David Paratore AMM Inner Circle Interview Transcript

  • August 7, 2012

  • ​Inner Circle: Tell us about to NanoSteel Co., its history, its mission, and its strategic objective.

    NanoSteel’s Paratore: Although NanoSteel has been around for 10 years, the actual technology has been in development for 18 years. The first eight years were conducted at the Idaho National Lab and funded by DARPA and the Department of Energy. The basic principle is simple. If you can create steel that has a microstructure with a grain size in the nanometer realm, you get really unique properties. The challenge has been that while people could do that, they achieved steel that had really interesting strength but no ductility. Essentially, it was very brittle. So, what’s taken 18 years to do is develop a way to create steel with nano-structure that not only has high strength but also has high elongation or ductility. Ductility is important because without it, you can’t shape the material. You can’t form the steel into parts. Looking at NanoSteel from a historical perspective, the initial eight years of development were conducted in the Idaho National Labs and The NanoSteel Company was created in 2002. Since the company was formed, we’ve been venture-backed with the goal of achieving  nano-structured sheet steel. We started with coatings, which were the first type of products that we could adapt this technology to, and we sell those coatings into the mining and oil and gas markets, to support applications that have high wear.

    Inner Circle: How are the coatings applied?  

    NanoSteel’s Paratore: The coatings are done in two ways. They are applied by a thermal spray process, which resembles a molten metallic spray paint. The other approach involves a weld overlay. Both are relatively simple technologies in terms of process dynamics. Simplicity is one of the mantras for NanoSteel. Any product we develop must be able to be manufactured using conventional production processes. We don’t develop products that require extra equipment to produce. For instance, you can apply our coatings even if you’re using a 50-year-old welding torch. That’s the basic idea. And that legacy continues in sheet steel. 

    Inner Circle: What distinguishes NanoSteel Co. from its’ competitors?

    NanoSteel’s Paratore: Our basic mission is designing alloys. That’s what we do. We design sheet steel. We design steel or iron-based alloys—call it what you want—with the idea of getting to that nanostructure. And that’s all we do. We feel we are one of the strongest players in basic alloy research and alloy design in the steel industry because we have spent so much time, effort and capital doing that. It is what we focus on. 

    Inner Circle: How does this singular focus and the knowledge base derived from it translate into an actual production environment? And what are the results going to mean to the sophisticated customer base you have targeted in the automotive arena.

    NanoSteel’s Paratore: Let’s start with the customer base. The idea has always been to create sheet steel for the automotive market because automotive really values high strength. Making vehicles lighter comes down to how strong you can make the material and how thin a gauge you can achieve. What we’ve done for the last two and a half years is focus specifically on the target requirements given to us by the auto industry. Our technology is truly market-driven; it’s not just technology for the sake of technology. Once you evolve the technology out of the lab, you face the really difficult transition of advancing the research into product development and actual commercialization. That’s one of the reasons we really value our steel partners. A lot of developments never make it out of the lab. That’s not the case with NanoSteel. Everything we have done, for the most part, has made it out of the lab. We’ve done this with our coatings. We’ve done it on our foils which are almost like an alternative to aluminum foil. And we’ve now doing it on sheet steel, using the same basic model. Develop the core research, making sure that in our research facilities, we don’t do just pure research, but actually do simulated production processes so that we can have a sense of where we need to go with the development. And then, for the final step, get a good, strong partner or partners to work with to help cross that chasm, so to speak. 

    Inner Circle: Can you identify your partners in the auto industry?  

    NanoSteel’s Paratore: I can’t do it at this time, but we will be sharing that information soon. (Editor’s note: On August 6, the NanoSteel Co. announced that General Motors Ventures LLC, a General Motors subsidiary created to invest in promising automotive technologies, invested in the Providence, R.I.-based company. Terms of the investment were not disclosed). 

    Inner Circle: How many partners are you working with?  

    NanoSteel’s  Paratore: Two very large, very reputable steel companies, people who really want to either develop their relationships in the auto industry or already have existing relationships.

    Inner Circle: Can you tell us some of the automakers you’ve worked with in terms of alloy design?  

    NanoSteel’s Paratore: From a confidentiality perspective, I can’t share names yet, but certainly in the next two to three months, we will be sharing that information. 

    Inner Circle: Can you talk specifically about the role of the steelmaker and the production processes involved?  What kind of equipment modifications or additions will be required?   

    NanoSteel’s Paratore: What we’re doing is designing a pure alloy system. We’re not making a coating anymore.  We’re making sheet steel, or a slab, or a thin slab. The basic idea is that all the mill is doing is process optimization to make sure that they can actually run our alloys on their system continuously. That’s really been the focus of our development efforts for the past eight to ten months. We have been conducting trials to make sure all the final tweaks have been made to do this most effectively. As anyone in steel knows, when you change the chemistry, you have to tailor the process somewhat to address the new chemistry. We’re not looking for the mill to add processing steps. We’re not asking for different-hot rolled steps or cold-rolled steps or heat treats. In fact, one of the benefits of our steels is you don’t need a lot of post processing or post heat treating. You get the structures you want pretty much right out of the oven. No pun intended.

    Inner Circle: So, where’s the magic? 

    NanoSteel’s Paratore: It’s in the chemistry. What we do basically is design chemistries to form certain structures or microstructures. In our case, we call them nano-structures. But that art, that talent at research is all in picking the right chemistry. And that chemistry then provides us a unique microstructure. We refer to that as a mechanism, which is essentially the way that the system of microstructure or alloy or piece of sheet steel will handle load and the ability to bend. From an intellectual property perspective, the “magic” is really on three fronts: Its chemistries, its microstructures, andits mechanisms. And they’re all unique. But the key is we’re not talking about adding exotic materials. We’re not talking about adding rare earths. We’re talking about taking ratios of materials or constituents that people just haven’t seen before but have already used. The breakthrough comes down to taking basic constituents that people are accustomed to seeing and using them in different ratios. And those ratios have created structures that people would not expect.

    Inner Circle: What enabled that breakthrough?  Was it pure human genius, or was it access to a set of analytical or modeling tools that weren’t available previously?

    NanoSteel’s Paratore: I’d say it’s more human genius than anything else. We have an incredibly talented research organization led by Dan Branagan, our chief technology officer. He’s been doing this for the last 18 years. He knows his stuff, and when you look at the technology and where it’s evolved from, there aren’t a lot of good models to do what we’re doing. It would have been great to have a nice numerical, computer model that would allow us to extrapolate into the realm that we’re in. But the problem with models is they typically only work well between two boundaries. When you’re trying to step outside the boundary without the database, however, the models are tough to use. We did try to use models but in essence, we’re creating a new database that someone could develop a model from. And that’s where Dan’s technique and skill have come in.

    Inner Circle: Did the automakers ask you for anything that you couldn’t deliver? Did you feel fairly confident you could meet their expectations or did they stick you with some wild parameters?

    NanoSteel’s Paratore: They give us wild ones. The most significant meeting with the automakers was held in October/November of 2010.  And they laid down a target of 1,200 MPa strength with 20-percent elongation.  I can distinctly remember Dan and myself in that meeting thinking, “We’ll never make that.” We just never thought we’d achieve that goal. That was November, 2010. In May of 2011, we actually had achieved it. So, we somewhat surprised ourselves. And we certainly surprised them because I think our auto partners purposely gave us an objective that they thought, “Yeah, well, you know, we’ll talk to you in three or four years.”  The reality was it took six months.

    Inner Circle: How is all this effort going to translate in terms of pricing the AHSS material?  

    NanoSteel’s Paratore: Price, of course, is a function of the constituents of the product. And when you look at technology, this is especially critical. Everyone says, “This is what we want in terms of performance.” And it doesn’t take 10 seconds, from the time you deliver what they want for them to claim it costs too much. We’ve seen that before in coatings, too. We have and we still design coatings for people, and within a week of giving them a solution, the next communication is, “I can’t afford that price. Find me a lower cost version.”  So, we’ve already taken that step. We started with relatively high-cost constituents or ratios of constituents. And what we’re actually optimizing right now is a very low-cost version. Now, low cost is a relative term. Is it going to be as low cost as some of your basic plain carbon steels? No. Is it going to be significantly less expensive than stainless steel? Absolutely. Is it going to be in the realm of a Martensitic or something like that? Sure. That’s what we’re looking to do. 

    Inner Circle: As you know, electric furnaces now account for more than 60 percent of the steel melting base in the U.S. Is the NanoSteel technology amenable to scrap-based steel?  

    NanoSteel’s Paratore: Absolutely. In fact, all the trials we are doing are in an EAF melting scrap. That’s another one of those things we use as a mantra.  If you develop something that is so unique that it can’t be used in a commercial environment, it doesn’t do anyone any good. What we focus on is making sure our alloys are robust enough that you can use an EAF and  scrap because that’s the way you keep costs down. If you don’t keep costs down, you don’t have a product.

    Inner Circle: You said earlier that the technology involved fewer processing steps on the mill floor as well as at the auto assembly plant. Specifically, what steps are eliminated?

    NanoSteel’s Paratore: The way we see it, a lot of high-strength steels involve the use of multiple heat treat cycles post the actual creation of the steel. We don’t need to do that. We’re looking at a process where with one hot-roll step and maybe one simple heat-treat step, you’re done. You have the structures you want. The reason we do that heat treat or hot roll, is to create microstructures that give the material that final boost of property performance, to get it to the place where people want and need it to be. Having said that, it can be cold rolled, because at the end of the day, you need gauges that the auto company wants. That’s not an issue. It all comes down to how much processing you need to doand whether the processing is done at the steel plant, before the material is delivered, or after delivery when someone for instance, needs to take a steel and hot form it. In the latter case, e they have to spend time and energy to get it up to temperature before they can shape it. We can eliminate that as well. That’s really why that auto OEM gave us the target they did. They gave us such a high elongation, 20 percent, because they want to cold form it. They don’t want to use hot forming if they can avoid it, which makes sense. For them, it’s time and it’s cost. So, that’s what we do. We eliminate that need and expense.

    Inner Circle: What’s the next step for NanoSteel Co.? Where do you go from here?  

    NanoSteel’s Paratore: In the short term, our next step is to validate this material for automotive use. So, that’s the next 12 months. That’s the most important step for us. And we’re on track to do that. Secondarily, if you look at alternative markets, the auto market is really rather unique. Automakers drive a lot of advanced high-strength steel development. It’s also fortunate that automotive is a very large market and, as such, provides a rationale to justify your investment. So, automotive is really a key focus for us. We have just recently started exploring other markets. For instance, deep wells in oil & gas. When you look at 30,000-foot deep wells, you’re getting into a realm where current steel technology doesn’t necessarily have the strengths or properties needed to handle the high pressures and high temperatures. So, that’s a conversation we’ve recently started with some of the oil and gas companies.  We’re happy to say, they actually came to us because they’ve heard what we’re doing I would say those two markets, automotive and oil & gas, are going to keep us busy for quite some time.

    Inner Circle: How are you going to handle this competitively given the fact you are working with several partners? Are you going to license your knowhow for application to anyone who wants to adopt it? 

    NanoSteel’s Paratore:  I think the business model is still evolving, but I would say that the license model is the likely answer. The reason we say that is simple: We’re not steel producers. We don’t have a $2-billion steel plant and we’re not going to build one. That’s not our model and it never has been. We’ve always contracted  manufacturing. The unique thing about the automotive base is that we don’t see it necessarily as, “We will be the supplier of the steel to an auto OEM.” We actually think that from a commercial viability perspective, the right answer is really, “Let the steel guys and auto guys work together.” It’s not for us to get in the middle. Our job is to design technology, design new alloys, and then, make them available for everyone to use. This is really the business model. And who gets those licenses and how we license really is key to what we’re working on today. My long-term answer is in  a perfect world,  the technology is available for everyone to use. It’s just a question of how we get there. Obviously, we’re in business to do the best we can for our investors as well.

    Inner Circle: Are you branding the technology or material in any certain way?  

    NanoSteel’s Paratore: We are simply branding it as NanoSteel. We’ve talked quite a bit about that. A lot of people would avoid the word steel in their name. And nano used to be an important word or a really high-flash word. It’s not so much anymore. One of the important things to know about our company is we pretty much try to do what we say we’re going to do. Our name reflects that. We make NanoSteel. We could call it other pretty things. We could find more colorful words. But in the end, that’s what we do. We make NanoSteel. And we make it work. So, from that perspective, NanoSteel will likely be the brand.

    Inner Circle: Do you have any preference regarding the structure of the licensing program? Would it be on a tonnage basis, an annual usage basis or something similar? 

    NanoSteel’s Paratore: It’s still in evolution, but I think the simplest model is what NanoSteel tends to gravitate to. There’s no reason to add complexity to a system that’s already very complex. So, is it a simple tonnage license model?  Yes, I think we could do that and make that work. Would it involve licensing auto OEMs, which is a really unique approach as opposed to licensing steel guys? I think that’s an alternative. But the likely solution is licensing the steel companies because if you’re a steel company, you’re going to want to make it for more than one customer or more than one automotive company. The idea is to structure the licensing program so that it’s ubiquitous, that everybody can get it.

    Inner Circle: You have a terrific story, Are there any worries at all? Anything that keeps you up at night?

    NanoSteel’s Paratore: I’m always worried. There are plenty of things that keep me up at night. The most important thing on my mind, what keeps me up at night, is making sure that we’ve hit all the specifications the auto guys want, because as anyone who deals with the automotive industry knows, there are many layers to that onion. And there are a lot of things that have to be validated to say that a new steel actually is a good steel. Another thing that keeps me up at night is making sure that we maximize the value of this technology. It’s been 18 years. A lot of money, a lot of time has been invested. And when we look ahead, we want to make sure that we really get the return on investment that all that effort and expense deserves.  

    Inner Circle: Wouldn’t that influence you to limit the number of licenses you sign?  

    NanoSteel’s Paratore: That’s a great point and one that we are still evolving. The question is, “How do you go to market and get optimal results for two different parties?”  One result is for the industry itself and the second is for investors. And you have to strike the right balance between the two. Personally, I like the idea of leaving a legacy. I want to be walking by every car and say, “Yep. That car is lighter, that car meets the CAFE standards because they use NanoSteel.”  And when you look at the automotive requirements, the global requirements, it’s not as simple as saying, “I’m going to license one company,” quite frankly because one company can’t support our auto buy.  When I look out and I see the needs in Korea and China and Europe and North America, I see a necessity to have multiple licenses.  How they get structured and who gets them, I think that’s the real question.

    Inner Circle: Are you at the point of validation yet anywhere?  

    NanoSteel’s Paratore: We’re getting close. We’re at the point now where we’re probably a few months away from delivering our first coils for validation, and then we start that validation process.

    Inner Circle: How competitive a space is the NanoSteel technology arena these days?  

    NanoSteel’s Paratore: I don’t feel it’s very competitive because of a few fundamental factors. Most basic steel alloy research is being done at a national level in the United States, Russia or China. There’s not a great deal of expense or energy expended elsewhere because it is expensive to do basic alloy research. So, I’m pretty comfortable in saying we’re one of the very few venture-backed startups in the steel space.   It doesn’t mean there isn’t any competition out there. We’re very much attuned to who’s doing what, but what is unique about NanoSteel is that we design steel that has nanostructures.  We don’t make steel one nano piece at a time. A lot of people jump to that conclusion and think the material can never be used in volume because you’re making such a small amount every time. That’s not us. We’re doing recyclable steel. We’re using an EAF. We’re making large, 100-ton melts, and we’re doing it in volume. It’s important to distinguish between nano-structures, which is what we do, and nano-particles, which is what a lot of other people do.

    Inner Circle: Eighteen years is a long time.  Usually, an endeavor on that scale has a few heroes or champions.  Was there one individual or a core of individuals that kept pushing the envelope?

    NanoSteel’s Paratore: From a hero perspective, it is Dan Branagan. Dan is the heart of this research organization. He leads our research group and has been doing this for 18 years. It’s his creativity that’s driven us to this success. When someone writes the saga of NanoSteel, it’s going to be on the shoulders of what Dan did. From a profitability perspective, we’re not profitable. I mean, we are truly a venture-backed startup. And as it is with most venture-backed startups, you’re using cash. You’re trying to develop something and the market is just opening up after you get there. That’s what we look forward to in the near future, that profitability. And I think this product line will get us there.

    Inner Circle: And the incursion in auto steel was the goal from the start?  

    NanoSteel’s Paratore: I think it evolved from the basic principle that we wanted to create nano-structured steel, and then when you look at the markets which really value those properties, automotive was the most likely.  At the end of the day, NanoSteel is about creating nano-structured sheet steels. It’s about giving users properties that they can’t get today: high elongation and high strength. And, allowing the auto industry to really stick with steel. That’s a big thing for us. We don’t see ourselves as, an exponential change in steel. We see this as an incremental innovation to the current technologies out there. We’re just moving the ball a little further down the path.  And I love that idea. I love the idea of being able to use the most prevalent material and continue to use that in cars, and provide properties so that it’s a lot more difficult for the aluminum and the carbon fiber guys. That’s the challenge that steel has. And we’re just one piece of that overall strategy for steel to be that answer for cars.