• Truth: USA natural gas prices at two-decade high
• Consequence: Steel mill costs up sharply
• The facts and forces driving global steel

THE TRUTH

• USA natural gas spot prices as of March 11, 2003 are up 89% to about $5.87 per million BTU versus the average spot for 2002 of $3.11 per million BTU. From January through February 2003, the average spot price in the United States was $6.13 per million BTU. The high this year was an astonishing $17.57 per million BTU on February 25 and the low was $4.32 on January 1. The average spot price in 2001 was $3.80 per million BTU and in 2000 it was $4.17.
• Steel mills generally purchase natural gas on a 3-month or 6-month contract basis. In addition, the mills pay an average of about $1 per million BTU for delivery.
• The run-up in the NG spot price and the prospect of higher energy costs has already prompted integrated and mini steelmakers alike to adopt measures to help offset rising costs. These include curtailing some operations, running EAFs at night and on weekends when electricity prices are lower, and increasing steel product prices. WSD estimates that integrated mills pay about 5 cents per KwH for electricity, while minimills pay about 4 cents per KwH.
• Natural gas prices are somewhat more volatile than oil prices, at least in North America. Oil prices hit a 13-year daily high of $37.83 per barrel on March 12 for West Texas Crude. The price of oil has increased 33%, averaging $34.75 per barrel so far this year, versus $26.17 in 2002. In 2000 and 2001, oil prices were $28 and $25 per barrel, respectively.

THE CONSEQUENCES

Rising natural gas prices have driven up the steel mills' costs. The impact is presented below for three types of USA mills: an integrated major mill (per ton of hot-rolled band), a thin-slab minimill (per ton of hot-rolled band), and a long-product minimill (per ton of rebar). In another table, WSD estimates gas and power costs in March 2003. We also consider the benefits from the use of low-cost coke oven gas.

The cost per ton is based on the prevailing spot price in mid-March (assuming no hedging) plus $1 per mmBTU for the delivery of natural gas. (Note: In a rising market, because the mills usually buy 3-6 months ahead, they do not get hit as hard for a while.)

In the table below, WSD estimates selected energy costs for March 2003 by adding electric power and gas costs. These include natural gas, coke oven gas, and electricity. Major mills require about 150 KwH of electricity to make a ton of hot-band, while minimills need about 600 KwH, for either hot-rolled band or rebar. Some integrated producers can offset part of their natural gas usage by using coke oven gas.

• An integrated mill without coke ovens requires about 4.1 million BTU of natural gas to produce a ton of hot-rolled band. Hence, after delivery costs, the natural gas cost per ton of hot band (as of mid-March 2003, assuming no hedging benefits) would be about $29. That's 67% above what it was last year. (Note: About 5.5 million BTU are needed through the cold-rolled stage. Cost currently would be about $38 per ton of cold-rolled coil.)

  q An integrated mill with coke ovens may receive a 2.7 mmBTU coke oven gas credit. This lowers their natural gas usage per ton to 1.4 mmBTU, or about $10 per ton with natural gas priced currently at $6.87.

  q An integrated mill may pay about 5 cents per KwH for electricity and require about 150 KwH per ton of HRB. That's a cost of $7.50 per ton which, when added to natural gas costs (with coke oven), results in a total energy cost of about $18 per ton at current prices. (Note: Without the benefit of coke oven gas, integrated mills would be paying about $36 per ton for both natural gas and electricity.)

• < An EAF-based thin-slab flat-rolled (TSFR) minimill, which hot charges 2-3 inch slab to a tunnel furnace, consumes about 250,000 BTU of natural gas in the electric arc furnace (EAF) shop and related processes, and then requires another 600,000 BTU in the tunnel furnace -- for a total of 850,000 BTU per ton of hot-rolled band. At the current natural gas price of $5.87 per million BTU and after delivery costs, the cost per ton of hot band would be about $6. This figure is 67% above last year's level, but about 79% below the integrated mill's cost.

• q A TSFR mill may pay about 4 cents per KwH for electricity. It requires about 600 KwH per ton of HRB. That's a cost of $24 per ton which, when added to natural gas costs results in a total energy cost of about $30 per ton at current prices.

• A long-product minimill that cold charges its billet to a reheat furnace would also consume about 250,000 BTU of natural gas in its EAF and related processes. It would then run billet through a conventional reheat furnace, which requires about another 1.2 million BTU -- for a total of 1.5 million BTU per ton of rebar. At the price of $5.87 per million BTU and after delivery costs, the natural gas cost per ton of rebar would be about $10.

• q A long-product minimill may pay about 4 cents per KwH for electricity. Its requirement of about 600 KwH per ton of rebar is the same as that of a TSFR mill. That's a cost of $24 per ton which, when added to natural gas costs results in a total energy cost of about $34 per ton at current prices.

A Volatile Outlook

According to Energyshop.com, the North American natural gas market will experience a slight decline in prices from the recent high levels during the spring as the weather in the United States begins to warm up. This source points out that natural gas production is about 5% lower than 2002 and gas storage levels have been declining rapidly due to the prolonged cold weather. Longer term, they see demand increasing about 2.5% per year, while supply is increasing just 1% per annum in North America.

The ratio of the natural gas price to the price of crude oil has averaged 0.11 since January 1991 versus the current ratio of 0.28. It is WSD's opinion that, granted some good news about Iraq (i.e., no war, a short war, some stability in the Middle East), the price of oil could decline to $25 per barrel. At such a level, the price of natural gas could fall to about $2.75 per million BTU ($3.75 delivered to the mill), if the historic gas-to-crude price ratio of 0.11 since 1991 were to apply.

Source: Bloomberg and World Steel Dynamics

The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any actions is neither authorized nor warranted.

It should be noted that a variety of factors, including changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors, including our own misjudgments or mistakes, may cause the statements herein concerning present and future conditions, results and trends to be inaccurate.

The officers, directors, employees or stockholders of World Steel Dynamics Inc. may, at times, directly or indirectly hold securities of, and/or that are related to, one or more of the companies that are referred to herein. World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report.

Copyright 2003 by World Steel Dynamics Inc., all rights reserved.