On an abandoned iron ore deposit just outside of Hibbing, Minnesota — the boyhood home of Bob Dylan — India’s Essar Steel is ramping up construction on a $1.9bn mining and processing facility.
On planned completion in the second quarter of 2016 it hopes to produce 7m tonnes annually of high-grade iron ore pellets for 70-80 years.
After being delayed several times by financing problems during the recession, the project — one of the largest greenfield construction projects in North America by capital expenditure — will be the first new facility in 40 years on Minnesota’s Mesabi Iron Range. The 150km stretch of the richest iron ore deposits in North America has powered the Great Lakes steel mills and US industrialisation for more than a century.
But the massive construction project comes as other US iron and steel companies cut production in the face of low global iron ore prices and cheap steel imports.
Essar, a $39bn conglomerate whose Canadian steelmaking operation recently emerged from bankruptcy protection, is placing a large bet on a new boom in US manufacturing that will create more demand for high-grade, domestically produced steel.
“For us, the market is regional,” said Madhu Vuppuluri, chief executive of Essar Steel. “Due to the infrastructure revival that is likely to take place here in North America, the US and Canadian steel industry will remain robust moving forward.”
In 2013, the American Society of Civil Engineers estimated that $3.6tn in investment was needed by 2020 to return US infrastructure to its optimal state.
Founded by billionaire brothers Shashi and Ravi Ruia, Mumbai-based Essar is one of India’s highest-profile family-run business groups, having grown rapidly over the past two decades in sectors ranging from steel and power to construction and oil refining.
But the group’s heavy North American investment comes as the wider Essar Group has launched a wave of asset sales and financial restructuring, as it struggles to cope with delays to major investment projects and mounting bad debts in its Indian operations.
Essar recently sold a 49 per cent stake in its main oil refinery to Rosneft of Russia, while in 2013 it took on a new $1bn loan from Moscow-based VTB Bank to fund a controversial delisting of its Essar Energy subsidiary from the London Stock Exchange.
By incorporating new workflow efficiencies with the latest pollution capture and extraction technologies, Essar claims it will be able to produce iron ore pellets at lower cost and with fewer environmental consequences than alternatives at a time when US steelmakers face higher labour costs and stricter environmental regulations than international competitors.
The proximity of its facility to steel mills in Chicago, Pittsburgh and Cleveland offers the company another advantage, as do the natural barriers to entry provided by the Great Lakes region.
“The geography in the middle of the continent has afforded the industry some protection from Brazilian and Australian iron ore. It’s very difficult for sea-based iron ore to go through all the locks of the St Lawrence Seaway. There are tons of logistical costs,” said David Waldron, a senior adviser at Roland Berger, a consultancy.
The early signs are optimistic. The company has secured several long-term agreements with US steelmakers, who themselves are preparing for rising demand for the high-grade steel used in automobiles and advanced manufacturing.
But Essar’s bet on a renaissance of American manufacturing comes as US miners and steelmakers are being squeezed by the lowest global iron ore prices in seven years. Aggressive production in Australia and Brazil, coupled with a slowing Chinese economy, has forced the price per tonne down from just under $200 in 2011 to just above $50 this summer as global supply outpaces demand.
The price shock has forced industry titans such as US Steel, AK Steel and Steel Dynamics to scale down production and lay off workers on the Iron Range and elsewhere. Furthermore, pointing to a 50 per cent increase since 2010 in the proportion of steel that has been imported, US steelmakers say that China’s state-owned steel companies continue to produce at high levels and dump the remaining product into the US market at artificially low prices.
“While iron ore prices aren’t expected to remain this low forever, domestic iron ore production continues to be challenged . . . In the short term, steel imports continue to hammer domestic steel producers,” said a spokesperson for ArcelorMittal, which owns both mines and steel mills in the Great Lakes region.
“[Essar] couldn’t have timed this worse,” said Tony Barrett, an economics professor at the College of St Scholastica in Duluth, Minnesota and an expert on the local mining industry. “You just have to ask yourself ‘is this going to make money over the next 30 years?’”
Source: FT