Yesterday, my Hibbing Daily Tribune column detailed the persistently low prices for iron ore at the root of many of the Iron Range’s current woes.
Today, I’m going to talk about debt. Supply and demand is one part of the economic picture for iron ore. Debt is what will probably determine the health of the companies who actually employ the workers, pay the bills and do the mining.
So let’s talk about how debt works for a household. Let’s say mom or dad makes most of the family income and is laid off or gets sick. There’s still some money coming in, but the bills are pilling up. Maybe they rob from retirement. Maybe they take out a home equity loan. Maybe they refinance under less-than-favorable conditions to get their mortgage lowered. Credits cards. Family loans. It’s all debt.
In any event, the costs don’t change. Even if you cut out luxuries, you have to pay your house and car loans. Debt racks up. So if mom or dad gets called back to work, they are making the same income but still have this “debt event” to reckon with. If they can’t pay the debt, they will go bankrupt.
The world of mining and steel companies is decidedly more complex. Still, the last few years have created a similar problem for Iron Range mines and their parent companies.
Let’s take Cliffs Natural Resources. They own Northshore and United Taconite, both currently idled. They are minority owners and chief operators of Hibbing Taconite, which is still running. Cliffs has faced extraordinary debt pressures after several investments in Canada and in the coal industry failed. Additionally, their cash cow — iron ore — dropped into the gutter, eliminating much of the income they would use to service debt.
At the start of the year, mining people I know and trust believed Cliffs was going to go bankrupt. For now, however, the company has wiggled out of that jam. One industry analyst now gives Cliffs more favorable marks, citing its progress in reducing its debt load.
Nevertheless, the same guy who likes what they’ve done — Brandon Dempster of Seeking Alpha — does not recommend long term investment in Cliffs:
Cliffs remains an incredibly difficult investment. The way I see it, the short-term progress that iron ore futures have made may be enough to send Cliffs higher for a few more weeks, with which I may make a quick trade, but the company still isn’t a compelling long.
Now let’s look at American steelmakers like U.S. Steel and the U.S. wing of ArcelorMittal. These are the two biggest domestic producers of new steel. Both own and operate mines on the Iron Range. U.S. Steel has the state’s biggest mine, Minntac, as well as Keewatin Taconite, which is currently idled with scant hope of reopening anytime soon. ArcelorMittal has the Minorca mine near Virginia, which is the only Minnesota mine to never slow down or stop during the current downturn.
The Northwest Indiana Times is increasingly my go-to publication for coverage of the domestic steel market. Damion Rico reported on U.S. Steel and ArcelorMittal last week:
Both ArcelorMittal and U.S. Steel now have to pay at least 20 percent interest on debt because they’re perceived as so high-risk, Bradford said. Other companies perceived as less risky are paying interest rates ranging from 5 percent to 7 percent.
“This tends to happen every cycle,” Bradford said. “The weaker the companies are, the more they pay to borrow. Rumors start whenever that happens.”
All U.S. steelmakers have been struggling after demand slowed in China, leaving the world with an estimated 700 million tons of steelmaking overcapacity, or eight times what the United States produced last year, American Iron and Steel Institute President and Chief Executive officer Thomas Gibson said. Shipments fell by 11.9 percent year-over-year in 2015 as imports captured a record 29 percent of the market share, leading to more than 12,000 layoffs nationwide last year.
China exported a record 112 million tons of steel last year, up 20 percent over the previous record of 94 million in 2014, Gibson said. That’s more steel than the United States made last year.
As a result of the import crisis, ArcelorMittal stock is mired around $3.50 a share. U.S. Steel’s stock price plunged in late January to $6.67 a share, the lowest it’s been in 100 years, Bradford said.
“These are cyclical companies,” he said. “When U.S. Steel stock is at $8 a share, that’s when going-out-of-business rumors go around.”
So rumors like this have gone on for some time, but like Cliffs, all hopes of full recovery for U.S. Steel and A-M hinge on profits from a recovery in iron ore prices. Many smart people say such a recovery will be a slow boil, not a raging spike.
To some degree, we can look at the coal mining industry for some clues about how this plays out over time. Coal has been struggling longer than iron. One of the biggest remaining coal mining companies, Peabody Incorporated (made famous by one of my favorite John Prine songs), has $1.47 billion in debt from a scheme in which it “self-bonded” to continue putting money into operations. Now that this option is no longer available, the company is staring down decades worth of debt with a fundamentally hobbled business model.
This is all to say, the supply and demand of iron ore and steel prices are important issues to follow, but so is the debt and financial health of the companies that sign the paychecks for workers here on the Iron Range.
We’ve been around long enough to know that the ore is in the ground. The workers live nearby. We know how to extract the ores. But the companies, and especially their source of funding, changes all the time. As we listen to executives talk about the prospects for their companies, we should be aware that they are speaking with the desperation of a broke person running out of options.
Maybe they’ll get a good break. Maybe not. But we can’t rely on this situation beyond reason.
The one inescapable problem with Range iron ore is that the Range is the most costly producer of raw material for steelmaking in the world. Available ores are low grade and require extensive post processing, and for many modern furnaces require even more post processing from the traditional taconite product. This means that ore can be produced and delivered from Australia, Brazil, and elsewhere for substantially less than from the Range. This is not dumping — selling at artificially low prices — this is the real cost of the product for the producers.
In this setting, when steel prices and demand collapse, as they have in the last four years, it is financially senseless for companies to keep mines on the Range operating rather than sourcing ore from lower cost producers, and they close them.
Unfortunately, both the copper-nickel mining being touted by many as a savior for the Range and the newly discussed titanium mining on the Range would also provide the world’s highest cost ores for those metals, again because of very low grade natural ores and the need for extensive post-processing. If the copper-nickel mines or the titanium mines were in production today, it is highly likely that they would be closed, just as the iron mines are. Mining from these high cost production sources would only operate in times when commodity prices were high, and the cyclic closures that have affected the Range for the last several decades would just expand into the new mining, most likely at the same time as iron, as economic contractions drove demand and prices down. We would have another few hundred unemployed miners.
One additional worry about the proposed new projects would be that automation has progressed rapidly in the world of mining. It is technically possible to run very large high production mines with only a handful of workers, many of whom might well be located far away or even overseas while they pilot drone-like robotic equipment. Instead of employing hundreds or thousands of workers, the new mines might just employ a few dozen, even while running round the clock shifts.
Extraction economies are having a very hard time of it world wide in the highly internationalized 21st century economy, and the way out for the Range is to find other industry, or face even further population out-migration and collapse. These are very hard decisions, given the very high wages in mining and the strong love for the lifestyle that has been available on the Range in the past. That makes facing this unpleasant reality and abandoning fantasies a very hard thing, but continuing to fantasize does not do anyone any favors.
A typical copper mine is approximately 0.6% ore. The average grades at Polymet are above that percentage, and Twin Metals are approximately at that percentage. Automation isn’t going to reduce any significant mine operation to a few dozen workers. Many of your other points are at least somewhat valid. I definitely agree that the Range needs to diversify into additional industries to become less reliant on the ups and downs of a single industry.
Automation already has reduced mines in Australia to that number of workers. See the article from the Australian University Aaron had last year. Even more reduction is possible. The trade off is the financial benefits of the very high front end costs and higher maintenance costs for more highly automated production, versus the costs of any number of humans doing the work. When that balance tips, the numbers of miners will tip with it.
Density of deposits is not the only factor in the amount of processing required. The reason that copper and nickel have not been developed in Northeastern Minnesota up until now — and the deposits have been well known since at least the 1960’s — is that it was unprofitable to develop them. High copper and nickel prices in the 2000’s as demand went through the roof due to demand from widespread use in new electronics and from economic development in China and India, as well as other developing nations, made the projects attractive. The subsequent collapse of prices during the world wide downturn touched off by the ongoing failure of European Union countries to recover from the recession and associated downturns in their supplier countries, along with issues of demand saturation in some consumer markets, has caused prices to plunge and projects to be put on hold.
The financial setting has caused the owners of Twin Metals to put the project on hold, to the extent that they are having to petition to protect their ore claims due to inactivity threatening voiding of agreements.
It remains correct that the ores present in Northeastern Minnesota for all exploitable metals require post processing that make the region the highest cost source for metal ores in all categories, and consequently the most vulnerable to shut down. This is not anything new up here, since we have been seeing it in iron for two generations now. The same thing will happen in other metals. When times are good, there will be good jobs, in whatever number the degree of automation dictates. When times are bad there will be extended lay offs.
All that said, the most important economic boost that the proposals for new mining offers is the cost of construction of the huge and very expensive plants required to do all this post processing. Union officials have described the boost to the region during the construction phase as similar to multiple (you fill in the blank) — very large projects employing more people at a time than will ever be employed during the operation phase of the plants, bringing large numbers of workers and dollars into the area, albeit for a very limited period of time, ending when the projects open. For Polymet, at least, those jobs will pay very well, since the late Jim Oberstar extracted an agreement to use union labor on all construction as the condition for his backing of the project.
You are really standing by your assertion that Polymet / Twin Metals could get by only employing a few dozen workers?
On the mining side, it has already been demonstrated in working mines in other countries. You are right in that no one has done anything similar for the ore processing side that I know of, but processing plant technology is theoretically easier to automate than mining itself.
In the end, I think we are both in agreement over the main point, and are just quibbling over details. Mining of all metals on the Range will be highly cyclical, with intermittent periods of high activity interspersed with significant periods of shut downs and lay-offs. Adding new operations will add jobs in boom times but make the frequent crises caused by busts worse, with more lay offs accelerating the negative impact of dips.
I am adding that technology will continue apace in elimination of more and more jobs as time passes as well.
I would also add the fact that the better the market for metals the faster the resources will be exhausted and the mines closed completely, . Mining, like almost all extraction industries, has a self limiting cycle, and it is not hard to see the final outcome for the Range, with the only question being how long that will be dragged out by cycles of closures.
As we both agree, diversification is the only way out of the disaster that awaits the Range at the end. Unfortunately, I am uncertain as to what path that diversification should follow and how to attain it. I am, however, certain that improvement of the qualifications of young people coming out of our schools and post secondary programs and improvement of our infrastructure, including transportation, energy, water and sewer, and broadband access, are important parts of the necessary formula to attract desirable alternative employment, whatever that may be.
Throwing money at infrastructure is a chicken and egg scenario. Where do we throw money to attract businesses that aren’t here yet? What infrastructure do we throw it at? The “range” covers hundreds of square miles. The IRRRB area covers an even larger area made up of hundreds of unique municipalities each with their own specific interests. We should definitely be improving educational opportunities for our young people across the region, but I have some trouble with the idea of throwing infrastructure money throughout the region without taking into account where the money might help diversify and strengthen the economy.
The state of MN has lumped us all together as being a single economic community. In many ways this is unrealistic, but to give it any chance of being successful, we need collaboration and a general plan going forward that not all are going to agree with.
The biggest thing we need is more money coming into the range from the outside. The best bet for this seems to be new manufacturing (and possibly call center) businesses. I consider Polymet and Twin Metals as great manufacturing opportunities to bring in additional money to the range economy from the outside. If they go, it gives us a huge economic boost, buying us time to get our act together on bringing additional (more diverse) businesses.
Investments in ourselves are always a risk, but if we have weak infrastructure we can safely bet that we will not attract businesses dependent on infrastructure, or allow local development of businesses dependent on it. We have to decide if we want to take the gamble that has worked well for the rest of MN in the past, including Duluth recently, or head in the direction of states like West Virginia, sliding into economic collapse as the extraction economy slows and halts, or even our neighbor Wisconsin, already in recession again as they fail to recover from the collapse of manufacturing.
I agree that the geographic size of the Range, the spread of its population over that area, and the existence of sub-region rivalry on the Range is a problem in planning any development.
I think the copper-nickel projects will have a very high positive impact during the construction phase of the projects. Their long term impact during the operation phase is less certain, due to the projects being at the mercy of the world economy and the strategic shifts of their owners in Switzerland/Britain and in Chile. As we have already discussed, they will certainly be shut down for many years of each generation of workers, and the less they are shut down the faster they will reach the ultimate end of operations through resource exhaustion. Depending on copper-nickel mining and potential new titanium mining for the future of the Range is undoubtedly a recipe for a short term boom during construction followed by long term stagnation mirroring the problems of the iron industry here. The operation phase short run is tenuous; in the long run it is doomed.
That is not to say that if the projects are successful in fending off litigation in federal courts that they should not be built. As long as they can operate without significant damage to the recreation and tourism industry, they will be at least a short term economic plus.