The story behind tariffs, steel and the Iron Range

An electric arc furnace display in Rotherham, England. (PHOTO: Elliott Brown, Flickr CC)

Eight months ago, President Trump’s administration slapped significant tariffs on several classes of foreign products, including steel. These tariffs have been at the center of speculation over America’s economy, global trade and politics ever since.

The conventional wisdom here on Northern Minnesota’s Iron Range is that the tariffs have been good for us. Sure, they might have a negative effect on other sectors of the economy (and provoke a trade war with China and other nations) but that’s not *our* problem. Tariffs seem to have improved demand and raised prices for steel, creating profit for steel companies like U.S. Steel and ArcelorMittal and raw material producers like Cleveland-Cliffs.

Initially, Wall Street agreed. Steel stocks surged at first along with other economic indicators. But in recent weeks, much changed. Steel stocks have struggled. This, despite the fact that companies like U.S. Steel are making a nice profit after successfully raising their prices more than 10 percent. Cleveland-Cliffs also had a great year of profits, even releasing a dividend for its stockholders. Nevertheless, Cliffs’ stock stalled out, too.

Cliffs CEO Lourenco Goncalves grew so frustrated with this that he lashed out at Wall Street analysts in a recent call. Just last week, the company began to buy back stock, signaling that they think it’s worth more than its current price.

This turn of events exposes a problem. Tariffs stoked steel profits in the short run. But Wall Street — and now large parts of main street — seem unconvinced that they’ve been good for the overall economy.

The evidence mounts. This week General Motors laid off 14,000 workers. Ford has experienced a similar slump in car sales, but has avoided layoffs by moving some workers and buying out others.

As I explained earlier this year, these automobile companies are getting killed by tariffs. Trade policy within North America brims with complicated supply chains and blends of foreign and domestic parts. Manufacturers are forced to choose between building redundant plants in the U.S., Canada, and Mexico or just idling their least profitable plants. And they’re choosing to idle plants.

And guess what? Wall Street rewards them for doing so. Analysts want them to be leaner.

Wall Street is a market. It’s not a moral arbiter or even a strategic planning tool. In this case, it’s reacting to an economic reality. The effects of the tariffs might indeed be short-lived. The end result could be an economic slowdown that eats into the demand for steel and the cushy profits these last two years produced.

During the downturn of 2015, some bristled over my assertion that the fundamental problem in steel was a glut of supply and a lack of demand. It was all China’s fault, we were told. But I maintained that while steel dumping was a factor (and yes, unfair), it was global supply and demand that spurred dumping in the first place.

I’m sticking to that argument. And I think it’s bearing out.

No pun intended on “bear.”

For instance, this week steel stocks took another hit. Not because of poor demand, but because of supply. Steel Dynamics announced a new $1.8 billion steel mill to be located somewhere in the Southwestern United States. 600 jobs. That’ll be a good project for some region down there. (Right now the company is shopping for sweetheart tax deals and incentives, which will limit the reward). But the market recoiled, punishing the whole sector for fears that there could be an oversupply of steel.

The last downturn proved the most fearful sight for local taconite mines: a giant mountain of iron ore heaped by the loading docks in Duluth. That signals a lack of demand for the sole output of the Iron Range’s largest industry.

Now, we could imagine Iron Range ore shipped to the Southwest to make steel. But this new plant, like all new steel mills in the world, will use electric arc furnaces. That means the plant requires nearly pure iron to make steel. Taconite pellets are a specific blend of iron and other elements designed for use in blast furnaces.

Here we are again at a far more important question. How will the Mesabi Range mining industry prepare itself for this changing marketplace? We see Cleveland-Cliffs building a hot-briquetted iron (HBI) plant in Ohio to feed electric arc furnaces. But what’s going to happen to the Range if companies don’t develop plants like this in Minnesota?

Adding value to iron products thus becomes a far more important goal than keeping all taconite mines running exactly as they are forever. In fact, doing so is impossible anyway, tariffs or not.

So, were the tariffs a good deal? In the short run they served the Iron Range well. For instance, steel company profits were important to the positive outcome of the Steelworkers labor contract negotiations this fall.

But a recession could put those same workers on unemployment. People must have enough money to buy things made of steel for demand to continue. Tariffs are raising prices, and that’s going to cut into demand for all products, especially expensive purchases like cars and appliances.

In the end, relying on tariffs is like using cocaine to get your house cleaned faster. IT WORKS! For a time.

The best thing for the Iron Range iron mining industry is steady demand for an ever-improving value-added product. The more value added, the heartier our industry will be when times get tight. The best thing for the Iron Range economy as a whole is expanding economic diversity, which should include mining and manufacturing but also a whole lot more.

When you ride booms, you get busted. We should not accept this cycle as unchangeable. We should learn and adapt.


Comments

  1. independant says:

    It should be a wake up call to the state of Minnesota and its citizens that so many companies are willing to low value metallic ore out of this state to other states for the beneficiation process (we are losing out on double the jobs or more) because the permitting and regulations are so insanely cumbersome and slow here. Cliffs and Magnetation decided it was easier to build in a more rational state and after Steel Dynamics couldn’t even get a damn iron ore mining permit for their iron nugget facility. After being forced to build a SCRAM operation and trucking concentrate from one end of the Iron Range to the other for a few years they said to hell with it and appears that they don’t want to have anything to do with this state anymore (I cant blame them). Ridiculous permitting and regulation do a fantastic job of chasing away billions of dollars worth of investment into our region.

    • The old Minnesota Steel, later Essar, later whatever they are now project got permits for a mine and a mill back in the 2000s. What’s changed? What specific part of the process is getting stuck?

    • It would be nice if the issue of getting new plants built were as simple as that.

      In reality, as Aaron notes in passing in his article, new plants come or go based mostly on the incentives that local and state governments are willing to extend. These incentives often end up costing the citizens of the state or local area more than the money the new facility would pump into the area. Then, unfortunately, the plants frequently close in response to market conditions out of the control of the state. The classic example would be the Northwest Airlines Airbus service plant in Duluth. The city and the state pumped incentives into the plant in such a large amount that one local economist calculated that they could pay twice as many people $100,000 a year as would be employed at the plant for the expected life of the plant. Then, of course, the plant closed, stayed closed for several years, and was eventually purchased by a firm that services Canadian owned Airbus planes, employing workers in smaller numbers and for smaller wages than Northwest promised. New York City is at this moment locked in a debate about the incentives that the city and state has extended to Amazon to open a plant in Queens and whether they are a prudent or even an appropriate investment.

      The steel plant in Ohio was opened at least partly due to such incentives.

      In terms of “permitting and regulations,” Northeastern Minnesota has a unique problem. In addition to being a center for mining, it has a beautiful and relatively pristine environment that generates a huge income from tourism and local use. A recent Harvard study found — and yes, I know it has been controversial and has been attacked by partisan forces — that new mining would actually cost the area money and jobs. Even if that is not true, protecting our natural environment and the large number of associated jobs from Duluth to I-Falls is critical in any permitting of new industry with significant potential threat to the environment. That is why it often takes longer to permit a plant in Northeastern Minnesota than in the already blasted heath of industrial Ohio or New Jersey — or in parts of the country where the prevailing attitude is “to hell with the environment, to hell with the local people, we’re gonna build that chemical plant anyhow, and if people want to have clean air and clean water, let them take a vacation to Minnesota.”

      And, of course, that process is sometimes made even longer by incompetence (or deceit) by the applicants, as was the case with the first Polymet application, where even the company now concedes the application was inadequate, resulting in a very significant delay and waste of time and money. Not to mention a significant embarrassment for the Minnesota DNR, which had carelessly rubber stamped the proposal only to have its flaws pointed out by the federal government, and Polymet develop a completely different approach to the problem.

  2. Diana Giombetti says:

    I am in total agreement. I am curious, however, about specific, viable suggestions for economic diversity.

    • I’ve written about this before. It’s not so easy as waiving a wand and saying, let’s have a software engineering firm, a four-year college and lots of new retail stores. All of these things, and more, come because we have people and the means to prepare people to do different kinds of jobs. So, we must quite literally start with what we already have and build functionality from there. What will attract people who work in the tech sector? Well, we need broadband in places where people want to live (in town, yes, but also in the country). We also need people who understand software design, coding, and who have creative minds. That means implementing that kind of training in young people, not years later as an afterthought. We also need affordable housing, day care for young families, and cultural expression.

      What makes people move to a town? That’s the kind of “town” we should be. Jobs will follow people. Contrary to the economic development strategy of late, *people* are the leading indicator of jobs.

      Are we as welcoming as we should be? Do we want people to move here? Do we want new students in our schools? What if they aren’t miners? What if they won’t be miners? What if they ARE miners but look different. Yes, yes and yes. We want people who want to live here no matter who they are.

      Because the person who starts the small business that becomes the next major employer is mixed in with all the rest. When we adopt a strategy of attraction we will start doing better. Small successes lead to bigger ones.

      • Very nice job on that brief summary, Aaron. Your point that much of the entrepreneurial work and much of the tech work in the US is being done by immigrants is a very good one. If you want to see how that looks in a Northwoods setting, take a drive over to Houghton.

        Cricket, anyone?

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