TECHNOLOGY & BUSINESS STRATEGY

To Focus or To Consolidate?

As industries and markets mature different business strategies can be appropriate; in some cases it makes sense to focus and at other times it makes sense to venture up or down the value chain. The term “disintermediation” is another way to describe a consolidation (or “cutting out the middle-man”). It can make sense given the right market conditions and technology impact.

The two situations described below highlight how market maturity can favour different outcomes:

• the introduction of the EAF “mini-mill” during the 1980’s and 1990’s decimated the integrated steel-mills in the USA.

• conversely around the same time the Asian markets developed and have come to dominate the steel supply based upon integrated steel mills. Indeed 70% of global steel production is still produced in such integrated steel mills in China, India and South Korea.

  The strategic advantage of consolidating the supply (vertical integration) is exemplified by the strategies of the Chinese battery and EV companies BYD and CATL - both of whom not only own lithium mines but control production through to batteries and cars. Their vertically integrated supply chains allow them to distribute profits across the production process and out-compete their less integrated competitors.

Note: As an aside…a recent audit of BYD’s accounts by the European Commission aimed at calculating the impact of alleged government subsidies -but the findings resulted only in a tariff of ~17% being imposed on BYD (down from 35% to other importers). Although a common complaint is that it is government subsidies that have unfairly assisted Chinese producers, it is often not the main reason their success. BYD’s current dominance is in many ways attributable to their vertically integrated supply chain.

A desire to "off-shore” externalities such as pollution created national strategies in developed economies such as UK and Germany that decimated domestic steel production. It is fortuitous for these countries that emerging low emission steel making technologies are coinciding with a demand for domestic production (fueled by geo-political tensions) which we feel will significantly affect the steel making industry.

Separation of Iron Production from Steel Production

The steel industry faces strategic transformation forced by a combination of regulatory emission targets, technology enablers, geopolitical tactics and market dynamics. We therefore predict the integrated steel-mill paradigm splitting - with iron feedstock production becoming geographically separated from steel making. i.e. Iron production will be strategically located near resources and/or available low emission energy and steel production (using modern modular and electrical powered furnace options) located closer to the end user.

Such consolidation isn’t a new phenomenon and companies such as Rio Tinto have already made acquisitions in novel steel production facilities and techniques that differ from their typical role as a mining company. Please note that at the bottom of the steel industry overview image above are some examples of this disintermediation (in this case mining companies moving up the value chain):

Vale (world’s largest iron ore producer) has announced a “mega-hub” for Oman which will produce low-emission iron. Vale (likely with a strategic partner) will harness low emission energy (natural gas initially and eventually solar) to produce iron (Pig Iron, Hot Briquetted Iron (HBI) or Direct Reduced Iron (DRI).

In doing so they will move their traditional product supply of iron ore further down the supply chain to equate with the product exiting a Blast Furnace.

Rio Tinto although predominantly a supplier of iron ore also produce rough steel and finish steel products from their site in Sorel-Tracey, QB, Canada. Additionally, their recent partnership with GraviHy aims at producing low-emission iron feedstock.

PRISM will leverage two key benefits of its PRCP process to similarly move up the value chain - selling iron powders to EAF mills and also producing primary steel products:

1. Refine Early or “Avoid the Need for (steel) Refining”

   A key benefit of BF-BOF facilities is their ability to manage differing ore and feedstock grades and impurities. PRISM’s reactor turns ore it into high purity iron powder. By supplying pure iron feedstock we alleviate the need for refining - which opens up a host of alternative steelmaking options…..

2. Induction Furnaces

   Induction Furnaces are a moderately recent technique that provide significant energy savings as compared to EAF. A key weakness however is that Induction Furnaces do not possess a significant refining capability - and thus need a pure feedstock (hence the synergy with PRISM’s pure iron powders).

   Note: EAFs also require feedstock with minimal impurities (such as good scrap steel or DRI) - and thus are an avid consumer of high purity iron powders. Induction Furnaces have even less refining ability and therefore require a high purity feedstock even more so.

Although the operating costs for PRCP will likely be higher than the BF-BOF route, assuming accounting for externalities (i.e. pollution [or conversely carbon credits]) as well as revenue credits for PRISM’s polymetallic metals, we are confident that the benefits will outweigh additional process costs.

Steel production in Induction Furnaces using PRISM’s high grade iron powders with pure alloy powders will generate significant energy savings, lower emissions and lower capital and operating costs.

Strategic Optionality on End Product

Retaining an option to sell iron powders or primary steel products means PRISM can adapt and benefit from the more profitable markets. Current plans are to sell 80% of PRISM’s iron production as primary steel products (slabs, blooms, billets) and 20% as iron feedstock.

A third product stream anticipated at ~30,000 tonnes per annum specialized iron powder markets for additive manufacturing and 3D printing.