Voestalpine Bets Big On US Shale Gas Boom
LONDON - Voestalpine AG is betting that the U.S. shale gas revolution will play an important role in lowering its steelmaking costs. The Austrian specialty steelmaker is building a new U.S. steel plant that will take advantage of lower energy prices in North America to compete with rivals.
European steelmakers are seeking to cut costs given anaemic steel demand and structural excess production capacity in Europe. While Voestalpine is protected by the fact that it sells high quality specialty steel products that are in great demand, but it still has to compete with steelmakers from abroad which can produce cheaper steel due to more abundant energy supplies and less stringent environmental costs.
Voestalpine announced earlier this year a plan to build a 550 million euro ($708.42 million) plant in Texas capable of producing 2 million tons of hot briquetted iron annually. HBI is used as a substitute for iron ore or scrap steel in steel-making furnaces and is very cost competitive when abundant supplies of cheap natural gas are available to burn off impurities and reduce iron ore into a purer form of iron that can be funnelled into a furnace.
Voestalpine's Chief Executive Wolfgang Eder told the Wall Street Journal in an interview that the company is able to substitute 15% of the iron ore in its blast furnace with HBI, resulting in significantly lower costs on several fronts. The most important cost saving, however, comes from cheaper U.S. gas than in Europe.
"The gas price in the U.S. is about one quarter of the gas price we would have to pay in Europe," said Dr. Eder. "This is the big economic advantage...[and] is the major driving force for this investment," he said.
Dr. Eder said he expects European natural gas prices will remain structurally disadvantaged for several years to come given Europe's dependence on Russia for gas imports and Europe's aversion to fracking, the process by which natural gas is extracted from shale rock.
On Thursday, Germany's association of beer brewers warned German politicians against fracking, citing concerns that any threat to the water supply is a threat to the purity of the country's beer.
"We have shale gas [in Europe] but this is a politically very sensitive issue and it is unlikely that we will have any major positive effect from shale gas drilling in Europe because it creates too [much] political risk. People in Europe are not in favor of this technology," he said.
He also added that the U.S. shale gas boom has taken off in part because the U.S. has large tracts of uninhabited land. By contrast, Europe is more densely populated and therefore faces more obstacles when it comes to shale gas drilling and exploration, Dr. Eder said.
Energy costs aside, HBI also lowers environmental and maintenance costs, Dr. Eder said. HBI results in lower coal and iron ore consumption, thereby lowering CO2 emissions and the need to buy CO2 permits if the company produces more CO2 emissions than its European Union-sanctioned quota.
HBI also lowers blast furnace maintenance costs because it's "less aggressive" than iron ore in a blast furnace, Dr. Eder said.
The company plans to ship half of the HBI plant's output to its European steel operations while the remainder will be sold to third parties. The plant is forecast to start operations toward the end of 2015.
Freight rates, an important variable in the company's investment strategy for the plant, isn't a great concern, said Dr. Eder. Voestalpine plans to lock in current shipping rates--which are currently a third of what they used to be 10 years ago--through long-term priced shipping contracts.
The lynchpin behind the plant's investment rationale is natural gas prices, said Dr. Eder. "Everything on top [of that] like the CO2 cost and some other minor effects is nice to have but we have based our basic calculation on this project on the gas price differential," he said.
Sarah Sloat contributed to this story.
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