Steel-making shortfall spurs Essar scrutiny

The crusher plant under construction at Essar Minnesota's Nashwauk project. (Aaron J. Brown)

Crusher plant under construction at Essar Minnesota’s Nashwauk project. (Aaron J. Brown)

It was supposed to be an innovative integrated steel mill.

That remains the fundamental shortfall of the Essar Steel Minnesota project near Nashwauk on the western Mesabi Iron Range. Work continues, to be sure, but Essar Minnesota will initially open as a straight-forward taconite plant. Perhaps next summer. Perhaps later, depending on who you talk to.

That’s the trouble. Even active construction (between 350-500 workers are on site any given day) can’t mask lingering doubts and disappointments about how this project has turned out. Those of us who have followed it even before Essar got involved have watched what was supposed to be the pivotal evolution of Minnesota’s iron ore business become a muddy, squabbling enigma that has produced as much heartburn as it has construction jobs.

Case in point, this Lee Schafer business column in Sunday’s Minneapolis Star Tribune.

A looming default on a $65.9 million state grant for a steel production facility provides a reminder that once the taxpayer gives something away in exchange for a dream that doesn’t come true, it’s not easy to get the money back.

That’s Schafer’s lede, and it pretty well summarizes the situation. I wrote about this recently, and it is certainly making the rounds. So is news that Essar may owe up to $32.9 million for a natural gas contract dispute dating back to Essar’s purchase of the project. The company is fighting that one, but that only indicates the legal battles here are on many fronts.

I reported on the project’s progress early this past summer, shortly after the May 2015 construction ramp-up. In the time since, more work has been done, but competing companies and market analysts continue to doubt Essar’s claims.

And there’s one problem that Essar’s progress can’t sugar-coat: the fact that the company will not be making anything other than taconite pellets in the foreseeable future. It will be capable of doing more, perhaps even direct-reduced iron pellets — a prime ingredient used in newer electric arc furnaces now dominating new steel production around the world. But capability has never been the problem; Action has. Slow financing and company overreach has added years and removed capacity from the original plan.

So will Essar pay back the money? Probably not, unless they have to. An Itasca County lawsuit to retrieve the state funding would take years to resolve. Will the state give the company its requested three-year extension? Probably not. More likely some kind of negotiated solution will occur, but to be brutally clear there are no great options for state at this point. On the private sector front, existing Iron Range taconite producers want Essar to pay up or play ball by allowing companies like Cliffs to buy into their operation. Essar is also resisting those efforts at this time.

Without a dramatic improvement to the global commodities market, especially to historically low iron ore prices, all of the Iron Range mines are going to have a hard time making money. That will make it difficult for Essar to add the DRI components to its operation, and it will slow efforts by other mines — especially cash-strapped Cliffs — to do so at their mines.

The heartbreaking truth is that when Iron Range mines figure out how to add value to their ore, to customize and modernize their products, they will likely secure decades of relevance in the global marketplace. And for all the talk about doing so, we are for the time being left with another stack of promises, right next to the old ones that haven’t come true. This industrial phenomenon is not limited to Essar, but it is certainly exemplified by it.

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