Nashwauk steel plant falls short of its big promise

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.

There is a modern new facility under construction near the town of Nashwauk in northeastern Minnesota, with construction jobs along with the promise of new full-time jobs. But it's not going to start operations by Oct. 1, as required under the terms of the grant.

If this were just a delay in construction, the grant situation would be easy to fix, perhaps just by negotiating an extension. But that's not the only issue.

When the plant does come to life, it won't produce any steel. Instead, it will be another facility that processes taconite, the little pellets that are a form of iron ore.

Minnesota already has several of those, and business hasn't been great lately. The reason state policymakers got excited about the project near Nashwauk was that it was supposed to be a steelmaking plant, the first facility in Minnesota that took rock out of the ground and then processed it enough to actually ship steel, not just the taconite.

So not only is the plant late, extending the terms to not get the money back just means the public will end up subsidizing a new operation that simply competes with other big employers in the northeastern Minnesota taconite business.

That hardly seems fair, and the most vocal competitor in pointing that out has been has been Cliffs Natural Resources, which manages three operations in northeastern Minnesota.

Obviously none of this was envisioned back in 2008, when about 1,000 people turned out for the groundbreaking. It was an understatement to call this an exciting development for the area: the prospect of a new facility that would be turning out steel by 2012, with an expected payroll of up to 700.

Between the groundbreaking and today, there was, of course, the worst economic downturn in more than 70 years. But the project also had trouble getting financed due to the financial instability of its parent company, the Essar Group in India.

Along the way the project shrunk to just a taconite plant.

The agreement to help fund the project was reached during the administration of former Gov. Tim Pawlenty, but to blame the Pawlenty administration for a bad deal is simply not fair. There were lots of fingerprints on this one, because it was just the kind of economic development project people of northeastern Minnesota had been looking for.

The idea was to diversify the regional economy away from its primary drivers, iron mining and timber. Any new industry helps, but so would a business that adds more processes to the commodity business of mining and processing taconite.

A steel mill sounded great, given that it's been nearly 40 years now since iron mining peaked in Minnesota, with direct employment of more than 15,000 workers. By the early 1980s, production had fallen to a level not seen since the Great Depression. The industry hasn't since come close to employing 15,000.

One of the casualties of the protracted downturn was an operation near Nashwauk called Butler Taconite. It closed for good in the summer of 1985. At least 400 jobs were lost.

The closure came even though deposits of iron on the property, the ore body, were still economically attractive. The first plans to start a new operation on the site surfaced in the mid-1990s, and eventually the Essar Group of India stepped into the project.

Essar was a steel producer, not a miner. Its plan in Minnesota was to build a modern "mine mouth" steel plant.

"The public money was devoted exclusively … to construct infrastructure for what was going to be a steel mill," said Tom Anzelc, a veteran DFL state legislator from Balsam Township and chair of the Iron Range delegation. "A railroad was built. Gas was brought in. A huge electrical substation was constructed. And that work is complete. Now we find ourselves in a situation where the behavior of the company does not comport with the terms of the agreement. And so we have a problem."

Anzelc said there was far from a consensus among northeastern Minnesota public officials about what to do about it, too. On the one hand, companies like Cliffs have a point, the public's money wasn't really meant to help build a facility that would compete with companies that have been employing neighbors for decades.

On the other hand, the day is fast approaching when Essar will put a viable mining site back into production, and if not making steel with 700 employees, it will at least be producing taconite with up to 350 employees.

One hope is Essar could yet be arm-twisted into building a facility to make a value-added product called direct reduced iron, much further up the value chain than just taconite. DRI pellets are a lot like pig iron in their iron content and can be used in electric arc furnaces, typically along with scrap.

Essar declined to comment.

A spokeswoman for the state's Department of Employment and Economic Development said in an e-mail that the state was "in communication" with Essar Steel Minnesota and its parent company about what to do.

"While the Essar firms will not meet the terms of the original agreement to construct a steel making facility by Oct. 1, we are certainly grateful for the work that has been done to-date to build a new taconite facility and to employ hundreds of Minnesotans, and we expect this work to continue," she said.

There are few good options here, in facing off against Essar. As best can be determined, the remedy in the reimbursement agreement if Essar won't come up with the $65.9 million is essentially to have the state, through Itasca County, just sue Essar for it.

And in the 30 years of watching public officials try to develop the economy of this state, suing a company the state's counting on to provide a lot of new jobs is one tactic that's never been tried.

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