Cliffs' deal with steel giant looks like Essar's last loss

A new long-term supply agreement that Cliffs Natural Resources has reached with steel giant ArcelorMittal put the final nail in the coffin of Essar Steel Minnesota, an unfinished taconite facility in northeastern Minnesota that the taxpayers have chipped in nearly $70 million to bring to fruition.

At this point it really doesn't matter if Essar Steel Minnesota somehow succeeds in reworking its finances and gets construction moving again, as there isn't an obvious customer for any production.

Even its own captive customer, a steelmaking Essar affiliate in Canada, may not be there if the project ever gets completed. Last month Essar was denied the right to bid for the assets of this operation, given that it was the one that put it into Canada's form of bankruptcy protection.

Those 350 employees that Essar Steel Minnesota promised won't be getting hired.

On the other hand, the new supply agreement with ArcelorMittal has helped to give Cliffs' United Taconite operation new life. It is gearing back up after putting more than 400 people out of work when it was idled last summer.

So skeptics of the Essar Steel Minnesota project have confirmation of what they've long suspected. What started out as an innovative economic development project to bring steelmaking jobs to northeastern Minnesota ended up being nothing but a taxpayer-subsidized effort to shift taconite mining jobs around on the Iron Range.

This pivotal contract with Cliffs, the one that finishes off Essar, was more or less expected. It's more like a 10-year renewal of agreements than a new deal. Cliffs will keep its position as the sole outside supplier of pellets to ArcelorMittal, a Luxembourg-based global steel industry giant with sales last year of $63.6 billion.

ArcelorMittal also mines its own ore, including at ArcelorMittal Minorca near Virginia on the Iron Range.

That the taconite industry has become nothing more than a brutal zero-sum game had to be top of mind for Cliffs executives as they sought to renew the supply agreement with ArcelorMittal. As Cliffs was negotiating with ArcelorMittal, it was also pointing out whenever it could that it sure didn't seem fair that it had to compete with a taxpayer-subsidized operation in Essar Steel Minnesota.

That Cliffs was competing with Essar at ArcelorMittal was no secret, as in February 2013 Essar Steel Minnesota announced that it had entered into its own long-term supply agreement with ArcelorMittal.

ArcelorMittal is a prized account for anybody in the iron mining business, as the market leader in integrated steelmaking in North America. ArcelorMittal's No. 7 blast furnace, just southeast of Chicago, can produce about 11,500 tons of iron per day and is the centerpiece of what's routinely called the biggest and most productive integrated steel making operation left in North America.

That new contract with ArcelorMittal may have been the high-water mark for Essar Steel Minnesota, although even that development was disappointing. A taconite processor wasn't the project that was promised.

"Renaissance on the Iron Range: $1.65 Billion Steelmaking Plant Breaks Ground Near Nashwauk," read the headline on a news release put out by the office of Gov. Tim Pawlenty in September 2008.

The groundbreaking culminated a yearslong process to restart taconite production at the mining site of the long-gone Butler Taconite, which closed down in the mid-1980s. Momentum for the project picked up when Essar stepped into the shoes of a local company.

First Essar was going to generate up to 2,000 construction jobs, then 700 permanent jobs at the plant and up to 2,000 additional jobs at local suppliers, and what was really celebrated in the fall of 2008 was making steel. This would be the Iron Range's first so-called "mine mouth" steel plant, producing much more value than just bulk raw materials, as unfinished steel slabs would leave there to be made into finished products.

It's been nothing but fits and starts in construction since then, as Essar struggled to keep the project funded. Suspicions soon grew that the steelmaking part of the project would be put off and that the plant would be a conventional taconite producer.

In fact, that was where the project stood when the global steel industry went into the tank and the project again ran out of money. In March Reuters first reported that Essar Steel Minnesota had hired financial advisers to try to restructure what was understood to be about $1 billion in debt.

It's interesting, though, that having Essar Steel Minnesota collapse didn't lead to an easy win for Cliffs. And that, too, points to how challenging conditions have remained in the taconite industry.

This spring, word reached a trade publication that United States Steel Corp. was aggressively chasing a supply contract with ArcelorMittal. U.S. Steel had 6 million tons of unused annual capacity at its Keetac operation in Keewatin as well as excess capacity at its big Minntac operation in Mountain Iron.

These operations were not traditional competitors of miners like Cliffs, of course, instead supplying U.S. Steel's integrated steelmaking operations.

Yet U.S. Steel isn't nearly the consumer of iron ore it once was. It had annual production capacity in its big flat-rolled steel segment of more than 24 million tons of raw steel in 2013, but with facility closures since then and slack steel demand it produced less than half that much last year.

Fighting off U.S. Steel as a taconite competitor is both unusual and somehow typical of the American steel industry in the second challenging year of a stomach-churning downturn. Even with no Essar Steel Minnesota, it's a battle over every slice of the pie.

And the pie sure isn't growing.

lee.schafer@startribune.com • 612-673-4302