We at Cleveland-Cliffs mourned the loss of Tom Conway, but our relationship with the USW will continue into the future, stronger than ever. We congratulate Dave McCall on his well-deserved election as international president of the USW. Dave has been the key leader within the USW in building our Cliffs USW partnership, which has been a model for other companies and for other sectors of the American economy. We look forward to continuing to fight for our people together with Dave McCall. With that, I’ll turn it back to Daryl for Q&A.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Lucas Pipes with B. Riley Securities. Please proceed with your question.
Lucas Pipes: Thank you very much, operator. Good morning everyone, and congrats on a great quarter. Lorenzo, really appreciated your comments on hydrogen and good job there. And I wondered if you could maybe expand on that hydrogen route on a couple fronts. Well, first, where would the carbon intensity go, or where would the coke intensity go once you fully converted a blast furnace to the use of DRI and hydrogen usage? And then secondly more strategically, does that change how you kind of think about the attractiveness of blast furnace assets? You mentioned in your prepared remarks others are betting on EAS, you don’t seem to go that direction. And obviously that would be really interesting to hear how you think about that in the current context. Thank you very much.
Lourenco Goncalves: Thanks for the questions, Lucas, and thanks for the kind words. Let’s talk about the carbon intensity first. It’s very easy to understand where the CO2 is generated in a blast furnace. We load in a blast furnace as part of the burden coal in the form of coke and coal in the form of coke is actually C, that C in a super saturated C environment in the presence of a ratified O2 will generate a lot of CO. And that CO, that monoxide of carbon is the reductant that takes the oxygen out of the pellet to create the iron metallic. So — and then when that chemical reaction happens, CO2 is generated. So the more you take coke out of the blast furnace, the least, you are going to be generating CO2, as simple as that.
Hydrogen follows an alternative chemical reaction to remove the oxygen. Instead of combining to produce CO and then CO2 hydrogen will combine to produce H2O and H2O is water in the form of steam. So instead of generating massive amounts of CO2, you are going to be generating massive amounts of steam. So the more you replace coke with the hydrogen, the more you are going to take CO2 out of the picture. And the use of direct reduced iron in the form of HBI in a blast furnace is for a simple reason when you load HBI, you are no longer loading an oxide, you are loading iron metallic. Vast majority is FE, not FEO. So we don’t have oxygen to be removed from that portion of the burden that is loaded in the form of HBI. So that per se, already reduced the needs of coke.
And that’s the reason our coke rates are so low as of today, even without hydrogen, because we load massive amounts of HBI. So we are loading a lot less O inside the blast furnace, so we need a lot less carbon. With hydrogen, we’re going to need even less carbon. How much less, time will tell, because we only have one trial so far in our smallest blast furnace in our fleet, that’s Middletown, which was a big success. And the next one will be a trial in Indiana Harbor 7. But that one we are going to do with a lot of hydrogen because we’re building a pipeline for that. So we are going to be the first ones in the world to adopt hydrogen as reductant, and that will be a new route. Will that change the EAFs? No. Yeah, absolute. We’ll continue to generate less CO2 than the current route, but EAFs cannot aim for a number that we’re going to get with hydrogen, among other things because the electrodes of the EAFs are made by graphite and graphite is C.
You cannot make graphite with hydrogen because graphite is solid. That’s why the electrodes are on graphite and hydrogen is a gas. So I would say that EAFs are limited in their ability to produce certain grades. They will be limited on reducing CO2 emissions beyond what they produce today. And the possibilities with hydrogen are, at this point, a lot more interesting for the next 10 to 20 years. One more thing, now that we are completely convinced that we’re going to have hydrogen Cleveland-Cliffs during Q4 will adopt a path to net zero and certainly will be way before 2050. We’re working on that. We’ll release that during 2000 — during the Q4 of 2023.
Lucas Pipes: Lorenzo, thank you very much for that and congrats on that. Two quick follow-ups. The first, the right to bid under USW’s basic labor agreement, which you received on August 17. Does that right extend to the totality of US steel or would non-union assets such as Big River Steel possibly be excluded from that? And then secondly, on the auto contract negotiations for annual 2024, if you could maybe just share some thoughts about negotiating in the current environment. Thank you very much.
Lourenco Goncalves: Yeah. Let me start for the one that I’m going to be able to respond, that’s the auto contract. We already said in our prepared remarks that we didn’t take price decrease. So we’re able to keep our prices in good shape, and we implemented Cliffs H. That’s all we’re going to disclose. And we’re not coming beyond that on the other portion of your question, Lucas.
Lucas Pipes: Understood. Lorenzo, thank you very much for all the color and to you and the team, best of luck.
Lourenco Goncalves: Thank you.
Operator: Thank you. Our next questions come from the line of Carlos De Alba with Morgan Stanley. Please proceed with your question.
Carlos De Alba: Yeah. Good morning, Lorenzo and Celso. Just on the hydrogen discussion. Maybe a couple of follow-ups. How much do you expect the CapEx to be as you convert, or you increase — yeah, you convert your blast furnaces to be able to be hydrogen ready. What is investment per blast furnace or per ton of steel? And second, is there a limitation? And if so, what more or less is the range of to which you can substitute coke with hydrogen in your blast furnaces?
Lourenco Goncalves: Yeah. The first portion, the investment, like I said in my prepared remarks, when you already have the blast furnace, you have the two years, you have the valves, everything in place, we are going to have to build a pipeline basically to bring the hydrogen from where the generation is, usually outside the fence, all the way to the blast furnace. We are doing that as we speak for Indiana Harbor 7, and we are doing Indiana Harbor 7, because that will be our high watermark. It’s the biggest blast furnace, the one that we use the most in terms of hydrogen because of its size. And it’s also because it’s our flagship, for instance, our biggest, the biggest in the Western Hemisphere and we are going to use as a demonstration plant for how to use hydrogen.
But it’s basically — it’s a pipeline and a couple of valves. So we are estimating the cap — this CapEx to be less than $9 million as we speak. So it’s very, very minimal. And also, don’t forget we are not doing this for free. We are going to pass this cost to the clients in the form of the Cliffs H2, like we’re doing the Cliffs H. If clients really want green steel, and I believe they do, they should be willing to pay and they should be willing to pass along to the consumer or their end users, whatever. We can’t just keep talking about this thing as theoretical exercise. It sounds like everybody’s praying for this thing to just go away. This thing is not going away. So if you’re going to have to tackle, if you’re going to have to fight it, you’re going to have to fight it the right way.
This is a business, we are incurring costs. They are not — as far as hydrogen are insist it’s not going to be massive costs, but whatever costs we have, we’re going to pass along in the form of Cliffs H. The other part of the question, I promise that I forgot. Can you repeat, Carlos?
Carlos De Alba: Sure. It is just, what is it the technical level or limit of to which you can replace hydrogen with or coke with hydrogen?
Lourenco Goncalves: Yeah. That’s a question. I don’t have an answer yet, because the coke in the blast furnace plays a couple different rules and of course, the most important one is to generate the reductant. The reductant is CO, like I explained before to Lucas Pipes. But it’s not just the fact that the coke generates the CO that’s the reductant. The other role that the coke plays is as a source of heat for the — inside of the furnace. Remember you are melting solids and transforming liquids. So that coke has that role. Hydrogen will play both roles, reductant and source of heat. So from these two standpoints, hydrogen is perfect. But there’s one third role that coke plays inside the blast furnace that hydrogen cannot replace.
