MPR: Iron Range Plant Proposal Carries Strings

Iron Range Plant Proposal Carries Strings
By Bob Kelleher
April 7, 1999

A new steel plant proposed for the Iron Range town of Nashwauk could create more than 1,000 jobs and pump millions of dollars into Northeast Minnesota's economy. But the proposal comes with a huge start-up cost including millions of dollars from the State of Minnesota.

THE IDEA MAY BE SIMPLE, but the application is not. The plan is to build a state-of-the-art steel mill on the Iron Range next to one of the nation's best bodies of iron ore. It's a $1.2 billion project that's never been done. Smaller steel mills of this type exist at times beside iron ore processing facilities, but none right at the iron mine.

The project would pair a high-tech facility for making high-quality iron pellets - dubbed "direct reduction iron" - with the sort of electric-arc furnace that's at the heart of the nation's thriving mini-mills.

Downtown Nashwauk is a small grid of streets and closed-up store fronts. The town is surrounded by a moonscape of man-made hills of rubble that's been pulled from the iron mines all around. Almost hidden in a drab blue building just off Main Street is the office of Minnesota Iron and Steel. Without so much as a sign on the place, it belies the image of a company with billion-dollar ambitions.

John Lefler is the newly-hired president and CEO of Minnesota Iron and Steel. He says the company would make high-quality rolled steel used in products like cars and appliances. And he says electric-arc technology, instead of a full-scale blast furnace, will help make that steel at low cost. That would enable Minnesota Iron and Steel to ride the boom and bust cycles that steer the nation's steel industry.

Lefler: The fact that we are targeting ultra-low manufacturing costs, will allow this company - and this is an important aspect - will allow this company to be profitable even in the downside of the cycle, which is what most steel companies can't do.

Lefler brings 33 years of experience in iron and steel including his most-recent position in charge of a steel mill in Gadsden, Alabama. This project attracted him, he says, because it combines the high-quality steel now made in blast furnaces, with the efficiency of modern electric-arc furnaces. That technology is now used by mini-mills to rework scrap metal into finished steel.

Lefler: I've always felt that the American steel industry will only win if it combines the best values from each concept. This is the way to do it, and so when this idea came along and I heard about it, I was very much interested in it because I do think this can set the future path of the domestic steel industry.

For the first time since iron was first pulled out of an underground mine some 40 miles from Nashwauk more than a century ago, finished steel would be made on the Iron Range. Shipping costs would be low because it's more efficient to ship finished steel than large volumes of iron ore. A mill would create more than 1,000 high-paying jobs for Northeast Minnesota, provide a workplace for young people, and help repopulate iron range schools and towns which have shriveled as the region's iron-pellet producers increased efficiency but slashed jobs.

Support comes from an impressive list of potential customers and investors, including Italian equipment manufacturer Danieli and Company, Japan's Kobe Steel and Itochu Corporation, a huge trading company, and an unnamed, major U.S. automobile manufacturer, that one area legislator says is Ford Motor Company.

Tony Barrett thinks it has a good chance of success. He's a Professor of Economics at the College of St. Scholastica in Duluth, who studies the economics of Minnesota's Iron Industry. Barrett has heard plenty of pessimism from Iron Rangers who have seen the complete failure of heralded economic projects like a Hibbing chopsticks factory and a high-tech electronics manufacturer. But Barrett is impressed by the foresight in this plan, and the team of customers, suppliers and corporate partners who have already shown support.

Barrett: Yeah, I mean you're looking at pretty good companies there. You're not looking at anyone who's endangered, you're looking at experts. If they can pull it off, just that alone would give me more confidence.

But the company faces many hurdles. According to Robert Garvey, CEO of Birmingham Steel and formerly with North Star Steel in Minneapolis, no one has ever married the different corporate culture of non-union mini-mills with that of traditional, and unionized, integrated steel companies. Garvey wonders whether the Iron Range's labor history might provide a workforce that's too rigid about work rules, wages and benefits. And he questions cost projections; especially the predicted low cost of Canadian Natural Gas. Energy prices, he says, tend to eventually float to the average world price.

But the biggest obstacle may be just putting together the initial investment. Economist Tony Barrett thinks it could be tough to lure investment in steel just when the industry has been complaining of financial pain from imported competition. Also, steel has traditionally produced a lower rate of return for investors than do other industries.

Company CEO John Lefler says it'll take local commitment to sway the final investments they need from the financial community. The company is asking the Minnesota Legislature for a $60 million forgivable loan which wouldn't have to be repaid if Minnesota Iron and Steel meets projected hiring numbers. Other public incentives for infrastructure, the Direct Reduced Iron plant and adjoining power plant, push the public contribution up to $95 million. That's a worthy investment, according to Lefler, that any state would give an arm for.

Lefler: A steel mill is a prize for any state. The jobs that spin off from a steel mill are a multiple of 5 or 6 times the number of jobs that are in that plant. So, most states will have a bidding war for a steel mill; that's what typically happens.

DFL State Representative Loren Solberg of Bovey believes in Minnesota Iron and Steel. He's authored a house bill for the loan after seeing the firm's letters of intent and meeting with potential customers and investors.

Solberg: Well, I think they have a very viable plan, and I think the viability has grown over the years. I really think that the project and company have a proven record right now, of being able to say something and prove that it's true.

Solberg's bill is stuck in the Republican-controlled House. That means its best chance may come from the DFL-dominated Senate, where DFL Senator Jerry Janezich of Chisholm is helping push the bill. Janezich expects little action from the Legislature until late in the session, but he predicts both DFLers and Republicans will come to support what could well be the biggest construction project ever in Minnesota.

Without public money, company officials say the pellet-making portion of the project will still happen, but the steel mill, which employs the lion's share of workers, could be built instead in another state.

When financing is in place, Minnesota Iron and Steel will seek air, water and other environmental permits; perhaps late this year. The use of natural gas to fuel a power plant will limit some potential pollutants, but an environmental official says the facility will likely face a lengthy review process to anticipate any unforeseen problems.

Bob Kelleher covers the Iron Range for Minnesota Public Radio. You can reach him at bkelleher@mpr.org.

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