount of molten steel has therefore been estimated to increase by as much as 10 to 15 per cent (Findlay 1990). Not only is continuous casting a cheaper way of producing steel than ingot casting, it is also much faster. For example, in an electric arc furnace, a billet can be produced from scrap in 1.5 hours. Ingot cooling itself can take in excess of 24 hours. Higher product quality (consistent composition, surface finish and dimension) is also gained through the use of continuous casting. Capital costs of a continuous caster are also much lower than that of an ingot caster; the primary reason being that ingot casting plants require the additional expense of reheating and primary rolling facilities in the production of semifinished steel. However, even though a continuous caster is less expensive to install than an ingot caster, retrofitting an existing plant with the newer casting technology represents a considerable added investment. For example, BHP incorporated a 2 million tonnes a year bloom caster into its Newcastle steelworks for about $A110 million in 1987 (BHP

22


Steel n.d.), and spent $A260 million on a continuous caster for the Whyalla steelworks in 1992 (BHP Steel, news release, 17 June 1992). Because of the significant cost of a continuous caster, capital constraints are likely to play a major role in the decision of whether or not to refit existing plant with the newer technology. The age of existing steel plants may also affect the adoption decision. Given their considerable cost, it may be inappropriate to add continuous casters to plants nearing the end of their productive life as the reductions in operating costs may not outweigh the cost of the caster if the entire steel plant has a limited life expectancy. It would be expected that the adoption of continuous casting technology would be slower in regions with older plants, for example in the United States and Eastern Europe, and faster in regions with relatively modern plants such as Asia and Western Europe.

Diffusion of the technology Worldwide commercial adoption of billet casting began in the early 1970s. In 1970,4 per cent of world crude steel production was continuously cast. By 1980 this share had risen to 30 per cent, and was 60 per cent in 1990. The adoption of larger scale and more expensive slab casters followed closely that of billet casting, but the risk of committing large amounts of capital to, what was at the time, a new unproven technology may have delayed adoption. The growth in the adoption of continuous casting technology varied widely between steelmaking regions of the world, as can be seen from table 6. Steelmakers in Japan and Western Europe adopted the technology relatively quickly, reaching 60 per cent and 40 per cent respectively by 1980. However, in the United States the rate of adoption was much slower, with only 20 per cent of crude steel production continuously cast in 1980. The relatively slow rate of adoption of continuous casting by US integrated steel producers was probably, at least in part, due to the poor financial state of the US steel industry. Another potentially important factor was probably the age of existing plant and equipment. The limited lifespan of many US steelmills may have made the purchase of continuous casting equipment unprofitable. In contrast to the integrated producers, the US electric arc furnace sector adopted continuous casting technology rapidly as the competitive advantages of minimills became evident. US steelmakers are now rapidly closing the gap in continuously cast steel production between Adoption of new steelmaking technologies

23

6 Share of crude steel produced by continuous casting Western Europe

Japan

United States

Total Eastern Europe

China

World

%

9%

%

%

O/o

5.6 31.1 59.5 91.1 93.9

3.8 9.1 20.3 44.4 67.4

3.4 5.9 10.4 15.2 18.3

-

3.6 7.9 10.8 22.2

4.0 13.9 30.1 47.4 60.0

Source: International Iron and Steel Institute (1991).

themselves and steelmakers in Western Europe and Japan. From 40 per cent in 1980, the proportion of continuously cast steel in the United States grew to 76 per cent in 1991. Still, continuous casting has not yet been universally adopted. The adoption of continuous casting in the important steelmaking regions of Eastern Europe and China, for example, is markedly below that of the industrialised steelmaking regions. As of 1990, Eastern Europe used the newer casting techniques on only 18 per cent of steel production, with China only slightly ahead, at 22 per cent. The relatively slow rate of adoption in these regions may be attributed to the age of existing plant, and capital constraints. Although continuous casting has been in use commercially for over twenty years, factors such as the age of plants, capital shortages, and a lack of technical expertise, may have all contributed to nearly 40 per cent of world steel production still being cast by the ingot method in 1990. Future changes in the relative efficiency of steel production in regions such as the United States, China and Eastern Europe as they increasingly use continuous casting may have implications for world steel trade as these regions become more competitive.

Forecasting future continuous casting rates Forecasts of future continuous casting rates were made using basically the same growth model employed for projecting future electric arc furnace use. This model is described in box 1 of chapter 2, and some underlying statistical analysis is reported in appendix C. A minor modification to this model is made in that the long run equilibrium level of continuous casting use, y*, is 24


set at 100 per cent. This seems reasonable since continuous casting technology appears to be unambiguously more efficient than competing technologies. Projections of continuous casting rates are presented in table 7. As illustrated in table 7, worldwide use of continuous casting is projected to increase from 60 per cent in 1990, to 89.5 per cent in 2000 and to 97.7 per cent in 2010. While full adoption is almost already complete in Japan, and to a lesser degree in Western Europe, considerable increases in the use of continuous casting are anticipated for the United States and China. The continuous casting rate in the United States is projected to rise from 67.4 per cent in 1990, to 95.2 per cent in 2000 and virtually all steel produced in the United States in 2010 is projected to be continuously cast. Projected trend values for China imply the percentage of steel continuously cast will rise quickly from 22.2 per cent in 1990, to 61.4 per cent in 2000 and to 90.9 per cent by 2010. Given the cost advantages of continuous casting, the proportion of steel continuously cast by a producer is often used as an indicator of market competitiveness (see, for example, OECD 1989). Hence, with regional differences in the use of the technology expected to diminish over the next ten years, relative changes in the pattern of steel trade may develop. Trade in long products in the US market has already shown a marked change in direction. Between 1984 and 1990, combined net imports of bars and

7 Projected percentage of crude steel produced by continuous casting Western Europe

Japan


United States

China

World

25

structural steels by the United States decreased by 2.5 million tonnes, largely being replaced by domestic production (Collins 1992). Collins also claimed that the trade balance in structurals will follow this pattern. As such, continued improvement in the relative efficiency of steel production by the adoption of technologies such as continuous casting can be expected to affect the direction of steel trade in the future.

New developments in casting techniques Thin slab casting Thin slab casting refers to the process where slabs are cast to a thickness of about 50 mm rather than the customary 200-300 mm slab. Casting steel to this thickness eliminates several rolling operations and significantly reduces both operating and capital costs. When these casters are constructed in line with rolling mills, energy savings of up to 50 per cent can be attained by eliminating the reheating of the cast steel in the production of hot rolled steel (Metal Bulletin Monthly, September 1991, pp. 88). The minimum efficient scale of traditional hot strip rolling mills is over 3 million tonnes a year and thcy can cost over US$600 million to build. Thin slab casting reduces the minimum efficient scale of plants to less than 1 million tonnes, hence enabling electric arc furnace producers to consider adoption. This innovation is a potentially important development, since it allows the electric arc furnace sector to produce a wider range of semifinished steel products. Nucor Corporation in the United States commissioned the first thin slab casting steel plant in 1989. Producer costs are reported to be 15-20 per cent below those of conventional slab casting plants, and capital costs per tonne of annual capacity are 20-35 per cent below conventional flat product works (Metal Bulletin Monthly, September 1991, pp. 88). Still, thin slab casting does have some drawbacks, compared with conventional continuous casters. Thin slab casters have slower production rates, and reduce the flexibility of the steel plant. Conventional slab casters operate at 1-5 tonnes a minute per strand, whereas in 1990 the limit for similar width thin slab casters was estimated to be about 2 tonnes a minute per strand. Because of the relatively large cross-sectional area of conventional casters, production of a range of product dimensions is possible from the one caster. Combination casters producing blooms or 26


slabs, width adjustment during casting, and link casting are all examples of the more flexible operation of a conventional caster (Reynolds 1990). These issues would not concern a small scale electric arc furnace producer searching for a niche market in the flat product market. Increased demand for high quality scrap, together with the increased levels of contaminants such as zinc and nickel in steel scrap, continues to pose problems for electric arc furnace producers with regard to feed stock. However, the main drawback for thin slab production of steel by electric arc furnace producers at present is the quality of steel being produced. Deficiencies in the surface quality of the steel remains a barrier to electric arc furnace penetration of the flat product market. These quality restraints have restricted thin slab cast steel from meeting the standards required for high quality cold rolled sheet used for automobile exterior parts and electrical appliances. Despite the problems outlined above, thin slab casters have the potential at present to produce steel of sufficient quaIity to satisfy more than half of the flat product market. Steel produced by thin slab casting is sold for tube and pipe manufacturing, service centres, general metal forming and other commodity grade uses such as construction.

I

I

The installation of a thin slab caster is an option for both electric arc furnace and integrated producers with older casting technology operating, as well as for those considering the construction of a new steel plant. However, it does not presently appear economic in the majority of existing steel plants to replace existing technology with a thin slab caster. There are considerable costs associated with replacing existing casters with a thin slab caster, including the adaptation of downstream rolling operations to the new casting process. Engineering constraints (for instance, the scale and location of existing plant and equipment) may also make it costly to adapt a thin slab caster to an existing plant. There is also some risk involved in replacing a known technology with a relatively unproven technology. To date no existing integrated steel plant operates a plant with a thin slab caster, although several proposals have been mooted. For example, the specialty producer, Acme Steel, in the United States has ordered a thin slab caster to replace existing ingot casting facilities (Metal Bulletin, 24 May 1993). Neither has a greenfields integrated steel plant been constructed using thin slab casting technology, although here too several proposals exist, Adoption oj.new steelmaking technologies

27

including the Compact Steel project in Western Australia, and the Kalinga project in India. The combination of electric arc furnace and thin slab caster appears to be a more profitable proposal, as the thin slab caster Jlows the lower cost electric arc furnace producer to enter the flat product market. In 1992, seven commercial thin slab casters were being installed or in operation worldwide at electric arc furnace plants - four in the United States, and one each in Italy, Turkey and Mexico, with a combined annual capacity of about 7 million tonnes. Further orders for thin slab casters of a similar scale have been placed by electric arc furnace producers such as Hanbo Steel in South Korea, and the Gallatin project in the United States. Japan's largest electric arc furnace steel producer, Tokyo Steel, has also entered the flat product market, but is using more conventional casting technology at its recently completed 1.2 million tonne capacity steel plant, as an alternative to thin slab casting. The hot rolled coil produced is sold for cut sheet, pipe making, and general metal forming. Steel has been forwarded to customers for testing as general cold rolled use also. However, here too, the quality required for automotive and electrical appliance applications has not yet been attained. In 1990, total world electric arc furnace production of flat products was less than 1 million tonnes, compared, for example, with total deliveries of flat products of 47 million tonnes in the United States and 48 million tonnes in Japan. If advances in casting techniques enable large scale production of flat products by the electric arc furnace route, this may not only crowd out integrated steel production, but have significant implications for iron ore and coking coal demand.

Direct strip casting In the face of increased competition from electric arc furnace producers, integrated steel producers are researching new steel making and casting technologies to minimise the costs of steel production. Integrated steelmakers are making plans to adopt casting technology beyond thin slab casting at a future stage when current installations have become obsolete. In this way, these steelmakers may be hoping to 'leapfrog' thin slab casting technology (Metal Bulletin, 10 August 1992, p. 17).

28


Direct strip casting of steel is planned to involve the direct casting of molten steel into strip, hence eliminating the labour and energy required to operate the hot strip mill which currently rolls cast slabs into strip. Although capital costs are expected to be similar to thin slab casting plants, potentially lower operating costs may make this a more competitive method. Producers currently researching direct casting include British Steel, Allegheny Ludlum, US Steel, Posco, and several Japanese integrated and stainless steel producers (Goldman Sachs 1992). It is inevitable that innovation in casting technology will enable some electric arc furnace entry into the flat product market. The extent to which these electric arc furnace producers can capture integrated market share, however, is still uncertain, and it remains to be seen how blast furnace technology is able to adapt to the changing market.


Pulverised coal injection The injection of pulverised coal into the iron making blast fumace was developed as early as 1963; however, it has only recently been adopted on a large scale co~nrnercialbasis. In the period 1987-91, for example, worldwide consumption of coals for pulverised coal injection (PCI) almost doubled, to reach 14 million tonnes. At that level, however, PC1 represents only a small fraction of the roughly 400 million tonnes a year of coking coal currently consumed in steelmaking worldwide. The use of PC1 allows for the partial substitution away from relatively expensive energy inputs to steelmaking, such as fuel oils and hard coking coals, to less costly soft coking coals. As a result, steelmaking countries such as Japan, Germany and France, which face relatively high energy costs, have proceeded more quickly in adopting PC1 technology than. for example, the United States, which continues to use its abundant supply of fuel oils, natural gas and coking coal within the more traditional steelmaking process. As already noted, PC1 represents only a small proportion of world blast furnace consumption of coal. However, the continued adoption of PC1 has the potential to significantly change the nature of world coal trade. PC1 allows for the substitution of relatively abundant semisoft coals for hard coking coals in the production of iron. Furthermore, the use of PC1 decreases demand for coal in aggregate, since PC1 represents a more efficient use of coal (by volume) compared with traditional methods of producing iron in blast furnaces.

PC1 technology The injection of pulverised coal into the blast fumace is a process in which coke is partially replaced with pulverised coal in the production of iron. Pulverised coal is generally semisoft or soft coking coal which has been ground into a fine powder. The powder is then injected into the base of the blast furnace, serving as an energy source for the production of the hot metal. In practice, the replacement ratio of injected coal to coking coal can be as high as 0.8 to 1.0 depending on the type of PC1 equipment installed and the way in which the blast furnace is managed. Generally, however, it is reasonable to expect that 1 kg of coke, and so 1.4 kg of coking coal, can be 30


replaced by 1 kg of PC1 coal when it is injected with heated air into the base of the blast furnace. While PC1 coal can perform two of the three primary functions of coke namely as an energy source for combustion, and a hydrocarbon source for chemical reactions to reduce iron ore oxides - PC1 cannot provide a permeable bed in the furnace through which molten iron can descend and gases can ascend. In addition, at very high levels of injection the efficient combustion of the injected coal becomes increasingly difficult, resulting in a decrease in the replacement ratio. Largely for these reasons, obtaining injection levels exceeding 150 kglthm (kilograms per tonne of hot metal) on average across the steel industry would likely require further modifications to the present technology. In particular, higher levels of oxygen enrichment in the heated blast furnace air would be necessary, along with improved burden distribution within the furnace, as well as the utilisation of superior coking coals and iron ores (Tateoka 1992, p. 39). Injection levels well above 150 kglthm have been achieved, but only under superior operating conditions (such as small pilot plants).

32


'

Coals suitable for injection The performance of PC1 technology at present relies heavily on the quality and consistency of the pulverised coal used in the blast furnace. While in the future it may be feasible to use a wide range of pulverised coals in the blast furnace (International Coal Report 1991), current technology requires that coal used satisfies specific quality criteria. Given that uniformity of flame temperature is important, the flow of coal through the injection lance into the tuyere cannot be disrupted. High moisture coals are more prone to clogging in the feeding and injection system. As a result, coals of less than 12 per cent moisture are preferred for PCI. Similarly, variations in the size of the grains of pulverised coal can affect the injection rate. Large lumps of coal are more likely to clog in the injection system, thus a balance must be adhered to which allows for easy pulverisation of the coal, while minimising the variation in grain size. The inherent combustion qualities of the coal are also important. High volatile coals with a minimum volatile matter content of 28 per cent are preferred for PCI. The use of high volatile coals, however, requires the injection of extra oxygen in the blast air in order to maintain the furnace combustion temperature (Burgess et al. 1987). Low ash coals are also preferred for PCI. High ash coals can lower the performance of the furnace through the buildup of non-combustible material. Coals with an ash content of less than 12 per cent are preferred. There are certain other coal characteristics which are to be avoided. Invariably these are characteristics which are also undesirable in coking coal because of their effect on the steel being produced. For example, sulphur and phosphorus can reduce the quality of the iron. Chlorine increases the prevalence of corrosion and alkalies can have a detrimental effect on furnace refractories. During 1990, Australia produced around 11.5 million tonnes of semisoft coking and PC1 coals. Contracted exports to Japan in Japanese fiscal year 1990 were 9.8 million tonnes.

Economic factors influencing PC1 use Generally a premium of around US$lO/t to US$l3/t exists for hard coking coal over semisoft coking coal suitable for PC1 use (table 8). As a result, a Adoption of new steelmaking teclznologies

33

8 Selected Australian-Japanese contract prices for coking coal and coke 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 US$/t US$/t US$/t US$/t US$/t US$/t US$/t US$/t US$/t US$/t

Hardcoking a

72.66 66.27 65.48 61.30 60.19 65.83 60.97 63.54 64.92 64.51

Other coking a

68.72 55.70 52.48 51.71 48.73 43.22 47.07 51.73 50.70 52.67

Coke b

94.92 89.24 83.46 86.81 84.53 72.21 80.90109.60 108.6 96.96

a cif Japan. b Japanese average coke export price to selected countries. Sources: International Energy Agency (1991); Tex Report (1992a); ABARE (1993).

considerable incentive exists for blast furnace operators to use technologies which enable greater input between coals. Furthermore, PC1 allows for a reduction in total coal consumption per unit of iron produced, since the coal does not need to be reduced to coke prior to injection. Given the high cost of producing coke (reflected in the market price for coke shown in table 8) relative to the purchase price of soft, and semisoft coking coal, reduced use of coke in the blast furnace can represent a substantial cost saving in itself. An additional advantage associated with PC1 technology is that it lessens the need to replace aging coke ovens. Coke ovens are large expensive structures, which have a life span of between 25 and 40 years. A typical cost for a coke oven battery is around US$200 million. The Western world's coke ovens are reaching ages where major reinvestment in new ovens will be required beyond the turn of the century. The installation of PC1 is one way a steelmaking firm can avoid major coke oven reinvestment in the future. By increasing PC1 coal injection levels and reducing coke rates, the production pressure on coke ovens can be eased, thereby extending the length of their working life. The installation of PC1 can have other benefits for the steelmaker. In particular, as observed by Chardon and Barry (1991), PC1 can improve the operating conditions and flexibility of the blast furnace. For example, the technology can encourage better gas distribution within the furnace and also improve the iron ore reduction process. It can make the steel production process more flexible since PC1 injection levels in the blast furnace can be modified relatively quickly and easily in comparison with altering coke oven output.

34


Installation costs of PCI Since PC1 and coking coal are partial substitutes it is reasonable to contrast the capital expenditure associated with these technologies as competing investments. The estimated cost of installing PC1 equipment is approximately US$30 million. However, PC1 equipment costs can vary widely between blast furnaces. For example, Kobe Steel recently announced PC1 equipment installation plans at its Kakogawano. 1 and no. 3 furnaces which, according to Coal Week International (1992, p. 8) was expected to cost 9 billion yen (US$7 1 million). Numerous reasons exist why capital costs may vary. For example, if a number of blast furnaces are situated in close proximity to one another the same pulveriser and feeder system may be used. The number of injection points may also vary between furnaces, thereby affecting costs. Differing makes and brands of PC1 equipment are also available. Despite these variations the cost still compares favourably with making an alternative investment in coke ovens. Chardon and Barry (1991) found that the replacement of coke capacity requires an investment of between US$220 and US$240 per annual ton, which is approximately four times that for a PC1 unit.

A case study - the Japanese steel industry Japan is a world leader in PC1 technology. With the largest percentage of PC1 units installed on its blast furnaces compared with any other country, it is the largest single consumer of PC1 coals for iron production. Japan has increased its consumption of PC1 coals steadily since the technology was first introduced in 1981 (table 9), and in 1991 accounted for over 40 per cent of world demand for PC1 coal. Given that Japanese iron production has remained relatively stable over the period since PC1 technology was introduced, the increase in PC1 coal consumption can be attributed to an increasing number of blast furnace operators installing PC1 equipment in their plants, and rising injection rates per tonne of iron produced. The first major PC1 unit was installed in a Japanese blast furnace in 1981 on the no. 1 blast furnace at Nippon Steel's Oita Works. By 1991,26 of the 33 operational blast furnaces were fitted for PCI. On average, these plants injected pulverised coal at the rate of 72 kg/thm of iron (Tateoka 1992); Adoption of new steelmaking technologies

35

9 Japanese steelmills' coal mix Japanese fiscal years

PC1 coal

Total coking coal

PC1 share

Source: Tex Report (1 992).

however, PC1 injection rates vary widely between individual companies (table 10). An analysis of individual companies' fuel consumption rates over the past decade indicates that some companies have been more successful than others at achieving a one for one replacement of coke with PCI. For example, between 1985 and 1988 NKK increased its PC1 injection rate from zero to 16 kglthm, while its coke rate rose on average from 506 kglthm to 5 12 kglthm. During the same period Kobe Steel made rapid advances with its PC1 program, lifting average injection rates from 35 kglthm to 66 kglthm and dropping its coke rate from 465 kglthm to 448 kglthm. As a result, NKK

10 Company injection rates in Japanese fiscal year 1991 Injection rate

Coke rate

Tar and fuel oil

Pig iron production

Nippon Steel NKK Kawasaki Sumitomo Kobe Source: Tex Report (1992)

36


actually increased its coke rate while increasing its injection rate, and Kobe Steel was able to replace 0.53 tonnes of coke with 1 tonne of PCI. Some short term variations in coking rates can be expected from time to time in the steel industry due to changes in the operating levels of blast furnaces. For example, in the last quarter of 1992 a rise in the coke rate in Japan was experienced without a corresponding fall in the PC1 injection rate. This largely reflected a fall in blast furnace productivity resulting from the economic downturn in the steel industry. At lower levels of output the operating efficiency of the blast furnace is reduced and increased amounts of coke are required to compensate for this effect.

Developments in the Japanese coke industry The coking of coal is a costly and time consuming component of the steelmaking process. Japan currently has sufficient coke ovens to process around 69 million tonnes of coking coal into approximately 51 million tonnes of coke. There are currently 108 coke oven batteries sites in Japan. On average each battery contain 53 ovens. Much of this capacity was brought on line concurrent with the expansion of the Japanese steel industry during the 1960s and the early 1970s. For example between 1960 and 1970,52 of the current 108 coke oven batteries commenced operation. Between 1970 and 1974 a further 37 batteries were built. Since then the numbers of coke ovens commissioned each year has declined significantly. There is a growing awareness of the detrimental effects that coke ovens can have on the environment. The ovens can emit large quantities of hazardous chemicals and gases into the atmosphere (Federal Register 1992). Within Japan there is a growing array of emission and planning regulations for coke oven batteries, thereby making it increasingly costly and technically difficult to maintain and replace existing capacity. Steelmills own the majority of the coke ovens in Japan, which are predominantly located on the same sites as their blast furnaces. Byproducts, including coke oven gas, heavy oil and tar are then utilised within the steelmill, or sold. Electricity utilities are sometimes located near the batteries in order to purchase these byproducts for fuel. The Japanese gas industry also operates coke ovens with gas produced being sold for domestic consumption and the coke sold to steelmills and foundry operators. In Adoption of new steelmaking technologies

37

addition, chemical companies operate coke ovens to produce chemicals such as benzene and naphtha. Assuming coke oven facilities have a limited life span it is possible to predict future coking capacity if no reinvestment in infrastructure occurs. Given that the Japanese steel sector experienced rapid growth throughout the 1960s and 1970s it is likely that it will face a rapid deterioration of its plant and equipment beyond the turn of the century. Dwyer and Muir (1992) projected future Japanese coking capacity assuming a range of coke oven life spans. For example, if the coke ovens only have an operational life of 30 years it is possible that Japan will have only 50 per cent of its current capacity at the turn of the century. If, on the other hand, a life span of 35 years is assumed, 50 per cent coke capacity will be reached by 2005 and virtually no capacity will exist beyond 2015. Given a life span of 50 years, 50 per cent of current capacity will be reached around 2010, but virtually no capacity will exist by 2020. While these estimates provide a guide to potential coke oven capacity loss, coke operators may be able to manage their oven batteries in such a way as to prolong the operational life of equipment. For example, continued maintenance and the use of new coking techniques may reduce wear and tear on infrastructure. In general, however, the Japanese steel industry is faced with aging coke ovens which will eventually require replacement if current levels of coke consumption are to be sustained in the future. In order to replace 5 1 million tonnes of coking capacity, enormous investment would be required. At a capital cost of US$240/t coke, replacement of 51 million tonnes of capacity represents an expenditure on the order of US$12.2 billion. Because PC1 is a cheaper partial substitute for coke and because the capital cost of PC1 installation is less than that of coke oven infrastructure, PC1 technology is likely to replace some of the declining coke capacity in the future. Since 1984 there have been no new coke ovens commissioned in Japan. However, during the same period, 22 blast furnaces were installed with injection equipment.

Summary In order to increase the competitiveness of the blast furnace, steelmakers, particularly in Japan and Western Europe, have developed techniques which allow for the injection of pulverised coal into the blast furnace. In doing so, 38


they have been able to use relatively less costly coking coals, and lessen the need to invest in costly improvements to aging coke making capacity. Even though significant increases in PC1 are constrained by technological factors, the adoption of this technology will certainly have an important impact on the steelmaking sector. In Japan, which leads the world in PC1


39

adoption, PC1coals currently represent only about 10per cent of total coking coal consumption by steelmakers. The results of a modelling exercise (reported in box 3) indicate that this number may increase to 16 per cent by the end of the decade. If the United States, which is only now starting to install PC1 technology on a commercial scale, follows the same general trend of adoption as seen in Japan over the past decade, the impact on the sector will be even more noticeable.

40


Innovations in ironmaking Blast furnace ironmaking is a highly advanced process using state of the art technology to produce high quality steel. However, as explained in the preceding chapters, blast furnace ironmaking does have several inherent drawbacks. Some of these drawbacks have allowed the electric arc furnace to take market share from integrated steel plants in the past two decades and there are other processes which, in the long run, threaten to further reduce the market share of integrated plants. Two such processes are the direct reduction process, which is already an established technology, and the emerging smelting reduction processes. In order to assess the relative advantages and disadvantages of these technologies it is necessary to first look at the limitations of the blast furnace process.

Limitations of the blast furnace process One of the major limitations of an integrated mill is that it requires operation on a large scale in order to achieve production economies. For example, an integrated mill needs to produce 2-3 million tonnes of hot metal a year in order to be economic. An integrated steelmill cannot be set up to service a local market alone - access to other domestic markets or to the international market is required. In comparison, an electric arc furnace is generally economic at levels of around 0.5 million tonnes of hot metal a year (Cusack 1992). As previously discussed, a modern greenfields integrated mill would cost around US$4.5 billion to establish whereas a minimill could be built for several hundred million US dollars or less. The large capital investment required for an integrated mill can only be offset by fully using capacity; an integrated steelmill cannot be stopped and started with the same flexibility as an electric arc furnace based steelmill. This constraint implies a relative lack of flexibility in production, which can severely limit the steelmakers' ability to respond to fluctuations in demand while maintaining operating efficiency. Furthermore, the blast furnace route relies on the extensive preparation of raw materials - in particular, coal to coke conversion and the sintering and/or pelletising of iron ore. As previously observed, coke ovens are capital Adoption of new steelmaking technologies

41

intensive structures. Western world coke making capacity is reaching the age where large scale investment in new oven batteries will be required after the turn of the century unless alternatives to coke in the blast furnace are found. Coking also requires the use of high quality coals to produce cokes with suitable characteristics. The relative scarcity of these coals combined with high demand has resulted in price premiums for these coals over thermal coals. Generally this premium is approximately US$lO/t. In addition, the conversion of coal to coke results in a significantly lower tonnage of coke to the original coal feed. Thus, if coking was able to be avoided, a smaller total quantity of coal would be required per tonne of steel produced. Already some success in this area has been achieved with PCI. However, the injection of pulverised coal can be viewed as providing only a partial substitute for coke given that PC1 cannot perform all the functions of coke. It was noted in the previous section on PC1 that for a total displacement of coke to occur the operating environment of the blast furnace would need to alter. The blast furnace also requires costly preparation of iron ore. In order for it to be used in the blast furnace it is usually necessary for it to be sintered or pelletised. This results in a consistent, high quality feed to the blast furnace. Sintering is the process whereby fine iron ore is heated with fluxing agents thereby agglomerating the ore into large particles. Sintered ore improves the efficiency and operating conditions of the blast furnace. Fine ore, for example, would restrict the permeability of the load to gases in the furnace. The process, however, requires special infrastructure, and operating costs (including the cost of raw materials) of the process can comprise approximately 40 per cent of total blast furnace operating costs. Alternatively, iron ore can be pelletised to upgrade the chemical composition of the ore, thereby producing a suitable blast furnace feed from high grade fine iron ores. The pellets are first formed by combining fine ore, bentonite and water on a rotating surface. The pellets are then dried and hardened by heating. Reflecting the cost of processing and the high quality iron feed to the blast furnace, pellets receive a price premium over both lump and fine iron ore.

Direct reduction processes Direct reduction is any process which extracts iron from iron ore without going through a molten stage. The product of direct reduction, directly reduced iron (DRI), has an iron content of around 90 per cent, and can be 42


used in electric arc furnaces and basic oxygen furnaces as a substitute for scrap steel. DRI is not, however, a substitute for the iron produced in a blast furnace. Because DRI never reaches a molten state it contains a large residual component. This residual must be removed before further refining to steel can take place. Direct reduction processes are not new. The first commercial plant began operation in 1957 (Meissner 1992); however, it is only recently that DRI production has become more widely used. In 1970 world DRI production was 1.3 million tonnes. By 1980 production had reached 7.4 million tonnes and in 1990 was 18.9 million tonnes. There are two broad types of direct reduction processes - gas based and coal based. The gas based processes are dominant, accounting for approximately 92 per cent of world DRI production in 1991. Direct reduction plants have tended to locate in areas with abundant supplies of inexpensive natural gas (Meissner 1992), and where the price of scrap is relatively high. The majority of DRI consumption takes place within electric arc furnaces which have direct reduction plants on site (International Iron and Steel Institute 1983b). DRI is used in electric arc furnace plants as a direct substitute for scrap. Because of its relative purity it is also used as a diluent for scrap with high impurity levels, allowing higher grades of steel to be produced (International Iron and Steel Institute 1983b). Direct reduced iron can also be used in the basic oxygen furnace; however, this is only a relatively minor use of DRI. In order for DRI to replace significant amounts of scrap in electric arc furnaces it would appear that the price of natural gas relative to the price of scrap would have to fall significantly in major steel producing regions. It should also be noted that any improvements to direct reduction technology are likely to improve the competitiveness of the electric arc furnace. Iron carbide may prove to be just such an improvement. Iron carbide, like DRI, involves the conversion of iron ore to a material which can be used as a substitute for scrap in electric arc furnaces. While the first commercial iron carbide plants are only currently being constructed, preliminary studies suggest that they may produce iron at lower operating and capital costs than DRI plants (Limerick and Mehta 1994). This could well contribute to an increase in electric arc furnace market share at the expense of integrated plants.


43

Direct reduction technology is also being used within the production processes of emerging steelmaking techniques. In particular, smelting reduction steelmaking methods involve direct reduction processes.

Direct smelting technology The limitations and problems associated with blast furnace ironmaking discussed earlier have led to considerable research into alternative ironmaking processes. Direct smelting technologies appear to be the most promising alternative ironmaking methods. The direct smelting of iron ore does not involve the intermediate steps of iron ore agglomeration and the production of coke. Iron ore fines and coal can be used directly in the ironmaking process. A simplified description of the blast furnace route and the direct smelting route is illustrated in figure D. The direct smelting of iron ore involves a reduction in the oxygen content of the ore in a prereduction furnace. The techniques used in the prereduction furnace are similar to the direct reduction processes used to produce DRI.

D Blast furnace and direct smelting ironmaking routes -

- - -- - - - -

-

-

Blast furnace route

I

EA B A R d

- - --

Direct smelting route

1 I

T lron ore

sinter plant

(lump,

1furnace

Converter

Prereduction furnace

-I

Blast F l = I [ F

Converter

0 Liquid steel

44


Gas recovered from the main smelting furnace is used in the prereduction process. The reduced iron ore (similar to DRI) is then fed into the smelting reduction furnace where coal and fluxes are added and oxygen is blown in. Final reduction takes place in a molten state and a product resembling blast furnace pig iron is produced. The product must then be further refined in an oxygen converter to produce steel. The hot metal produced in the direct smelting process could be used without further processing as feedstock for electric arc or basic oxygen furnaces. However, if direct smelting operations were separate from the steelmaking facility there would be considerable energy loss, since the metal would need to be cast and remelted before being refined to steel. Consequently, it would seem that most applications of direct smelting would be within a steelmaking plant so that the hot metal produced in the direct smelting process would then be immediately refined to semifinished or finished steel.

Smelting reduction research and development At present there are several companies involved in the research and development of competing direct smelting technologies. The processes being developed include: the XR process (Kawasaki Steel), the COREX process (Voest Alpine), the SC process (Sumitomo Metal), the BSHoogovens process (British Steel - Hoogovens) and the HIsmelt process (CRA - Midrex). In addition to research by individual companies there are joint government and industry efforts to develop direct smelting technologies in Japan and the United States. In Japan, the Ministry of International Trade and Industry and the major Japanese steelmills are working together on the DIOS (direct iron ore smelting reduction) process. In the United States, the American Iron and Steel Institute (AISI) has obtained funds from the US Department of Energy to investigate direct steelmaking processes. Iscor's COREX plant in South Africa is the only direct smelting plant in commercial operation at present. The plant has an annual capacity of 300 000 tonnes and the quality of the hot metal produced is similar to that produced in a blast furnace (Metal Bulletin Monthly 1992). The production costs of the COREX process have been around 30 per cent lower than Iscor 's blast furnace route and emissions are significantly lower than those from the blast furnace route (Metal Bulletin Monthly 1992). -

--


Advantages of smelting reduction The major advantages of direct smelting are consistent across the different direct smelting methods. These advantages are seen to be in the areas of raw material savings, scale and capital cost advantages, production flexibility and environmental issues.

Raw materials Direct smelting techniques do not require raw materials to be processed to the degree they have to be for use in blast furnaces. Iron ore fines can be fed directly into the prereduction furnace and coal is fed directly into the smelting reduction furnace. The need for the sintering and pelletising of iron ore and the coking of coal is eliminated. Not only do direct smelting technologies allow for the direct use of raw materials but they allow for a wider range of raw materials to be used. One of the major incentives for research into direct smelting technologies has been the possibility of efficient smelting of lower grade iron ores (in terms of physical and chemical properties) so that previously uneconomic ores may be used (Cusack 1992). Direct smelting technologies will also, in general, use less coal per tonne of hot metal produced. For instance, the HIsmelt process is projected to have coal consumption of 630 kg/t of hot metal produced, whereas a typical blast furnace uses around 750 kg/t (Cusack 1992). It is expected that a wide variety of coals could be used, including low grade thermal coal (Tanaka 1988). The ability to use cheaper and possibly less raw material inputs has obvious implications for the costs of raw material supplies.

Scale and capital cost Annual capacity of 0.3-0.5 million tonnes a year has been proposed as an expected minimum economic scale (Cusack 1992) for direct smelting plants. This compares with an efficient scale of around 3 million tonnes a year for a modern blast furnace. Smaller scale has advantages in that plants can be located closer to end user industries and plants can be geared toward specific markets. Because of the smaller scale of direct smelting plants and the ability to operate without iron ore sinter and pellet plants and coke ovens, the capital costs of these processes can be expected to be significantly less than those of blast furnace processes.

46


Flexibility Smelting reduction furnaces allow more flexibility of operation than blast furnaces as they can be stopped and started much more easily than a blast furnace (Tanaka 1988). This is an important advantage of direct reduction as it would allow steelmakers to adjust more easily to changes in steel demand. At present, when demand for steel falls many integrated steel plants are forced to continue operating at high capacity utilisation rates because of the significant economies of scale present in integrated plant operation. An additional advantage is that because reduction is carried out in a molten state at a high temperature, it is much quicker than the solid state reduction which takes place in a blast furnace. Smelting reduction processes are considered to be 10 to 100 times faster than the blast furnace (Tanaka 1988). This allows for greater flexibility in terms of allowing a wider variety of steel to be produced within a given period.

Factors agecting smelting reduction adoption There are several factors which are likely to affect the rate of adoption of smelting reduction technology. Obviously the most important factor will be the efficiency of the technology relative to current steelmaking technologies, and in particular relative to blast furnace based steelmaking. As yet the relative efficiency of emerging smelting reduction techniques is largely unknown; however, pilot plant results seem promising for several of the new processes. The COREX process has proven to be a commercial success in South Africa, and steelmakers in several other countries have concluded contracts for the building of COREX plants (Miyazaki 1992). A drawback of the COREX process is that it requires the sale of byproduct gases for the process to be economically viable. For example, Compact Steel has proposed to construct a COREX based steelmill in Western Australia, and use the exhaust gas from the COREX iron making process to power a privately owned power station. Compact Steel has stated that the project would not be viable without the construction of this power station, and the sale of excess power to the national power grid (Metal Bulletin 1993). Environmental pressures may also affect the rate of adoption of smelting reduction technology. Because smelting reduction techniques are 'cleaner' than traditional blast furnace techniques they will become relatively more competitive under any policies designed to reduce emissions. As has already Adoption of new steelmaking technologies

47

been discussed there are already policies in place designed to limit harmful emissions from steelmaking processes, and from coke ovens in particular. These types of policies can be expected to make electric arc and smelting reduction steelmaking techniques more attractive at the expense of blast furnace based techniques.

Conclusions Current research and development into smelting reduction processes seems encouraging. These processes will have several advantages over the traditional blast furnace based steelmaking methods. They have advantages in that raw materials do not require preprocessing; they also have lower capital costs, exhibit greater production flexibility and have less of an impact on the environment. However, largely due to constraints facing the world steel industry and the early stage of development of the technology, it appears unl~kelythat smelting reduction processes will gain a significant share of world crude steel production over the next decade. Nevertheless, if widely adopted, these technologies will lead to a significant fall in coking coal consumption and an increase in thermal coal consumption in the steel industry.

48


Implications of new steelmaking technologies Over the past thirty years, the steel industry has undergone significant change as some drawbacks of the traditional blast furnace technology have become evident and alternative steelmaking techniques have been developed and adopted. In this report, some of the important trends in the adoption of new steelmaking technologies have been discussed, and the forces likely to promote the development of some of the more promising technologies of the next century examined. Each of the various steelmaking technologies which has been investigated in this report has the potential to significantly change the way in which steel is produced in the future and, consequently, to also change the use of raw inputs to steelmaking. As a major exporter of iron ore and coking coal, Australia's trade performance is likely to be greatly influenced by such forces. The production of steel from electric arc furnaces has increased markedly over the past three decades. The share of total crude steel output produced in electric arc furnaces has risen from around 5 per cent in 1960 to 28 per cent in 1990. The production of steel in electric arc furnaces does not require either iron ore or coking coal as inputs, unlike the more traditional steelmaking processes. Steel producers using the electric arc furnace process have been able to take market share from integrated steel producers through the cost advantages which they have in producing certain basic steel products. Until recently, the electric arc furnace sector has been largely unable to compete in the market for flat steel products, due to economies of scale in downstream rolling processes, and the generally inferior quality of scrap based electric arc furnace product. With the flat market comprising roughly 40 per cent of total steel demand, this technological constraint has served to temper the continued growth in the sector. Innovative techniques in steel casting which are currently being developed have the potential to greatly enlarge the product market in which the electric arc furnace sector can compete. Thin slab casting technology, if proven to be commercially successful, will enable the electric arc furnace sector to Adoption of new steelmaking technologies

49

compete in the market for flat products, and could displace a sizable portion of the steel currently produced via the blast furnace. At this time, it is impossible to project to what extent this combined technology will affect the market share of electric arc furnace production. Furthermore, the commercial development of thin slab casting has only recently begun, and it will likely be some time until fully adopted, even if it is proved to be successful. In the long run, however, successful development of thin slab casting would greatly influence the market for raw steelmaking materials. As the blast furnace is displaced by the electric arc furnace, demand for iron ore and coking coal will fall. However, demand for quality feedstock to the electric arc furnace will expand, with the potential for increased demand for iron ore based products such as direct reduced iron. In order to increase the competitiveness of the blast furnace, steelmakers, particularly in Japan and Western Europe, have developed techniques which allow for the injection of pulverised coal into the blast furnace. The direct injection of coal allows for partial substitution away from relatively expensive fuel oils and hard coking coals toward less costly soft coking coals. As steelmakers increase coal injection levels, demand for lower quality coking coals will increase at the expense of high quality coking coals. Australia has abundant supplies of both, and is well placed to accommodate the changing demand for coking coals. However, the price premiums enjoyed by the higher quality coking coals are likely to be diminished. At present, there are considerable research and development efforts underway into entirely new ways of producing steel. The major thrust of this effort is into smelting reduction ironmaking methods which are aimed at competing with the blast furnace in the medium term, and entirely replacing it in the long term. If successful, these processes will have several advantages over traditional blast furnace based steelmaking methods. They have advantages in that raw materials do not require preprocessing, and they have lower capital costs, exhibit greater production flexibility and have less of an impact on the surrounding environment. If adopted, these technologies will lead to a significant fall in coking coal consumption and an increase in thermal coal consumption in the steel industry. Given the large capital requirements and long asset lives inherent in the steelmaking industry, adoption of the new steelmaking technologies discussed in this report is likely to be gradual. Over the rest of the 1990s,

50


new casting techniques will further enhance the scope for electric arc furnaces to compete with blast furnaces, placing some downward pressure on demand for iron ore and coking coal as scrap based electric arc furnace production of steel captures a greater share of total steel production. However, the easing in iron ore demand from this source will occur against the background of overall growth in demand for steel and will be tempered by the gradual substitution of direct reduced iron for steel scrap as an input to electric arc furnace production. Toward the end of the 1990s, however, it is expected that scrap will remain the primary feedstock for electric arc furnaces, leading to an increase in the price of steel scrap (particularly high quality scrap to be used in conjunction with thin slab casting) and a small overall decrease in the demand for iron ore per unit of steel produced. The continued progressive adoption of pulverised coal injection will further erode demand for high quality coking coal, leading to a decrease in the price premium on that coal over lesser quality coking coal and thermal coal. The wider adoption of thin slab casting in association with electric arc facilities will lead to a significant increase in the electric arc furnace share of steel production. This increase will require greater amounts of iron based feedstock, since, while obsolete scrap is widely abundant, the high quality steel scrap needed to produce the expanded range of steel products which thin slab casting offers to electric arc furnace producers will become increasingly scarce relative to demand. As such, a large increase in electric arc furnace production may be expected to lead to only a moderate decrease in demand for iron ore per unit of steel produced. Furthermore, the introduction of new direct smelting techniques will likely erode a portion of the scrap based electric arc furnace market share over this period. The net effect is likely to be only marginal easing in demand for iron ore per unit of steel produced. On the other hand, the overall effect of a wider adoption of new steelmaking technologies on coking coal will be an ongoing decrease in demand for high quality coals. Over the medium term, pulverised coal injection will temper demand for premium coking coals. Over the long term, the new direct smelting techniques being developed now are aimed at totally eliminating the use of the more costly coking coals and increasing demand for more abundant thermal coal.

Appendix A model of technological diffusion A growth model common to the literature is represented in differential form as :

The adjustment, or rate of growth, as represented by the time derivative dyjdt, is proportional to the level of y,, which, in the case of the electric arc furnace, for example, is the level of steel produced by the electric arc furnace over a given period, and the difference between this level and the long run equilibrium level y*. The coefficient /3 is a measure of the speed of adjustment and determines the slope of the curve implicit in equation 1. An important feature of this model is that the rate of growth is greatest when the diffusion process is at 50 per cent of its long run equilibrium value, which occurs when y, = y*, with the rate of growth symmetric about this inflection point. The basic growth model as represented in equation 1 can be modified and estimated in numerous ways. The most common is the logistic, which is symmetric about an inflection point of 50 per cent of its long run equilibrium. An often used alternative to the logistic is the Gompertz curve, which is asymmetric, with an inflection point at 37 per cent of its long run equilibrium. Bewley and Fiebig (1988) present a modified logistic which allows for a time varying speed of adjustment coefficient, which implicitly determines the point of inflection. The relative merits of these alternative models (or approximations, where necessary) were compared, and the form presented below in equation 3 was determined to be the most appropriate based on the model selection criteria offered by Young and Ord (1989). Following Chow (1967), a discrete approximation of equation 1 is used for estimation by replacing the time derivative of y, with its difference y, - y,_,. The approximation is represented as:

52


-

-

The curve implicit to equation 2 is defined by the two parameters, fl and y*. Equation 2 can be rearranged in order to allow for standard estimation procedures.

where 8 is defined as fly*; 8 and can be estimated directly, and y* can be recovered given the definition of 8. The quadratic represented in equation 3 retains the essential properties of equation 1. The diffusion follows an S shape, with the rate of growth being relatively small in both the early (y, close to 0) and late stage of adoption ( y , close to y*), and converging to a stable equilibrium value as determined by the parameter y*.


53

I

Appendix Application of the diffusion model to electric arc furnace production Some points should be made about the application of the diffusion model to the adoption of electric arc furnace technology. Electric arc furnace production is actually a process, rather than a product; however, it is far easier to measure the product, which is simply steel produced from the electric arc furnace. Furthermore, the level of steel produced by an electric arc furnace in a given period is a flow variable. Within the context of technological adoption, the use of this flow variable can be considered as a proxy for the stock of electric arc furnace capacity. The second point to be made is that annual electric arc furnace production (y,) and the long run level of electric arc furnace production b*)are partly determined by changing aggregate demand for steel. If the relative proportion of electric arc furnace production to total steel production is examined, these aggregate demand disturbances can be filtered out, leaving the focus on the diffusion of technology. This point is similar to that made by Knudson (1991), who has argued that the relative measure is more relevant than the absolute level of production since it reflects the displacement of other technologies. As such, y, is defined as the proportion of electric arc furnace steel production to the total production of steel, and the long run value y* is defined analogously. The electric arc furnace diffusion process was estimated following equation 3 for four major steelmaking regions for which the data are readily available -the United States, Western Europe, Japan and the world as a whole. Data used were regional electric arc furnace production shares of total regional crude steel production over the period 1970-90. The estimated coefficients are reported below, with t-statistics in parentheses.

United States (4)

54

yt - yt-~= 0.141y,, - 0.346y2,1, (2.892) (2.23 1) R2 = 0.47 DW = 2.31


Western Europe (5)

Japan (6)

Yr - yt-, = 0.121ys, - O . ~ ‘ I ~ Y ~ , ~ , (2.731) (2.147) DW = 2.07 R2 = 0.52

yr- yt-, = 0 . 0 8 6 ~ + -~0.223yZh1, (1.561) (1.047) R2= 0.35 DW = 2.06

World (7)

yr - yt-l = 0.097y,, - 0.292yZkI, (2.202) (1.544) R2 = 0.5 1 DW = 2.45

Standard diagnostic tests suggest that the growth model represents the adoption process reasonably well. For the most part, the coefficients are significant at the 95 per cent critical level. The point estimates of the speed of adjustment coefficient, p, are slightly different across the various regions, although not significantly different in a statistical sense. Tests for serial correlation can be a particularly useful diagnostic in trend analysis. Nelson and Kang (1984) have demonstrated that it is not difficult to fit a low order trend to sample data even when no trend exists. More generally, systematic behaviour on the part of the residuals may be evidence of misspecification, particularly with respect to the nature of the restrictive shape of the curve which was imposed on the data. For example, fitting a linear trend to data actually generated from the S-shaped process would result in predicted values which were systematically overestimates, and would underestimate the true relationship. Systematic behaviour in the residuals in terms of serial correlation is not evident, as judged by the DW statistic. The values of the R2statistic are quite reasonable, considering that the dependent variable is in terms of first differences, and the explanatory power of the regressors was shown to be significant, as judged by the F-test. Further tests indicated that trend growth is largely unresponsive to market factors such as relative inputs prices and production levels. For a detailed evaluation of this data set, see Labson and Gooday (1993).

ABARE irrigation model

55

Appendix Regression results - continuous casting The adoption of continuous casting has been estimated following equation 3 for the United States, Western Europe, Japan and China. Worldwide adoption was estimated using the Gompertz curve, which was judged to more accurately fit the data than Chow's logistic form. In all cases, the long run ceiling (y*) is presumed to be 100 per cent. Autocorrelation was found in the case of Japan. The results reported for Japan are based on the Cochrane-Orcutt correction for autocorrelation. The sample period covers 1970to 1990.The estimated coefficients are reported below, with t-statistics in parentheses.

United States (8)

Yt

- Yt-l

= 0.210y,,( y* - y,,),

(6.756) D W = 2.41

Western Europe (9)

Yr -Yt-l = 0-247~,1(y* - ykl),

(17.604) DW = 2.21 Japan (10)

China (11)

56

R2 = 0.94

YZ-Y,-, = 0-298~+1( Y*- Y ~ I ) , (6.757) DW = 1.62 R2= 0.90

Yt -Yt-1

= 0.175~,,(Y*-Y,,)

(3.838) DW = 1.81

World (12)

R2 = 0.71

R2 = 0.51

Yc - YI-L = 0-093~t-,(log( y*) - l0g(ygl)), (14.221) DW = 2.36 R2 = 0.91


Appendix Regression results - pulverised coal injection The adoption of Japanese PC1 use was estimated under an augmented version of equation 3. The summary measure of PC1 use is defined as the ratio of PC1 coal to total steelmill coking coal consumption. The sample period starts in Japanese fiscal year (JFY) 1982, in which PC1 coals represented less than 1 per cent of total Japanese coking coal demand, and finishes in 1991, where PC1 coal use had increased to 9.6 per cent of total blast furnace consumption of coking coals. Following the description of the advantages of PC1 technology, it seems reasonable to expect that the relative price of coke to semisoft (PCI) coking coals may have an important additional effect on the adoption of the technology. To examine the effect of relative coke to coal prices on the adoption process, the adjustment coefficient, /3, was allowed to vary with the relative price of coke to PC1 coal, P,. Following Williams (1972), the adjustment coefficient is represented as:

and on substituting equation 13 into the basic growth model represented in equation 1:

This model still retains the basic time invariant trend, as represented by the first term of the right hand side of equation 14, but also contains an adaptive component which depends on the relative price of coke. The model used for estimation is again based on the approximation to the differential equation in difference form:

To simplify the estimation procedure, y* is held constant. As such, equation 15 is represented as:

- - -

-


where Q,, is the quadratic y,, (y* - y,,). The Schwarz Criterion and likelihood ratio test were used to determine whether the relative price of coke to PC1 coal has a measurable influence on the short run adoption of PC1 (for a detailed description of these tests, see Labson and Gooday 1993). Under the Schwarz Criterion, the relative price of coke to PC1 coal was found to have an influence on the short run adjustment in PC1 use. This result is supported by the likelihood ratio test at the 10 per cent critical level. The regression equation as estimated for the preferred model is:

58


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