China vows ‘zombie’ hunt in steel wars

Zombies. PHOTO: Lindsey Turner, Flickr CC

Zombies. PHOTO: Lindsey Turner, Flickr CC

One of the frustrations in living through the booms and busts of the Iron Range economy is the simplistic way our mining-based economy is portrayed in the media. It’s either, “The Range will die soon,” or “EVERYTHING IS GREAT!” The problem is neither of these statements have been true at any point in history.

It’s especially true today. The Iron Range is changing, but that’s not new. This process began decades ago and will continue until one day we look about and see a world completely different than 1978 — the model on which most baby boomer leaders continue to dream.

And we’re not alone. China, the villain in our Iron Range iron and steel narrative, has its problems, too. It has a sizable chunk of the world’s population within its borders and needs to find a way for a billion people to keep working to avoid social problems and civil unrest.

To imagine the unrest, picture the scene at an Iron Range bar where four or five laid off miners complain about their state in life. Now picture 100 times more unemployed miners at that bar — at every bar — and wonder what might happen.

That, in a nutshell, is why China “dumps” steel — selling it at a price lower that it costs to produce. They lose money, but they keep peace and power.

The rest of the largely capitalist world doesn’t like dumped steel because it busts the markets. Markets have fewer qualms about laid off workers, busying them with lousier jobs and longer hours. You can’t complain at the bar when you’re pulling a double at Taco Bell to make a house payment. Markets care about price and profit. Markets, by the way, aren’t people, but their beneficiaries are.

Because China’s steelmaking capacity is so much greater than that of the United States or Europe, China’s actions have disproportionate impact. Which is what leads us to the trade protections — nay, the burgeoning trade war — between the United States and China.

We’re very familiar with aspects of this trade problem here in Northern Minnesota. The mining industry downturn of 2015 and 2016 is attributed largely to the collapse in demand for iron ore due to low prices and dumped steel, mostly from China. But what we see is only a fraction of the picture.

We cheer as U.S. Rep. Rick Nolan, and U.S. Sens. Amy Klobuchar and Al Franken secured tariffs on dumped steel. There’s evidence those measures are a big part of the reason the mining industry is less miserable now that it was a year ago.

But we’re still in relatively rough shape, certainly the region’s economy remains badly out of balance, and we now see that some of the mining-related jobs lost in this recent downturn are likely never coming back.

China, in response to the world’s backlash against its trade practices, is in a tough bind. It needs trade, but it needs to keep those workers on the job. So this week at an international trade meeting, China vowed it would shut down its “zombie” steel mills over the next five years. Whether it will or whether it will simply dump steel somewhere else, perhaps into the growing economy of populous African nations, remains to be seen.

I talked about the “zombie” problem in a Feb. 4 post about this same topic:

I reported last week about how American ports are building for more steel imports, not less. Yet weeks ago, Business Insider reported on “zombie” ships sailing the oceans. These would be ships that are leveraged so deeply that their owners can’t make money even fully loaded with commercial cargo. Nevertheless the companies keep running their shipping routes because they need cash. In many cases they’re shipping “zombie” Chinese steel at a loss for both themselves and their customers.

That’s the damnedest thing. No one is making any money! Oh, executives are still getting paid plenty, but the companies have become money pits. The reason is debt and overproduction. Yet the companies continue going into debt and overproducing. Zombies!

The reason people fear zombies is because they can turn you into a zombie, too. This is the heart of the fear here in Northern Minnesota, where we hope the cold winters and deep woods would keep us safe. They can’t keep us safe forever. Dependence on this business model will probably never keep us safe again.

Not much new today.

China, by the way, reports that it will invest in value added iron products at its mines and mills, doing what European steelmakers have done to survive these turbulent times. Since they don’t care about making profits, there’s certainly no barrier to them building experimental plants all over the land. It will, after all, keep their workers on the job.

In terms of investment in the value-added goal, Minnesota’s Iron Range isn’t even close to the rest of the world. That should probably be the biggest fear of everyone involved in the Mesabi mining industry.

 

Comments

  1. Essar invested in the “value added goal” and it looks like they are going to lose their shirts. Polymet is investing in the Range, and have been pummelled by most everyone who doesn’t actually live on the Range. Where’s the incentive to invest anything there? Minnesota doesn’t want mining and pretty soon, mining is going to return the favor. Abandon ship, anyone with common sense. The Range is fading away, and it’s going to take a Trump or someone similar to revive it. Not likely. About the only industry that’s thriving is retirement homes, from what I’ve seen.

    • Independent says:

      Your right. People are just as disconnected about the minerals used in their everyday life as they are about where their food comes from. Disconnected from reality is how most Americans now live their entire lives. Our poor kids don’t stand a chance.

    • Gray Camp says:

      Essar deserves a large portion of the blame for “losing their shirts”. As far as I know, Polymet is still on the path to getting permitted. Your post is perhaps a bit overdramatic. True, there are plenty of people in MN who don’t want mining, and those people might eventually modify the laws to prevent new mining, but hasn’t happened yet.

  2. Nick Lansing says:

    Shutting down the zombie plants is extra hard for China. It hurts employment and local governments.

    Local governments in China get much of their funding from taxes on local industries. It doesn’t matter if the plants are inefficient, they pay taxes. The governments resist efforts to close inefficient plants and encourage new development even in saturated industries.

  3. IronMiner says:

    “In terms of investment in the value-added goal, Minnesota’s Iron Range isn’t even close to the rest of the world. That should probably be the biggest fear of everyone involved in the Mesabi mining industry”

    Would would this be a fear? Even if located elsewhere, it still wouldn’t compete to sell to China or other foreign country’s due to the shipping costs involved.

    The iron range sells to the domestic steel mills, which mainly are located on the Great Lakes. The location is great, because outside mines can’t compete with our price of pellets to supply the steel mills… So we are protected from outside pellet competition.

    But as seen, the country isn’t protected against the steel dumping, the finished products. But when we have strict environmental standards, which is a huge investment from our domestic companies, China and other country’s don’t have the same regulations to abide by. They can produce “dirty emissions” and not need to invest in all the pollution control devices and strategies we do. Not quite the even playing field, which is why tariffs have been implemented.

    If they want to play on the same field, there is no way they could compete here, playing by the same rules.

    So your last paragraph is quite irreverent saying we fear being far away from the rest of the world, when you couldn’t be farther from the truth!

    • Gerald S says:

      The steel industry continues to evolve.

      Although China has been dumping steel during the recent downturn in demand, disposing of the inventories generated by zombie plants and by political demands in China, China can and does produce steel more cheaply than the US — lower labor costs, weak environmental regulation, cheap local coal, and cheaper ore from Australia being major factors. However, China appears to be following the path blazed earlier by West Germany and then by Japan, getting out of low tech, low value added smokestack industry to pursue higher tech opportunities, with industrial robots and electric cars and light trucks being two recent areas of emphasis. They appear to be doing this first to stabilize their economy and make it less vulnerable to shocks like the recent downturn driven by economic failures in Europe, second to reduce the terrible pollution that has come to be common in China as their economy grew explosively, and third to deal with the fact that they are no longer the cheapest labor supply in the world, having lost to Viet Nam, Indonesia, Malaysia, the Philippines, and even to Botswana in that race to the bottom. New steel plants are being planned or built in Indonesia and the Philippines, where easy access to Australian ore and low labor costs will make them the lowest cost supplier.

      The US steel industry is also evolving in ways that may hurt the Range. Specialty steel plants are popping up, mostly in the South, using scrap iron and pig iron as source material. The experiments in the Gulf Coast that Aaron cited elsewhere and plans for similar operations on the West Coast, where ores will come from Brazil (the Gulf) and Australia (the West), and coal from traditional sources as well as Wyoming, are serious threats for production that will beat Range/Great Lakes prices with US sourced steel and also enjoy easier access to user markets growing in the South and West. The Great Lakes steel industry continues to involute, and this competition may accelerate that.

      In the end, developed countries with high labor costs and an emphasis on environmental safety succeed only if they adopt newer technology with greater value added that benefits from educated work forces. Germany has mastered that, as have the Scandinavian countries, the Netherlands, and Japan, and Taiwan, South Korea, and Singapore are well on their way — with China now joining the chase.

      The end of the Range extraction economy is visible on the horizon, even if non-ferrous mining meets the promises being given. The grandchildren of current miners will not be miners. The Range has to figure out how to deal with that, since world competition and exhaustion of our resources will make that outcome a certainty, not a possibility.

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