Essar Steel Minnesota’s Chapter 11 Bankruptcy – Another Victim Of The Chinese Steel Industry

According to Forbes, Essar Steel Minnesota went into Chapter 11 bankruptcy on Friday as the State of Minnesota withdrew the state licences for the taconite the company was preparing to mine. It might seem a little odd that an Indian owned mine in Minnesota will go out of business as a result of the Chinese steel industry slowing down but that is what has happened. This globalization thing really does mean that the international markets are connected in this manner. The basic background here is that taconite is a low grade form of iron ore used to make steel. As China’s steel industry has grown less fast than other iron ore miners thought it would the price of high grade ore has fallen. That in turn has knock on effects on the low grade ore. There is a way out of this but not for the current owners, Essar.

The story:

Essar Steel Minnesota, a sister company to Essar Steel Algoma and an expected future supplier of taconite to the Sault steelmaker, has filed for U.S. Chapter 11 bankruptcy protection, Minnesota news media are reporting.

The action was taken after Minnesota Governor Mark Dayton terminated Essar’s lease agreements with the state Friday.

The company pretty much ran out of development money a year back and has littered the area with unpaid bills. So, the Governor gave them a warning that unless they showed they could finance the project to completion then those leases would be pulled:

Essar Steel Minnesota, which once promised the state’s first new taconite plant in decades and the state’s first direct-reduced iron plant, filed for Chapter 11 bankruptcy protection Friday after falling short of both of those promises.

The company filed in federal court in Delaware on the same day that Minnesota Gov. Mark Dayton refused to extend a deadline to terminate Essar’s state mineral leases that gave the company access to the iron ore at the proposed mine site outside Nashwauk.

No real evidence of being able to complete the financing arrived and thus the pulling of the leases.

In his statement, Gov. Dayton said Lourenco Goncalves, the chief executive of iron-ore miner Cliffs Natural Resources CLF +11.80% Inc., has expressed a “strong desire” to take over the existing Essar Steel Minnesota project if Cliffs is assigned the state mining leases. Negotiations continue, the governor said, adding that he and Mr. Goncalves will meet again Tuesday.

Here’s what the essential problem is:

The difference this time is the Chinese economic juggernaut has slowed, says Andrew Lane, an analyst for Morningstar MORN +0.04%.

“The significant decline in iron ore spot prices since about 2011 is largely a function of fading Chinese demand,” he says.

At the same time, Lane says, the world’s three largest iron ore mining companies have all ramped up production over the past decade.

Everyone thought China would keep growing as it has done, keep swallowing the iron ore to build a new economy. So, production of the high grade ore that China generally uses was increased. And increased rather faster than China’s consumption, leading to a price crash. $190 a tonne to, at some points, $50 a tonne.

These Minnesota mines produce taconite pellets. That’s a lower grade ore worth a little less and it’s not quite a prefect substitute. You can’t just switch from one to another although with a little adjustment a blast furnace can take either. What has happened here is that the price that can be gained for taconite pellets has fallen below the cost of developing the new mine. Thus no more money is being spent upon developing it of course, investors aren’t willing to put in more money.