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May 1, 2005

Power Up

With oil prices at a record high, dwindling domestic natural gas supplies pushing up the cost of a major energy component for many plants and the once-reliable electricity network in increasing jeopardy, metals companies are responding with a renewed sense of urgency.

Serious concerns about energy cost and supply date to the early 1970s, when an Arab oil embargo sent fuel prices skyrocketing. Instability and wars in the Middle East, pressure by environmentalists to curb exploration and drilling, and soaring demand from a rapidly industrializing Third World have been major factors periodically propelling prices upward in the ensuing decades. Between peaks, prices moderate, even sink, as recessions curb demand or producers cashing in on the high prices boost production—and then a supply glut forces prices back down.

Energy conservation in heavy industry has always been a function of the cost equation. Companies respond with conservation efforts and innovative technologies when the price pressure is on, then relax when it is off.

Today, energy costs are again in the forefront of metals company concerns. With oil prices at a record high, dwindling domestic natural gas supplies pushing up the cost of a major energy component for many plants and the once-reliable electricity network in increasing jeopardy, companies are responding with a renewed sense of urgency.

In Crawfordsville, Indiana, a Nucor Corp. pilot plant is turning out light gauge carbon steel utilizing a new twin roll casting process that reduces by more than 80% the energy costs of turning molten steel into finished cold coil.

A short drive up the road in Lafayette, managers of an Alcoa aluminum extrusion facility realize an estimated $1.9 million in annual savings after converting from steam to direct fire natural gas heating, and implementing other recommendations in a comprehensive written energy assessment.

About 100 miles to the northeast, in Columbia City, operators on the melt shop floor at a Steel Dynamics plant frequently check a computer screen displaying current electricity costs to determine whether to purchase and keep operating or shut down until prices moderate.

Meanwhile, in Newburgh, near the Kentucky border, Alcoa's aluminum smelting and fabricating operations have cut natural gas consumption by 25% by rethinking preheating processes to reduce the amount of energy that was literally going up the stack.

These snapshots from the Hoosier state exemplify efforts at metals plants around North America to rein in rising energy costs with initiatives ranging from innovative technologies, to equipment replacement, to cost-controlling contracts, to process improvement programs.

During the past five years, volatile prices and concerns about the reliability of future supplies have brought energy issues to the forefront of challenges facing U.S. and Canadian manufacturers. In recent months, concern has focused on natural gas prices, which hit a high in December of $6.25 per thousand cubic feet at wellhead, triple the average price in the 1990s.

“Recent natural gas market conditions represent a significant cost problem to healthy steel companies, and a potentially fatal problem to weak ones,” Guy Ausmus, purchasing manager at Mittal Steel's Ispat Inland Inc. subsidiary and chairman of the American Iron and Steel Institute's Energy and Climate Committee, told a Congressional subcommittee last year. “[At Ispat Inland] we fight like cats and dogs for a 50-cent per ton decrement in manufacturing costs, and gas has given us a $5 to $9 increase in cost.”

The Aluminum Association attributes the loss of 2 million U.S. manufacturing jobs since 1998 largely to energy prices. Meanwhile, plant shutdowns due to failures in the electric grid delivery system have driven other companies out of business or out of the country.

While solutions to the complex issues underlying energy pricing and reliability are largely dependent on breaking the gridlock over comprehensive energy policy legislation (See “Not In A Hurry,”), some metals companies are taking immediate, internal steps to stabilize costs and improve reliability.

THE FUNDAMENTALS

Companies viewed as leaders in energy conservation say the key to their energy cost savings success is adherence to the basic business fundamentals of goal setting, benchmarking and employee involvement. A thorough written assessment of energy usage at every plant—which may be done internally or in conjunction with experts from the local utility, consulting firms or the Department of Energy—provides the foundation.

At all Alcoa Engineered Products plants, a formal 20- to 30-page written assessment by a team of experts from inside and outside the company “looks at the operation from top to bottom, wall to wall,” says Jim Bollenbacher, vice president of environment, health and safety, who is working to meet a 2005 goal to reduce energy costs by 7%. Decisions on implementation are made after further study at the plant level.

While assessments have achieved substantial cost savings through such measures as changing the heating system in Alcoa's Lafayette plant and replacing lighting systems at two other plants, recent energy cost spikes have caused Alcoa to take a second look at even bigger investments.

“Waste heat recovery has been around for several years. It's expensive, but we are looking at it again now because it is such a big opportunity for energy cost savings,” Bollenbacher says. The company has installed regenerative burners, which recycle warm air from within the furnace, at a number of plants and is looking at the energy saving potential of electromagnetic pumps.

THE KEYS TO ENERGY
COST SAVINGS

Start with goal setting, benchmarking, best practice sharing and employee involvement
Conduct a thorough, written assessment of energy usage at every plant

CREATIVE SOLUTIONS INCLUDE

Utilizing by-product fuels from primary operations
Investing in new technologies, such as LEDs for lighting applications
Redesigning plant layout

But not all energy savings programs require a big investment. By re-engineering how aluminum ingots are preheated prior to hot rolling, Alcoa's Warrick Operations in Newburgh reduced the preheating cycle time by an average of 25.8% with a commensurate savings in natural gas use—with zero capital expense.

In Canada, where metals companies face similar challenges from rising energy prices, Dofasco employed cross-functional internal teams to conduct energy audits. Results include programs to inspect and repair steam traps and to detect leaks in compressed air systems, says Carolyn Barnes, manager of energy conservation. The use of new technology, such as LEDs (light emitting diodes) for certain lighting applications, is encouraged. Another electricity saving project planned for 2005 is the installation of a soft start on a fume fan to allow the fan to shut down in idle periods.

To drive continuous improvement, Dofasco appointed energy coordinators for each of the process areas. Energy performance is tracked monthly. Employee involvement is an integral element. Since 2003, office workers have been enlisted in a turn-off-the-lights program, and in April the company launched energy conservation skills workshops for 500 people and computer-based awareness training for all 7,000 employees in its Hamilton, Ontario, plant.

SCRUTINIZE LOGISTICS

Roger Baker, a senior engineer at ComEd, an electric utility company based in Chicago, says energy assessments like those at Alcoa and Dofasco can result in savings of 15% to 25%. In metal casting plants, for example, Baker often finds 40% of the energy going up the chimney. “By replacing open reverb melters with stack melters, instead of 40% of the heat going out, only 7% or 8% goes out,” he says.

Other improvements can result from scrutinizing logistics and evaluating the cost-benefit ratio of re-designing the plant layout. “How the product moves around the plant is something we look at,” Baker says. “For example, by moving the ingot closer to the melter, you don't have to move the forklift so far. It's amazing how much energy can be used by moving things around.” However, Baker notes that such re-designs can be costly, with a payback period of up to six years.

At Samuel, Son & Co., Ltd.'s steel processing service center in Hamilton, Ontario, a simple plant design change is yielding significant savings. The plant previously had a compressor for each of its seven cut to length and slitter lines. By moving four compressors to one location, eliminating three altogether, the company saves energy. Most of the time, only two compressors are needed for five lines, says Maintenance Supervisor Al Robinson. That results in a daily electric bill savings of C$50, or about US$41, with an added benefit of significant noise reduction on the plant floor. The payback period will be less than two years, Robinson says.

Joe Russo, senior vice president at Lisle, Illinois-based IPSCO Enterprises, says energy conservation is stimulated by quarterly benchmarking meetings and best practice sharing among the company's three facilities. A Six Sigma program has spurred equipment and process changes that reduced energy costs $2.5 million last year. For example, the company modified the size and design of carbon/oxygen lances, improving the yield and therefore lowering energy costs on a per-ton basis. “We changed the depth of injection into the furnace as well as the flow rate,” Russo says. “We also changed the timing of the introduction of the lances into the furnace. These were primarily designed to make the most judicious use of oxygen, taking into account the price differential between electrical and chemical energy.”

“We spend a lot of time as slab producers in optimizing the reheat furnace,” Russo adds. That includes maximizing the percentage of materials charged directly from the caster into the re-heat furnace, saving a portion of the cost of reheating. Maximizing hearth coverage significantly improves the amount of energy required per ton to obtain rolling temperature. “We also developed a software model to allow us to maintain a minimum resonance time in the reheat furnace,” he says.

Worries about the impact of power failures go hand-in-hand with energy cost concerns. In Canada, Algoma Steel is protecting itself against both rising costs and power outages while reducing emissions by utilizing by-product fuels from primary operations, such as coke oven and blast furnace gases. Transported through piping systems to boiler house operations, the gases are burned to produce high pressure steam. Steam turbines then power generators to produce 30 megawatts of electricity. “Internally generated electricity has provided Algoma with security and reliability, as well as cost savings,” says Michael Gassi, superintendent-utilities.

He cites the major North American power outage in August 2003, when the steam turbines fueled by by-product gases provided enough power to prevent major damage to the company's assets by enabling the steelmaking operation to empty its No. 5 vessel of molten liquid steel and stabilize other equipment.

PEAKS, VALLEYS AND GAMBLING

Many companies, including IPSCO and Sierra Aluminum, attack the uncertainties of energy costs through long-term contracts with electricity providers. They even out the peaks and valleys of natural gas prices by hedging on derivative contracts.

A more unusual approach to energy purchasing is in place in the Steel Dynamics plant in Columbia City. An electric cooperative serving rural electric membership corporations buys power directly for the plant. By looking at a computer screen, the melt shop supervisor can see the average price of energy consumed for the last five minutes and make decisions about whether to continue to purchase and consume based on current power costs. If prices reach and stay above a predetermined level, the melt shop manager determines whether to shut down, weighing cost considerations against the need for inventory. At Steel Dynamics, this is an option because the melt shop has greater capacity than the rolling mill.

With power prices fluctuating between $10 and $100 per megawatt by time of day and time of year, Dick Teets, vice president and general manager of Steel Dynamics' structural and rail division, calls it a “neat, flexible arrangement. We can manage our energy costs differently than our sister plants that have to buy through their local utility.” But without a contract, he is also more vulnerable to being cut off during an energy system failure. “I don't have an insurance policy so it is a bit of a gamble,” he admits.

A gamble of another type is underway in Crawfordsville, where Nucor has invested in a new casting technique known as Castrip, developed by Broken Hill Proprietary Corp. and Ishikawajima-Harima Heavy Industries Co., Ltd. in Australia. This technology produces lighter gauge steel sheets with 89% less energy than thick slab casters and 81% less than slim slab casters, at the same time substantially reducing emissions.

Castrip uses a twin-roll casting process first envisioned by Sir Henry Bessemer in 1857. Precision robotics, high speed computing and sensing controls have finally made Bessemer's dream feasible. The process itself is simple, with molten metal fed between two counter-rotating rolls. Dramatically less energy is required because Castrip does not require reheating and there is only one hot reduction stand. In comparison, slab casters require large quantities of energy to reheat slabs and then additional energy to roll them in a multi-stand hot strip mill.

Nucor Corporate Controller Jim Frias says the Castrip process is now commercially viable. The company is seeking a second Nucor location for a Castrip operation in the United States and is seeking a joint venture partner for a Castrip plant overseas. “This process makes sheet steel production energy efficient,” he says.

While the energy savings are substantial,they are not large enough to justify replacing a working caster with Castrip. “Castrip will be most successful as an addition to an existing steel mill that has excess steel melting capacity. Castrip is a very efficient outlet for that extra melting capacity,” Frias says.

With energy prices near record highs, the company hopes to find a ready market for Castrip licenses in the near future.

 NOT IN A HURRY

A CALL TO ACTION
In his State of the Union address, President Bush pulled no punches about his impatience with Congress for failing to pass an energy bill during his first term: “Nearly four years ago, I submitted a comprehensive energy strategy that encourages conservation, alternative sources, a modernized electricity grid and more production here at home—including safe, clean nuclear energy. Four years of debate is enough: I urge Congress to pass legislation that makes America more secure and less dependent on foreign energy.”

The House responded quickly to the president's call, passing an energy package in April. At press time, the Senate was working to draft a bill, with Senate Energy and Natural Resources Committee Chairman Pete Domenici (R-NM) still hopeful that finalized legislation would reach the President's desk before the August Congressional recess.

The House moved rapidly by using the energy bill that failed to pass the Senate last session as a basis for this year's legislation. Provisions carried over to the 2005 bill include mandatory electricity reliability standards, incentives for transmission grid improvements and loosened restrictions on transmission facility siting; royalty relief for research on oil and natural gas exploration and development of deep and ultra-deep gas wells in the Gulf of Mexico; and funding for energy efficiency projects, renewable energy and development of hydrogen-powered automobiles. The bill also allows for exploration and development of oil and gas on non-park federal lands and in the Arctic National Wildlife Refuge (ANWR)—issues that have been flashpoints for environmentalists for years.

Some new provisions were added, including extending daylight-saving time by two months to reduce energy use and giving the Federal Energy Regulatory Commission final say over the location of liquefied natural gas (LNG ) import terminals, with power to override state and local opposition. While some Democrats criticized the bill for placing the interests of oil and gas companies over consumer and environmental concerns, House Energy and Commerce Committee Chairman Joe Barton (R-TX) said, “Passage of this bill will ensure a more affordable and environmentally friendly energy supply. America's prosperity and national security is at stake.”

Meanwhile, Domenici believes he can avoid stalemates in the Senate by starting fresh and building a new bill with bi-partisan buy-in. Committee hearings and a floor vote on a Senate bill are expected in May. Senate Democrats support his deliberate approach.

“We're not men in a hurry,” says Bill Wicker, Senate Energy Committee aide to Sen. Jeff Bingaman (D-NM), the ranking Democrat, noting that there is bipartisan support for passing substantive legislation this time around. “We all agree on the need for an energy policy and we will work hard on that, but we will not take the same old tired legislation that has failed repeatedly in the Senate. We are going through a process to get a grip on a balanced approach between increasing supply and reducing consumption.”

ENERGY PROPOSALS AND PRIORITIES

House Energy and Commerce Committee Proposal
As passed by the House, this bill includes:
New domestic oil and gas exploration on non-park federal lands and in the Alaska National Wildlife Refuge
Mandatory electricity reliability standards
Incentives for improvements to the transmission grid
Federal authority to pre-empt local opposition on liquefied natural gas terminal siting
Natural gas exploration with royalty relief for deep and ultra-deep wells in the Gulf of Mexico
Extension of daylight-saving time by two months
Incentives for hydrogen fuel cell cars, and renewable energies such as biomass, wind, solar and hydroelectricity
Liability protection for the makers of MTBE, a gasoline additive that contaminates drinking water

 

Industry Associations
Priorities include:
Additional electric generating capacity
Uniform electricity reliability standards
A grid that will support peak demand
Assurance that consumers won’t receive preference over business users
Continued favorable pricing for hydroelectric power from Power Marketing Administrations.

COMPLEX, FRAGMENTED, CONTRADICTORY
Regardless of approach, there are many political minefields along the way. Regional concerns, hefty price tags for new programs and environmental issues stalemated energy policy reforms in the past. Still, with consumers distraught over record high gasoline prices, the trade deficit soaring and continued erosion of manufacturing jobs, there is widespread optimism that the time is right for new policy initiatives.

“The prospects are good,” says Robin King, vice president, public affairs, for The Aluminum Association. “There is recognition of the need for changes in policy. Most members of Congress are sensitive to the need—they don't want more plants closed in their districts.”

Among the changes sought by associations representing the metals industry are some of those addressed in the House bill, such as opening more areas to natural gas exploration and regulatory changes that would ensure a more reliable supply of electricity. They also hope to maintain threatened regional price breaks for hydroelectric power.

The unknown, King says, is how much change Congress mandates in the complex, fragmented and sometimes contradictory layers of government policy that are widely blamed for the dramatic rise in natural gas prices and the crisis state of electricity reliability.

For example, the American Petroleum Institute (API) blames soaring natural gas prices on policies that discourage the development of supplies while, at the same time, encouraging consumption. Natural gas exploration is banned in many areas off the East and West Coasts and in the Gulf of Mexico, affecting 70 trillion cubic feet of U.S. natural gas resources, the API says. By way of comparison, the U.S. consumed 22 trillion cubic feet of natural gas in 2004.

Other restrictions and litigation by environmental groups have limited access to reserves in federal lands in the West and Alaska. As a result, domestic production of natural gas has grown at an annual rate of less than 1% since 1996. While supplies are limited, demand is soaring, in large part due to environmental regulations that favor clean burning natural gas over coal. In fact, 87% of new electric generating capacity is natural gas-fired, a trend that is expected to continue. The Department of Energy's Energy Information Administration (EIA) forecasts that natural gas demand will grow by more than one-third by 2025.

Proponents of drilling in the Alaska National Wildlife Refuge cite those statistics to support their case over the objections of environmentalists. Less controversial are additional incentives to construct a pipeline to transport natural gas from Alaska, which has 18% of all domestic gas reserves. Last October, Bush signed a bill to streamline federal permitting for the project and authorize $18 billion in federal loan guarantees. Even with the pipeline, the EIA says the United States will need to import substantially more natural gas over the next 20 years to meet increased demand. In fact, EIA projects imports of liquefied natural gas (LNG) should increase 16-fold. Opposition to the specialized terminals required for LNG has slowed growth of imports, spurring the House action that would give the federal government power to override state and local authorities on terminal siting.

LOOKING AHEAD
The Department of Energy's Energy Information Administration envisions an easing in prices over the next five years. However, this is based on assumptions that natural gas supplies will grow with completion of an Alaskan natural gas pipeline and construction of additional terminals needed for imported liquefied natural gas (LNG). Both are the focus of intense opposition by environmentalists. If these projects are stymied, a much gloomier price picture emerges. And even with increased supplies of natural gas from Alaska and overseas, increasing demand is expected to drive up prices again between 2010 and 2025.

INDUSTRIAL-LEVEL CONTRACTS
Meanwhile, deregulation and fallout from the Enron scandal has created upheaval and financial turmoil in the electric utility industry that jeopardizes prospects for needed investment in the power infrastructure, a concern exacerbated by the largest cascading power outage in U.S. history in 2003. Associations representing large industrial users have several priorities: additional generating capacity, uniform electricity reliability standards, a grid that will support peak demand and assurance that industrial users won't be cut off just to keep the lights on for consumers.

“We not only need capacity for peak use, we also need the principle that industries are provided with industrial-level contracts that will be honored in times of peak demand,” King says.

The Steel Manufacturers Association is focused on establishing regulatory practices that will reward demand response, says Thomas Danjczek, president. While the ability of electric furnace steel companies to curtail use during peak demand represents an enormous resource for enhancing grid reliability, regulatory changes need to consider the resulting productivity and lost production costs, Danjczek says.

The metals industry is also concerned about balancing the advantages that many manufacturers enjoy from regional electric price breaks with the need for a secure national grid. In his 2005 budget, Bush proposed that Power Marketing Administrations—which provide low-cost electricity in areas where hydroelectric power is generated, such as the Pacific Northwest—be required to charge market rates for the power they sell. This proposal is anathema to the aluminum industry, concentrated in the Northwest, because of lower energy prices. However, the Bush plan appeared to be dead on arrival: Domenici called it “politically untenable” and declared he would not support it. Sen. Larry Craig (R-ID), a member of the Senate Energy Committee, said, “Our efforts need to be focused on passing an energy bill, effectively decreasing rates nationwide, rather than raising revenue at the expense of the Northwest's economy.”

BI-PARTISAN
Still, there is increasing recognition that energy issues will require factions to set aside regional and philosophical differences. A bi-partisan group of top energy experts from industry, government, labor, academia and environmental organizations advocates a package that balances efforts to increase energy supplies while reducing risks from climate change. Industry groups like the National Association of Manufacturers (NAM) that have lobbied to open the Gulf and ANWR and increase the number of LNG terminals acknowledge the need for compromise.

“There is no perfect bill,” says Darren McKinney, senior director of media relations for NAM. “A good bill that deals with the issue in a comprehensive fashion will call for compromise.”

Regardless of what emerges from the new energy bill, newly appointed Secretary of Energy Samuel Bodman cautions that there will be no quick fix to the issue of rising energy prices.

“High prices have been a long time in the making, and they will be a long time in coming down, even if we passed an energy bill today,” Bodman told the House Energy Committee. “We need a balanced approach looking at all energy sources, including nuclear, coal and hydrogen, and we need to make every effort to improve the efficiency of how we use energy today. It will take years to deal with all of these efforts. It will take a long time to solve this problem.”