United States Steel Corp. (NYSE:X) is in a good position to supply its own internal needs in 2012 of coal-based metallurgical coke and may not need to buy any coke produced by merchant companies this year, said U.S. Steel Chairman and CEO John Surma during a Jan. 31 earnings call.
“With our current North American cokemaking facilities, the long-term Gateway supply agreement with Granite City and increased injection of natural gas to reduce our coke consumption rates, we currently do not anticipate the need to purchase merchant coke in 2012,” said Surma. “Natural gas continues to be a very cost-effective fuel in our blast furnaces as a substitute for a portion of our coke needs, and we’re expecting our 2012 coke consumption rate per ton of hot metal to be approximately 100 pounds lower as compared to our 2010 consumption rate.”
The Gateway reference is to a coke plant built by SunCoke Energy (NYSE:SXC) at U.S. Steel’s Granite City steel plant in Illinois. The Granite City Works has an annual raw steelmaking capability of 2.8 million tons. Gateway Energy & Coke Co. LLC, a subsidiary of SunCoke, constructed a heat recovery coke plant with an annual capacity of 650,000 tons of coke that began operations in the fourth quarter of 2009. U. S. Steel has a 15-year arrangement to purchase coke under which Gateway is obligated to supply 90% to 105% of the expected annual capacity of the heat recovery coke plant.
U.S. Steel’s coke and coke substitute projects at the Clairton works in southwest Pennsylvania and the Gary facilities in Indiana remain on target and will likely start production in 2012 and reach their full production capabilities in early 2015. “With the completion of the coke and coke substitute projects at Clairton and Gary, we believe we will remain self-sufficient when the markets have recovered to pre-recession levels,” Surma added.
All of U.S. Steel’s North American coking coal requirements for 2012 are sourced and priced, and coking coal costs are expected to increase by about $9 per ton in 2012. “And we’ll average approximately $188 per ton including freight to our cokemaking facilities,” Surma added. “This reflects the benefits of our continuing aggressive efforts to include a larger portion of lower-priced coals in our coal blends.”
Asked by an analyst whether U.S. Steel bought any outside coke in 2011, Surma said the company probably purchased some. “It wasn’t a lot because we didn’t run as heavy and we were doing quite a bit better on our own production, plus we were doing a lot of gas and reduced our requirements,” he added. “And I don’t know that we didn’t buy any from Asia or very little. We may have purchased some. I think we did from some domestic sources, and that’s largely for logistical benefits where it might make sense and might not make sense to ship Clairton coke to Alabama, for example. So I’d say it was a fairly modest effect and the benefit is not having to go far away and buy a lot. So there’ll be some improvement just by not using any merchant coke year-to-year, but I think it’s more affected by the amount of gas balance because I’ve said, 100 pounds per ton of hot metal gas as compared to coke is a pretty good benefit.”
U.S. Steel likes 2012 coal contract pricing
Surma was also asked about declining coking coal prices lately and whether it was a good idea to already nail down 2012 coal contracts in light of that. “Well, our general practice has been, our suppliers’ preferences has been is to try to arrange things on an annual basis,” he said. “It provides us with a stable supply. And I think us being one of the first stops on the rail line or on the barge line, puts us in a good position with our coal suppliers. It may be coal prices go lower or maybe they go higher. But we like where we settled. We think we’ve got pretty good prices, and we’ve got a good supply and we’re confident we’re going to be well taken care of by our suppliers. So we felt this was still a good time to make that deal and our suppliers were of a mind to do that. So we’re comfortable with where we are. Small increase over last year, much less than some on your side of the table were predicting for us, of course but would like lower. But we think we ended up in a pretty good position.”
An analyst asked about a Carbonyx project at Gary, which will convert coal into a cheaper coke substitute, and a Clairton coke works rebuild program, and whether these would trigger shutdowns of existing coke facilities. “One of the points that we liked about the new facility is that it is flexible,” said Surma. “It can be taken up and down with some relative ease. We want to see how that works, of course, before we get going. I guess it’s going to be a very competitive facility and once we start it, no one’s going to want to stop it. There are some other batteries in our system that are nearing the end of their lives for environmental performance reasons. And that’s sort of all part of the schedule. So it may be that, that can be something that slows us down a bit. And keep in mind, it could take out some production where the Carbonyx would replace it. Keep in mind, we’re still running the coke plant in Hamilton [in Canada] with a pretty high level and that incremental coke in the system not being consumed in Hamilton.”
Capital expenditures for U.S. Steel in 2011 of $848m largely consisted of strategic projects primarily related to coke and coke substitute production, including blast furnace coal injection in Europe, a carbon alloy facility at the Gary Works and an environmentally advanced coke battery at the Mon Valley Works’ Clairton plant.
Gary Works, U. S. Steel’s largest manufacturing plant, is on the south shore of Lake Michigan. Comprised of both steelmaking and finishing facilities, Gary Works has an annual raw steelmaking capability of 7.5 million tons. Gary Works also operates three coke batteries, with annual production capability of 1.3 million tons.
The Clairton coke plant is located about 20 miles south of Pittsburgh in Clairton, Pa., on the west bank of the Monongahela River. The largest coke plant in the U.S., Clairton operates 12 coke oven batteries and produces about 4.7 million tons of coke annually, serving customers in the commercial coke market as well as U. S. Steel’s steelmaking facilities, said the U.S. Steel website.
Said U.S. Steel in an October 2011 Form 10-Q filing: “Engineering and construction of a technologically and environmentally advanced coke battery at the Mon Valley Works’ Clairton Plant in Clairton, Pennsylvania is underway with completion expected in 2012. We are constructing a two module carbon alloy facility at our Gary Works in Indiana which utilizes an environmentally compliant, energy efficient and flexible production technology to produce a coke substitute product. The facility has a projected capacity of 500,000 tons per year with completion expected in 2012. We have received the necessary air permits for up to 1 million tons of such capacity.”