Financial turmoil half a world away is melting Minnesota’s iron country

[mahatmakanejeeves]

Business

Financial turmoil half a world away is melting Minnesota’s iron country

By Ylan Q. Mui February 3 at 8:42 PM
@ylanmui

IRON JUNCTION, MINN. — The railroad tracks that connect the 50-year-old iron mine here to the rest of America are hidden by a blanket of snow. On a normal day, a train would be plowing through the snow every three hours, carrying thousands of tons of iron ore destined to be melted into the steel frame of a car or the beams of a skyscraper.

But nothing has been normal in this region for nearly a year, when the mines began shutting down, victims of a global plunge in the price of natural resources that is upending the world economic order. Brazil is in recession. Australia is struggling to pay its debts. South Africa’s currency is plummeting. ... And here in America’s Iron Range, the snow on the railroad tracks lies smooth and undisturbed.

“Over the last 30 years, the bad times last longer and the good times are shorter,” said state lawmaker Tom Anzelc, whose House district includes the region. “This particular time is the worst I have ever seen.” ... The source of the turbulence is China, where famously breakneck growth is coming to an end and no one is sure how painful that will be. The country that had helped power the world economy for years is now sowing fear across international financial markets.

In the United States, China’s hand is most obviously felt on Wall Street, which booked the worst start to a year in its history. But the country’s influence is also reshaping many corners of the U.S. economy: Soybean farmers in the Midwest are worried that demand from their best customer could begin to wane. Home buyers in California are competing with Chinese investors stowing their money in real estate far from Beijing. Factory workers in central Illinois are bracing for massive layoffs amid plunging sales at Caterpillar, which manufactures heavy machinery and is one of the region’s largest employers.
....

[mahatmakanejeeves]

1. Another four paragraphs:

Full disclosure: I own shares of Cliffs Natural Resources, and am I ever getting my clock cleaned.

China’s state-controlled steel mills didn’t slow down even when its economy did, as government officials kept the plants running to boost growth. The overproduction has created a worldwide glut of steel. In the mid-1990s, China manufactured just 93 million tons. Last year, it produced more than eight times that amount, though officials have said they plan to taper off this year.

Much of the excess supply has ended up on U.S. shores, with the nation importing a record amount of cheap steel from overseas. That has forced American steel companies to idle their mills and lay off thousands of workers. Trade lawsuits against China are winding their way through international courts.

“That type of overcapacity is going to wreak economic turmoil,” said Scott Paul, head of the Alliance for American Manufacturing. “The longer it takes to address it, the more painful it’s going to be for everybody.”

At the end of the line is the Iron Range. With the blast furnaces turned off at U.S. steel mills, there’s little demand for the taconite pellets that are the crux of the local economy. ... One of the first mines to shut down was Keewatin Taconite, which has been idle for more than nine months. United Taconite, where Hill was working, followed in August. In December, {Cliffs Natural Resources} closed its other mine in the region, Northshore. The official head count of 2,000 unemployed doesn’t include the larger ecosystem of contractors, suppliers and local businesses that depend on the mines.

[Brickbat]

2. Yep, we're hurting up here.

You ride the boom as long as you can, and prepare for the bust you know is coming. There's a lot of talk about diversification, but that takes time and money and effort -- more than a lot of people feel they have right now.

[mahatmakanejeeves]

3. ArcelorMittal Steels Itself for Tougher Times

I've got some of this too. Ooof.

9:12 am ET
Feb 5, 2016
Commodities

ArcelorMittal Steels Itself for Tougher Times

By Amboise Ecorcheville

—Bloomberg News
ArcelorMittal MT -9.93% has gone cap in hand yet again to shareholders as crumbling commodity prices threaten to make a mess of its finances. Friday’s announcement of a $3 billion capital increase is the steel-making giant’s third cash call since 2009. The move looks well judged, given the risk that the commodities slump could last for some time.

One illustration of the depth of ArcelorMittal’s woes is that the latest capital increase represents, at around €2.7 billion, not so far short of half of its market capitalization of around €6.67 billion. The controlling Mittal family is backing the capital hike to the tune of around $1.1 billion, but with new stock likely to be sold at around a 30% discount to lure other investors, the move could dilute earnings by around 37%, according to analysts at Citi.

ArcelorMittal isn’t relying only on shareholders to stump up the cash. It reckons it can raise $1 billion from the sale of its 35% stake in Spanish automotive-steel company Gestamp. Management is also counting on a new cost-savings and efficiency plans to generate an extra $3 billion in earnings by 2020 even if iron ore and steel prices remain where they are today. Resisting the temptation to count on asset sales looks wise considering that assets in the mining and steel sector are fetching rock-bottom prices.

The group, the world’s single biggest shipper of steel, isn’t completely out of danger. Assuming ArcelorMittal does get its debt down to below $12 billion from $15.7 billion at the end of last year, it would leave the group with net debt at 2.7 times forecast earnings before interest, taxes, depreciation and amortization in 2016. That’s not necessarily alarming. But so much depends on the economic outlook.