Nucor Steel is ratcheting up its objections to the Big River Steel superproject, including questions concerning steel capacity, its impact on Nucor’s state tax contributions, and the possibility of moving jobs out of Arkansas.
Nearly one month ago, Talk Business Arkansas first reported on the initial pushback Nucor launched in its opposition of the John Correnti-led Big River Steel project – a $1.1 billion investment in Osceola, Ark., expected to create 525 jobs averaging $75,000 a year.
Charlotte, N.C.-based Nucor Corp. has been circulating a new series of questions to Arkansas lawmakers with bullet point answers and talking points. Nucor has two major steel producing facilities in Mississippi County, where Big River wants to locate.
The five-page memo distributed by Nucor reiterates some previous concerns about the project. It claims Big River will drive up raw material costs and employee wages as well as be a 100% direct competitor to existing Nucor facilities in Arkansas, a claim disputed by Big River.
THREAT OF TRANSFERS
One question in the memo asks what Nucor Steel Arkansas (NSA) will do if Big River Steel (BRS) is built. Nucor counters:
As every business does, Nucor will seek to maximize profitability in order to insure our long term existence. When the cost to produce sheet steel in Arkansas reduces the profitability below that of our sister Nucor divisions, then orders, tons and jobs will be diverted to those divisions. This will lower the operating rate, profit, payroll and headcount in Arkansas.
While Nucor is opposed to laying off teammates, we are not opposed to transferring them to our other sheet mills in Crawfordsville, Indiana; Decatur, Alabama or Berkeley, South Carolina. The freight differentials to move these orders, tons and jobs are relatively small.
Additionally, since BRS will increase the raw material costs for Nucor Yamato Steel (also located in Blytheville), the same business decision logic will shift jobs from Arkansas to Berkeley, South Carolina for those smaller beam sections that Berkeley will produce. Note that BRS will have the same business pressures as Nucor, and will need to make similar tough decisions in order to avoid failure …
… Unfortunately, this possibility of building BRS is already affecting investment decisions and increased jobs at NSA. Last month Nucor purchased the value-added processing lines from bankrupt RG Steel. NSA is a prime candidate for this $140M and 27 person job expansion. However, the possibility of a competing mill located 30 miles away will be a major factor in determining where this expansion proceeds.
Nucor takes issue with the assumption that $75,000 a year wages can be provided by Big River Steel. It claims that Big River may not meet that goal if it is not running at full capacity, which Nucor says will be a high hurdle to clear.
The sheet steel industry has been running about 70 to 75% for 4+ years. Profits have been squeezed… According to the Organization of Economic Co-operation and Development (OECD) , even if no more steel mills are built worldwide, it will take 5 to 7 years for demand to catch up to supply. Unfortunately, mills continue to be built and steel continues to be dumped into the USA.
If the [Big River] pay structure is set up similarly to the Nucor bonus pay structure, then 2/3 of an employee’s pay will be “at risk” and is based upon running at full capacity. Since the industry is operating at roughly 75% and BRS will have stiff completion across all their product lines (no niche markets), then $75,000 will be problematic.
WINNERS & LOSERS
Nucor spends a portion of the memo asking why state legislators and economic development officials would pick “winners and losers” in the corporate investment game.
Help us understand how you can be backing a competitor when we have been in Arkansas for 25 years, have poured $2B of direct and indirect taxes in the state treasury, have brought many customers and corresponding manufacturing jobs to Mississippi County, and have been a good corporate citizen to the state and to northeast Arkansas.
Help us understand why the state believes this is such a good investment when the industry is operating at 70 to 75%, Nucor Steel Arkansas hasn’t run full since September, 2008, Nucor Steel Arkansas didn’t produce 600,000 tons last year due to lack of orders, and the BRS financial assumptions are more than questionable. If this is such a good deal, with their overstated rate of return, why aren’t steel mills popping up all over the place?
By voting to subsidize BRS ($400,000+/job), you ARE voting against jobs. You are voting against high paying jobs that have been in the area for 25 years. As stated earlier, having 3 mills so close together will drive up the costs for all mills. At some point, orders, tons and people will flow to where they can most profitably be produced. In Nucor’s case, that will be one of our 3 sheet mills in Indiana, Alabama or South Carolina.
We don’t believe it makes political sense for the state to attempt to pick winners and losers and putting existing successful industries in jeopardy by giving unique advantages to their competitors. Do other established businesses need to worry about the state subsidizing their competitors?
SCRAP METAL MARKET
An interesting contentious point in the Nucor memo addresses market conditions outlined in a report conducted by Little Rock-based Delta Trust and Bank for the Arkansas Teacher Retirement System, a $60 million, 20% investor in the project.
Nucor describes the Delta Trust report as “exuberant.” It contends that the northeast Arkansas region that would be home to the Nucor and Big River steel mills is already a “scrap importer” of the high-quality grades of scrap needed to produce flat-rolled steel.
Nucor may change that equation as it moves forward on phase one of a $750 million, 150-job iron and steel making facility in Louisiana that it announced in September 2010. The project could eventually become a $3.4 billion project creating 1,250 jobs paying an average wage of $75,000, according to a Louisiana Economic Development press announcement.
The state of Louisiana offered $160 million in performance-based financial assistance to land the project. At the time, Nucor and Louisiana officials also said the project would apply for a Gulf Opportunity Zone bond allocation of $600 million. Other local incentives were outlined in the announcement.
In its most recent earnings release on Jan. 29, 2013, Nucor officials said, “Construction is going well on our 2,500,000-ton DRI (direct reduced iron) facility in Louisiana. The majority of the equipment arrived in 2012, and we are on schedule for start-up in mid-2013.”
The facility will make a product capable of providing scrap metal for consumption at mini-steel mills, in essence, the raw materials needed for Nucor’s flat-rolled steel products. Presumably, Big River Steel will be in need of similar raw materials.
THE KOCH BROTHERS ANGLE
The controversial Koch Brothers – whose corporate conglomerate Koch Industries is ponying up a reported $120 million for a 40% stake in the Big River Steel deal – are also mentioned in the memo. Koch Industries owns a variety of industrial investments, including Georgia-Pacific, which announced a $250 million expansion project in Crossett, Arkansas in October 2010.
The Nucor Q&A states:
It appears to be a great deal for the Koch brothers. This is a $1.1B project and they will have a 40% ownership by putting up $125M. That is pretty good leverage. However, it appears that they can use the 30% recycling tax credit. This credit is estimated to be $240M. As a 40% stakeholder, the Koch brothers are entitled to $96M of this tax credit.
Depending on their tax structure, they may be able to use this tax credit for any business that owes Arkansas tax (possibly Georgia Pacific), whether or not BRS is successful.
Therefore, they will have a 40% equity stake in a $1.1B enterprise for a total investment of $29M. (Of course, this assumes it is a good thing to have a 40% equity stake in a start-up venture in an industry that is oversupplied and is running at 70 to 75% capacity.) With an 18:1 leverage ratio after the tax credit ($24 million for 40% of a $1.1B entity), why not roll the dice. So, it is a good deal for the Koch brothers. That doesn’t mean this is a viable project or a good investment for Arkansas.
SURVIVAL OF THE FITTEST
Despite the arguments detailed in the five-page Q&A, Nucor asks a final question to lawmakers indicating that it can withstand Big River competition.
Will Nucor Steel Arkansas survive if BRS comes to Mississippi County?
A – Yes. We have a great work force that safely and efficiently produces a high quality product and services that our customers highly value. We will win the competition but not without high senseless costs to NSA and BRS and the taxpayers of Arkansas.
Arkansas lawmakers have received two independent analyses of a state-produced report on the Big River Steel project. Officials have remained tight-lipped about the two studies, but House Speaker Davy Carter, R-Cabot, has indicated there are “no surprises” from the executive summary he’s reviewed.
Questions remain as to how the information in the analyses will be distributed to legislators to allow them to make an informed decision on the $125 million bond issue to support a loan and key state incentives for the $1.1 billion superproject. House and Senate leaders are guarded to not let out any proprietary information that could jeopardize the deal or conflict with confidentiality agreements.
On Monday (March 25), a Joint Agriculture/Economic Development legislative committee is scheduled to convene to hear presentations on the two legislative reports.