Even as surging steel prices continue to create ripples throughout the U.S. economy, Steel Dynamics (NASDAQ:STLD) is working on a potentially promising technology that could inject new raw material into the marketplace.

As Fool contributor Rich Smith has written, tight steel supplies have resulted in a near-term profits bonanza for steel makers including Schnitzer Steel Industries (NASDAQ:SCHN) and Reliance Steel (NYSE:RS). On the downside, the supply crunch has caused serious friction between steel suppliers and industrial consumers, most notably in the current legal dispute between Steel Dynamics, Textron (NYSE:TXT), and General Motors (NYSE:GM). The tension arises as steel suppliers themselves are facing rising raw material costs as the price of scrap and iron ore also climbs.

As so often happens, though, technology is poised to add another variable to the equation. Back in March 2002, Steel Dynamics formed a joint venture with mining concern Cleveland-Cliffs (NYSE:CLF), Ferrometrics, and Japanese steel maker Kobe Steel to test and develop Kobe's Itmk3 iron production technology. The U.S. Department of Energy also loaned support to the effort, which became known as the Mesabi Nugget project, because Itmk3 promised to be far cheaper, as well as more energy-efficient and environmentally friendly, than current blast-furnace technologies.

By all accounts, the initiative has been a huge success. Itmk3 technology yields iron nuggets composed of 96% to 98% iron. At this level of purity, the Mesabi iron can be used by the growing steel mini-mills, such as Steel Dynamics, which are traditionally fed by recycled scrap steel.

Faced with soaring pig iron and scrap prices, Steel Dynamics is rushing to build a 500,000-ton per-year Itmk3 facility in the U.S. The company estimates that producing the Itmk3 iron nuggets will cost $150 to $160 per ton. With finished steel sheets currently selling for north of $400 per ton, the plan seems to make a lot of sense.

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Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.