AK Steel Holding Corp. could start mining coal next month, another significant step forward in the steelmaker's efforts to become more self-sufficient for raw materials to lower supply costs.
Spikes and volatility in the cost of key raw materials such as iron ore, coke and coal have in recent years have destabilized AK Steel's costs of producing steel.
To hedge against the up and down market prices of raw materials, AK Steel made a pair of multimillion acquisitions in coal and iron ore interests back in October 2011.
Plans are for AK Steel's coal and iron ore supply chains to be 50 percent vertically integrated by 2015 — so in the future AK Steel will buy half its steelmaking materials and produce the other half itself.
"Together, Magnetation and AK Coal Resources will enhance the long-term profitability of AK Steel in a meaningful way," AK Steel spokesman Barry Racey said.
The cost benefits can't come soon enough. AK Steel had four consecutive years of financial losses netting a more than $1 billion loss in 2012.
In light of worldwide natural disasters, labor strikes and other events, vertical integration of supply chains is a hot business topic, said Susanna Sterling-Bodnar, outgoing president of the Council of Supply Chain Management Professionals, Cincinnati Roundtable.
"You can get ownership of suppliers … to reduce your supply chain risk and also to get visibility and control over your integrated supply chain," said Sterling-Bodnar, supply chain engineer for LeanCor Supply Chain Group, a Northern Kentucky third party provider of supply chain services.
To that end, AK Steel bought in 2011 all the stock of Solar Fuel Company Inc., which controlled estimated reserves of more than 20 million short tons of metallurgical coal in Somerset County, Penn. The company was renamed AK Coal Resources Inc. and is a subsidiary of AK Steel Holding Corp.
Metallurgical coal is used to make fuel for blast furnaces, the hot part of a steel mill where iron ore is converted to molten metal.
In 2012, AK Steel also bought a coal preparation plant in Somerset County, which cleans and processes coal for shipment, Racey said.
AK Coal Resources anticipates obtaining a permit to construct and operate its initial underground mine still this quarter or shortly after, according to a May public company filing with the U.S. Securities and Exchange Commission.
AK Steel says it will open a series of mines, but the exact number is yet to be announced.
When fully operational, AK Coal Resources will produce about one million tons of metallurgical coal a year, meeting about half of AK Steel's annual coal needs.
Since the initial acquisition, approximately $45 million has been invested in AK Coal Resources, which has 40 employees, Racey said.
Local workers will remember AK Steel's predecessor Armco, founded in Middletown in 1899, once mined coal.
At the same time AK Steel announced its 2011 investment to buy a coal company, the Butler County steelmaker also said it formed a joint venture with Minnesota company Magnetation Inc. to produce iron ore concentrate. The joint venture, called Magnetation LLC, is close to construction on a plant in Indiana to make pellets from the concentrate. James Wainscott, AK Steel CEO, told investors in April that Magnetation has obtained the needed environmental permit from Indiana to start construction.
Once the pellet plant is fully up and running, Magnetation LLC expects to produce 3 million tons of pellets a year for AK Steel's use and for sale to outside companies. There are concentrate plants already running.
AK Steel's blast furnaces at Middletown Works and Ashland Works consume coke, made from coal, and iron ore. Ashland Works is a Kentucky steel plant.
To date $150 million has been invested in Magnetation LLC, according to Racey.
Additionally, SunCoke Energy started operations in 2011 of a Middletown coke plant on Yankee Road near the steel mill to supply AK's plant Middletown Works with coke.
The positives of vertical integration include quality control, quicker decision making and the ability to set standards throughout the production process, supply chain expert Sterling-Bodnar said. Possible negatives include the costs of capital investment, larger corporate bureaucracy and straying from core business strengths.
"You're output is a function of your input," she said. "Every company nowadays in the global world is dependent on their supply chain on the delivery of raw materials and parts to manufacture and deliver quality products. Therefore, the timeliness and quality of those deliveries is going to determine your success with customers."
"It's only going to work if it's done right," she said.
AK Steel is headquartered in West Chester Twp. and operates seven steel plants including Middletown Works, as well as other facilities.