Big River Steel Economic Reports Released In Full

On Friday afternoon (March 22), the Bureau of Legislative Research released an additional executive summary and two full independent reports regarding the Big River Steel Mill project.

Yesterday, an executive summary of a report from IHS Global Insights was provided to the public. It suggested that projections conducted by the Arkansas Economic Development Commission on the $1.1 billion steel mill superproject may not be met.

But a more comprehensive read of the report, which you can read here, provides a somewhat favorable analysis of the Big River Steel project, while raising questions or warnings generally tied to requests for more details.

COMPARING PROJECTS
Looking at a fairly similar project in Columbus, Mississippi involving John Correnti, a leading investor in Big River Steel, the report notes there was about $100 million in additional financing needed for the $880 million Severstal project. That infusion, which came from private sources, occurred during the height of the recession – a worse case scenario.

“In total, for capital projects, the management of BRS has a good record in keeping costs in line with expectations. The similarities among these two projects, coupled with the success of the Columbus facility from a capital cost and project time perspective, leads us to view the estimated capital costs for the Big River Steel Facility as reasonable,” the report noted.

“With respect to estimated job creation, Severstal Columbus employs 545 workers at an average salary of $72,000 after starting with just 50 industry veterans. These statistics are almost identical to the promises of the BRS management team, at 525 jobs at $75,000 average salary with 50 industry veterans,” the report also stated.

IHS also claims that other recent steel facilities built in the U.S. are “inferior” points of comparison.

“The ThyssenKrupp facility at Calvert, Alabama is not a fair comparison because it is a part of a large global supply chain – a ‘virtual integrated mill’ as the company terms it – that was produced at a much higher planned capital cost. The electric arc furnace production method utilized at the Columbus facility and the planned Big River Steel facility is much less capital intensive.”

POSITIVE FORECAST
In the IHS economic feasibility analysis, the consulting group concludes that there is a positive forecast for the markets Big River will compete in. IHS specializes in market analysis and has a division dedicated to studying the steel industry making them very reputable on this front.

Big River Steel (BRS) could compete in four major areas of steel production:

Hot Rolled Carbon Sheet – “The BRS facility would likely have a lower cost of production than several mills within the United States, though attributable to lower labor costs than lower material costs or other efficiencies. As such, BRS would be positioned to displace at least some domestic producers by competing on price.”

Cold-Reduced Carbon Sheet – “Automotive is the single largest end market. .. Like hot-rolled carbon sheet, the cold-reduced carbon sheet market is quite large (consumption will likely exceed 12 million short tons in 2013), but also highly competitive. Just as in HRCS, the differentiating factor would be width, serving markets that are currently under-served, but not un-served.”

Hot-Dipped Galvanized Sheet – “The hot-dipped galvanized sheet (HDGS) demand is concentrated largely in the automotive and construction markets. The application of zinc during the galvanizing process makes steel corrosion resistant, a crucial element for automotive applications.” IHS noted that there are fewer players in this field.

Electrical Steel – This would be part of Phase II of the Big River Project and IHS says domestic and export opportunities exist. “Electrical steel is a much smaller, more specialized product than the three aforementioned products, but also offers the greatest market opportunity. .. In the U.S., there are only two producers of electrical steel: Allegheny Ludlum and AK Steel.”

A final positive bullet point centers on Big River’s profitability – a crucial key to the company making it in the short-run and long-run to pay back the state’s investment and fulfill its promises of contributing to the economy.

“Bottom Line: In our estimation, the gross profits in almost every scenario are sufficient to service the debt, especially considering the tax incentives that are also a part of the package,” the IHS report said.

POINTS OF CONTENTION
One of those incentives – a recycling equipment tax credit – seems to be a confusing point of calculation for both of the independent legislative studies. The tax credit has been on the books since 1993 and it allows for a 30% credit on equipment and installation costs used for the reduction, reuse or recycling of solid waste material for commercial purposes.

The Big River Steel mill will use scrap metal, so the equipment used in its production process would qualify. IHS estimates the tax credit could be worth approximately $216 million to Big River Steel. A bill being studied by the current legislature could also allow a carry forward period from 3 to 14 years on the tax credit, which adds to the uncertainty of how it could impact the financial models for the superproject.

Nonetheless, IHS asserts what state economic leaders have said since Day One that Arkansas has provided “penalty or clawback provisions in most of the incentives described above, especially for the two bond issues, in order to recapture most or all of the value of the incentives provided if BRS does not meet the performance criteria for each incentive.”

The long-term viability of the Big River Steel plant and what IHS characterized as a “zero sum” effect were a big red flag in its executive summary. However upon closer inspection, IHS’ full report offers more detail that might mitigate that warning.

It references a major new Nucor steel mill slated for Louisiana and an existing, struggling ThyssenKrupp plant in Alabama.

“Considering competing projects that are already underway, such as Nucor’s DRI facility in Louisiana and ThyssenKrupp’s facility in Alabama, the American steel industry could quickly find itself in a troubling over-supply condition,” the full report said. “Although the Nucor facility in Louisiana and the ThyssenKrupp facility in Alabama present some risk to our outlook, we believe that there is space in the market for all three.

“Bottom Line: The steel industry can handle the addition of Big River Steel, both Phase I and Phase II, from a capacity perspective. However, if any other major facilities, other than projects already announced, were to be added to the U.S. steel stock, the industry would quickly find itself in a highly competitive, zero-sum environment.”

MIXED BAG
IHS’ cost-benefit analysis offers a mixed bag of assessment on an AEDC report and its own conclusions. Primarily, IHS says it would like more data and understanding of how AEDC modeled its results. AEDC has countered it would like the same from IHS.

When state lawmakers meet Monday in a Joint Agriculture/Economic Development committee meeting to review these reports, it is likely to present AEDC leaders with an opportunity to explain away IHS concerns.

IHS begins the section with an agreement of AEDC’s estimated impact on corporate tax revenues. IHS argues that AEDC’s projections of indirect employment of 2,000 construction-related jobs may be estimated too high (although the REMI report suggests a number higher than AEDC).

IHS contends that the proximity of the project to Missouri and Tennessee could mean an undetermined amount of direct spending and employment “will leak out of the state.” Neither IHS nor AEDC, which agrees with the assumption, place a dollar value on that potential leakage.

On the long-term economic benefits, IHS said AEDC may have projected too high, but it is making that assertion with a request for more information.

“IHS believes that the AEDC has somewhat over-estimated the long-term, net economic benefits of the incentive package being offered. This finding is based on information made available to IHS as we did not, however, have access to the complete set of assumptions, calculations, and methodologies used by AEDC, especially in calculating benefits. IHS’ own cost-benefit analysis discussed below yields lower, but still positive, net economic benefits based on our effort to replicate, as accurately possible, AEDC’s analysis,” the report said.

REMI REPORT
A second executive summary and full report  was also released by the Bureau of Legislative Research on Friday. The second report was submitted by Regional Economic Models, Inc. (REMI), which conducted an independent review of the project.

While the IHS report totals 38 pages, the REMI findings are 28 pages in length and are heavy on visual graphs and tables. The REMI study, which seeks to quantify a number of economic modeling assumptions and projections, concludes that the Big River Steel Mill will be good for Arkansas.

“The project would have a generally positive impact by itself on the economy, which should not be a surprise given the input of hundreds of jobs and over a billion dollars. However, this story becomes more complicated when considering the high cost of some of the incentives involved with the project,” the report said.

While the state estimated about 2,000 jobs during the construction phase of the Big River project, REMI suggests a higher number. It says 3,500-4,000 jobs could be created during construction. After Phase II of the project, REMI sees 1,300 direct and indirect jobs tied to the steel mill through Big River employees and suppliers and vendors for the operation.

“The project would create about $400 million in additional annual gross domestic product (GDP) during construction and about $150 million more in additional GDP in subsequent years,” according to the report. “The fiscal impact picture can be more mixed, depending on the exact size of the incentives offered to the project and the higher ‘carrying costs’ to the state economy for having more jobs, GDP, and especially more population.”

As with the IHS study, REMI appears slightly flummoxed by the recycling tax credit, which it estimates as a potential $240 million liability to the state over time.

“The recycling tax credit is the biggest issue. Without it, the fiscal impact to the state is generally positive, but if the opportunity cost of the foregone revenue behind the credit counts as a liability against the state budget to the tune of $240 million, then the fiscal impact is negative,” the REMI report said.

“However, the net fiscal costs are relatively low compared to the economic benefits, and increasing state taxes or decreasing spending to make the budget whole again to these degrees would have a smaller effect on the state’s economy than opening and operating the steel plant,” it added. “While this is a burden on the state budget, this does not necessarily make the impact of Big River negative in the economic sense, as a net loss of $225 million or so over 30 years has a long way to go to contend with the billions of additional total GDP over the same period.”