Big Iron Range steel project still going -- for now

Steel plant site
A diagram of the site of the new Essar Steel plant, which will be built in Nashwauk, Minn. on the Iron Range.
MPR Photo/Bob Kelleher

By all accounts, construction is proceeding as planned on Essar Steel's new Iron Range taconite and steel facility.

But Essar has had trouble getting banks to back the huge project north of Nashwauk, Minn. Some Iron Range lawmakers reported hearing those financing concerns from Essar North America President Madhu Vuppuluri in a recent meeting.

Vuppuluri is now in India, and he has not been available to respond.

But reports of his comments launched a storm of speculation about the viability of this very big and desirable construction project.

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Right now things are as about as bad as we've seen for a very long time, and I'm talking probably pre-World War II.

Demand for steel from customers like auto makers has dropped to next to nothing and layoffs have spread across the Range.

Itasca County Commissioner Chair Karen Burthwick admits to some concerns about the Essar project's health.

"We've seen reports in the news that Essar has been unable to obtain all of the funding that it needs for the project, and I know there is a lot of concern out in the community about that, as to whether or not the project can go forward without that," Burthwick said. "And of course, just looking at the economic times that we're in and the downturn in the steel industry is a concern."

But Nashwauk Mayor Bill Hendricks has none of those misgivings. Hendricks said Essar is still preparing ground for a taconite plant.

"They're digging. They're preparing the site. They've got machines out there - moving machines that are in the process of moving forward. And everything is moving forward," said Hendricks.

State Sen. Tom Saxhaug, DFL - Grand Rapids, who was in the meeting with Vuppuluri, said the executive's comments to lawmakers were not about Essar, but about corporate finance in general.

"He was talking in a broad sense, and I don't think Essar has any particular problems with financing," Saxhaug said.

Gov. Tim Pawlenty echoed that in an Iron Range meeting this week, saying the company had told state officials they did not need any of the state's financial help.

Essar is one of several Iron Range mining projects either underway or in the later planning stages.

However, as Iron Range Resources Commissioner Sandy Layman noted, tight credit markets do make this a challenging time to build.

"I think what we're recognizing is that the large projects that are moving forward, and thankfully they are moving forward, are experiencing what all projects are experiencing. And that is a very tight lending market," she said.

And, it's a difficult time to be in the steel industry, with huge financial pressures, according to analyst Steve Oman, with the credit ratings firm Moody's Investors Service.

"Right now things are as about as bad as we've seen for a very long time," he said, "and I'm talking probably pre-World War II."

Oman's firm doesn't rate Essar Steel Minnesota, so he confined his comments to the steel industry in general.

Oman said steel prices have dropped by half since last summer, before the bottom dropped out. Even though labor and material costs for construction are much lower now, most companies, he said, will try to hold onto their cash.

"Companies will be reluctant to throw any more money into a new project right now. They're much more worried about maintaining adequate liquidity -- keeping the cash balances high -- because they just don't know if the banks will be there to support them if they need to raise some cash on a short basis," Oman said.

Essar has a huge Indian conglomerate behind it, and its deep pockets could sustain the Minnesota project for some time.

But no company can afford to burn cash indefinitely, and more freely flowing credit will increase the chances of Essar Steel Minnesota getting completed on schedule.