Want to know what keeps Governor Bryant and MDA awake at night? Something like this story reported in the Wall Street Journal yesterday:
"The newest, largest and most technologically advanced steel plant in the U.S. is for sale, likely ending an ambitious effort by German steel company ThyssenKrupp AG to establish itself in the Americas.
The $5 billion plant in southwestern Alabama—the biggest steel facility built in the U.S. in four decades—opened in 2010, importing steel slabs made at ThyssenKrupp's new $6.8 billion plant in Brazil and processing them into high-grade sheets for car and appliance makers. The arrangement represented an unusual attempt to link steelmaking on different continents. Former ThyssenKrupp Vice President Kai Mahnke, who left the company last year, described the paired plants in a 2010 interview as "a virtual, integrated steel mill, even though there are" thousands of miles between them.
Now ThyssenKrupp is pulling the plug on that $11.8 billion investment, citing high production and transportation costs, a weakening market and intense competition. The Steel Americas division, of which the two plants are the only production facilities, incurred a $1 billion loss for the first nine months of the fiscal year that ended Sunday.....
ThyssenKrupp is seeking book value, or $8.86 billion, for the two plants, and has enlisted Goldman Sachs Group Inc. and Morgan Stanley to help sell the facilities. Bids were due the last week of September.
Dan DiMicco, chief executive of Nucor Corp.,the No. 2 steel producer in the U.S. by tonnage after U.S. Steel Corp., said relying on Brazil for steel was a "bad idea" and ill-timed given the market's downturn. "This thing never should have been built, but the reality is that it's there, so we'll take a look at it," said Mr. DiMicco, who declined to comment regarding analyst estimates that Nucor would offer $1 billion for the Alabama plant. ThyssenKrupp declined to comment.
Others considering submitting bids include U.S. Steel and ArcelorMittal according to analysts and people in the industry. One possibility for U.S. Steel: trading its mill in Slovakia to ThyssenKrupp for the Alabama plant. The Pittsburgh-based steelmaker declined to comment.
ArcelorMittal is taking a serious look at the plant, said a company official, who declined to elaborate.
Analysts and industry experts said South Korean and Chinese steelmakers are interested in the Brazilian plant, which employs 3,500 people. The Alabama plant employs about 1,500....
ThyssenKrupp decided to build instead, and use a low-cost country to make the basic-commodity-type product and ship it to the U.S. for value-added processing. At the time, the cost of making steel in Brazil was considerably lower, according to ThyssenKrupp. The company could earn more money shipping steel to Alabama, even with the added shipping costs of $20 a metric ton, than selling it in Brazil. Alabama was selected over Arkansas and Louisiana, which were also competing for the plant, after Alabama offered nearly $1 billion in tax breaks and incentives, including site preparation and job training.
A spokesman for the company said it won't need to repay the incentives in the event of a sale, because "all the obligations have been met."
For the six months ended in March, the Brazil plant shipped out 1.7 million tons of steel slab and the Alabama site delivered 1.4 million tons of carbon steel to customers, ThyssenKrupp said. The company had planned for each plant to have a final capacity of five million tons a year, including all kinds of steel....
Importing unfinished goods from a lower-cost base to the U.S. for final, value-added work is a common strategy for manufacturers, who want to keep production costs low but also be near customers to respond to demand, said Thomas Mayor, a vice president for New York-based Booz & Co. who advises companies about supply chains.
"Their strategy made sense in 2007, at that point in the cycle," Mr. Mayor said. He added that the company "got hit with the double whammy of a bad market and facilities where employees are still fairly low on the learning curve." ThyssenKrupp declined to comment.
Relying on a foreign mill for slab steel is unusual, said William Selesky, a metals and mining analyst with Argus Research, who is based in New York.
"Normally, there aren't supply chains like that," Mr. Selesky said. "It's a blip on the radar screen."
Success depended on labor and raw-material costs in Brazil remaining low and steel prices in the U.S. remaining high. Instead, the opposite occurred. Prices of benchmark hot-rolled coil steel in the U.S. have fallen to $620 a ton, from more than $800 during the summer of 2011.
"Production costs in Brazil are rising disproportionately due to increasing labor costs, inflation effects and in particular the appreciation of the Brazilian currency," ThyssenKrupp said in May. In addition, the company said ore prices have increased sharply, putting Steel Americas at a competitive disadvantage compared with U.S. producers that have their own iron-ore and coal mines.
The Alabama plant, located on 3,700 acres near Mobile and equipped with specially designed cameras that monitor steel as it is rolled, coated and treated, is highly regarded but remains a tough sell.
"It is an awe-inspiring project," said Lisa Goldenberg, chief operating officer for Delaware Steel Co. and president of the Association of Steel Distributors. "But they overspent, and they overestimated the volatility of the American market." ThyssenKrupp declined to comment.
Location is another issue. "They make a wonderful, world-class product, but unfortunately, the freight cost is insurmountable as far as getting the product up here," said Jim Barnett, president of Grand Steel Products Inc., a company based in Farmington Hills, Mich., that sells steel to the construction, automotive, mining, agriculture and furniture industries.
The $50- to $90-a-ton cost of shipping steel from Alabama to Michigan, he said, is "somewhere between 12% and 16% of the cost of the steel."Article Thank you, Mr. Bernanke.
Wednesday, October 3, 2012
Did Alabama blow $1 billion in tax incentives on a steel plant?
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9 comments:
I think Bernank's a tool but what did he have to do with this sad situation?
Three words jump out of the article. Increasiing labor costs.
What exactly are the $1 billion in tax breaks and incentives. The story says Alabama spent money on site prep and job training, so that is money lost. But I would guess the bulk of the $1 billion was an agreement not to tax the facility for a period of years, perhaps 15. So on that part Alabama is losing nothing and still has the steel plant which will likely continue to operate in some fashion.
The moral of the story is not that states shouldn't offer incentives, but that states should be wary of spending substantial amounts of hard money. Instead incentives should be in the form of reduced or no taxation for a period of years.
1:59, I think KF is referring to the part that Bernanke played in raising the value of the Brazilian currency by reducing the value of the dollar through continued quantitative easing.
i'm so glad that Louisiana didn't get this plant!!!!
I think that Mr. Barnett's comment about the cost of shipping steel shows us how out of touch he is. at those prices you could truck steel up to Michigan and show a profit hauling the steel. I think that Mr. Barnett is also a bidder for the buisness.
KF, I tend to agree with 8:15's comments, and go a step further.
If the incentives were in the form of tax breaks, then the state hasn't lost anything. In fact, at this point may be ahead - construction cost of the plant, employment during construction, etc. with most of the incentives not coming about as costs if they were tax breaks.
Second - the infrastructure and job training. If another company buys this facility, as is indicated, they will be operating it and doing so "without" the tax breaks (unless of course, the state offers the new company, the buyer) new incentives. But the infrastructure costs invested will pay off the same to the state no matter that the original company went broke - if someone else comes into the picture as the new owner, employs people, and operates the facility, what the heck does AL care? What have they lost.
This isn't the well-reknown beef plant where the state invested everything - and more - including equipment and building, to a company with no assets, and for a facility with no commercial value.
I agree that states (cities, counties, etc.) should get out of the corporate welfare business. But as long as they are in it, just because the original company doesn't operate the facility doesn't mean it is all bad. Lets pass judgment when we see if they secure a purchaser and operator of the facility.
The best approach would be for the state of Alabama to loan the purchaser the money to buy the plant.
Then the state can make money on the new investment, and make the money on the old investment too.
Karma bites thyssen
Should have never closed the Detroit branch
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