Low prices for natural gas have led to lower demand for coal as a fuel for electricity generation and to wider margins for chemical products makers. Now it looks like the U.S. steel industry could catch a break from the low prices.

Nucor Corp. (NYSE: NUE) is building a new plant in Louisiana that will use natural gas to fire a direct-reduced iron (DRI) plant. The company signed a long term deal with a division of Encana Corp. (NYSE: ECA) to carry out an onshore drilling program that will keep the steelmaker’s natural gas supply available at low cost for more than 20 years.

An Austrian steelmaker has also said that it is considering a new $660 million U.S. plant to take advantage of the abundant and cheap supply of U.S. natural gas. Bloomberg News reports that a DRI plant produces steel for about 20% less than the traditional blast furnace.

Commodity trading firm Cargill Inc. has formed a joint venture with an Australian steelmaker to build a DRI plant in Ohio and India’s Essar Global Ltd. is planning a new plant in Minnesota.

While it is true that the U.S. currently wallows in an over-supply of natural gas, plans to export some of the gas as well as increased domestic demand could drive the price much higher. Even if the price were to double to around $8 per thousand cubic feet, however, making steel with the DRI method will continue to enjoy a cost advantage.

Paul Ausick

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