How Will HBI Shape the Future of Iron Ore Producers

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Due to the increasing concern over environmental sustainability, steel producers around the globe have been shifting their mode of steel making from traditional Basic Oxygen Furnace (BOF) technology to Electric Arc Furnace (EAF) technology as it is less detrimental to the environment.  EAF's use Hot Briquetted Iron ( HBI ) (as an alternative to steel scrap) as its raw material for production of steel unlike iron ore used by traditional BOF producers. Thus, increased production facilities of EAF producers, have, in turn, resulted in an increase in demand for HBI.

Traditional blast furnaces use large quantities of coke to transform iron ore into steel and hence results in emitting a significant quantity of carbon into the atmosphere. EAF technology, on the other hand, uses electric energy for steel production and is less harmful to the environment. With the increasing use of renewable sources of energy, the use of EAF technology would further narrow the harmful impact of steel making into the environment. In addition to that, the production time and the initial setup cost for EAF is much lower than that of BOF, making it a more favorable choice for steel production.

EAF technology, however, initially produced steel of lower quality in comparison to the steel produced from BOF as these plants used scrap steel to produce finished steel output. HBI is increasingly being used as an alternative to scrap steel in EAF and has enabled the production of higher grade steel and helped steel producers to move up their value chain.

Potential EAF Market in the Chinese Economy

The world's largest steel producing economy, China, produced only 5% of its total steel production through EAF compared to 66% in North America in 2016. China's current EAF capacity is around 100 million tons and given the increased environmental concerns in the country, this trend is most likely to change in the upcoming years. EAF capacity in China is expected to grow by an additional 10-20 million tons a year over the next three years. This trend is most likely to continue and expand across various countries as they strive to achieve a cleaner environment. Major steel producers such as Nucor and  ArcelorMittal have invested and been shifting their production volumes from BOF to HBI technology.  U.S. Steel, who has not ventured into the EAF technology yet, believes that EAF is the future of steelmaking and plans to set up their production facilities once the company's fundamentals are strong.

(Source: World Steel Association)

You can view our base case for EAF producers here and create different scenarios using our interactive platform.

Iron ore giants have recognized the existence of this vast opportunity and have initiated planned investment of their capex to build HBI plants. Cleveland Cliffs ( CLF ), for example, has planned to invest $700 million into their HBI project, which is estimated to be completed by 2020. (( Cliffs Natural Resources Inc. Announces its First HBI Production Plant in the Great Lakes Region , Cleveland Cliffs News Release)) Thus, given the environmental benefit that EAF poses, the demand for HBI is most likely increase even further and remain a prospective investment domain for iron ore producers across the globe.

Have more questions about Cleveland Cliffs? See the links below.


1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Cliffs Natural Resources

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks , US Markets , Investing Ideas
Referenced Symbols: CLF , HBI , RIO , VALE , MT

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