IRON RANGE
As we saw in the section on the development of taconite, the Iron Range has a history of reinventing itself through the application of new technologies. While the taconite processing industry went through many evolutionary technological changes that increased efficiency and reduced workforces in the 50 years since its inception, there is another revolutionary technological change on the horizon of the Range; where the 1950s had taconite, the early 21st century should be witness to the development of value-added iron on the range.
To understand the idea behind value-added iron, it is necessary to understand the basic functionality of the North American steel market. The vast majority of iron ore produced in the United States is used to make steel products. Nearly all of the taconite on the Range eventually becomes steel. But the taconite’s fated end destination as steel is not the only limiting factor on the taconite’s market. There are two other major limitations on the market of Minnesota’s ore: the phenomenon of “captive” iron ore and the technological inability of the newly dominant type of steel production unit to use taconite pellets.
Seventy-five percent of the iron ore removed from the Range today is “captive” iron ore, meaning it is ore mined by a vertically-integrated steel producer and will be sent directly to that producer. Cleveland-Cliffs, which owns the Northshore Mining Company and has partial stake in United Taconite and Hibbing Taconite is the only mining company on the range that does not also make steel. It mines 25 percent of the ore output, and most of this ore is tied up in long-term agreements with steel producers.
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Steel mini-mills look generally like this. Source: steel-technology.com
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More important to the Range, however, is that the Range’s ore cannot be used by the type of steel production unit – the “mini-mill” - that now makes more than 50 percent of United States steel. Historically, blast furnace operators of integrated steel producers made nearly all steel in the United States. Gradually, however, electric “mini-mills” have increased their share of the steel market, overtaking integrated steel producers in the late 1990s. Electric furnace steel “mini-mills” are an entirely different technology than blast furnaces. They use scrap steel (85 percent) and pig iron or direct reduced iron, or DRI, (15 percent) as their chief inputs, rather than iron ore. In fact, they are technologically incapable of using taconite as an input into the steel making process. This means that the Iron Range cannot sell its product to more than half of the steel producing market in the United States. Add this to a gradually increasing amount of steel being imported (21 percent of the market, as of 2003), and Iron Range is forced to sell its product to only 37 percent of the steel market in the United States.
Realizing that the Range’s ore was being shut out of the majority of the United States steel production market, the IRRRB and several private companies began to look into finding a way to make Minnesota’s ore compatible with electric furnace steel mills. To do this, the Range’s taconite would have to be transmorgrafied into an input compatible with the mills. This would mean converting the ore into either DRI or pig iron. Minnesota’s taconite, as shipped, is about 65 percent iron. Both pig iron and DRI have very high iron content; pig iron is about 97 percent iron and DRI is about 94 percent. As such, converting taconite to one of these products would be adding value to the iron ore product. The process is very similar to how Minnesota’s low grade ores, which are 25 to 30 percent iron, are converted into taconite pellets that are 65 percent iron.
There are two major impediments to turning Minnesota’s ore into a value-added iron product. First, Minnesota’s ores are naturally high in silica, which makes the steel production cost in electric furnaces. Second, the direct reduced iron process that is so successful in other countries is heavily reliant on natural gas, which is much more expensive in Minnesota than it is in other DRI-producing areas. For instance, the energy cost to produce one ton of DRI in Venezuela is $13; in Minnesota, the equivalent cost is $65. The alternative is to use the energy source in which the United States has a competitive advantage: coal. However, coal adds silica and sulfur to the already high-silica ores.
As such, Minnesota has more or less eschewed the DRI process and is putting all of its hopes and resources into making pig iron out of the Range’s taconite. The pig iron process naturally reduces silica and sulfur, allowing the use of coal as an energy source and iron-reductant. A recent government committee estimated that while pig iron costs $80/ton to produce in Brazil, it would cost $95/ton in Minnesota. Because transportation costs play a large role in the landed cost to steel mills, this would place Minnesota in a great position to compete for the North American electric furnace market.
However, all of this pig iron talk is mostly still just that: talk. Moreover, this talk has been going on for many years without much action. There is one exception, however, and, as of this writing, this exception looks like it has potential to finally put Minnesota in the sights of North American mini-mill operators. The exception is the Mesabi Nugget operation, a project that derives, once again, from government-sponsored economic development so common to the region.
Mesabi Nugget, LLC, was formed in September 2001 specifically to test technology developed by Kobe Steel, Inc. of Japan that turns low-grade ore into pig-iron using mostly coal-based energy on Minnesota’s low-grade ores. The technology, dubbed ITmk3 (pronounced “eye-tee mark three”), turns iron ore fines mixed with pulverized coal into pig iron, which according to Kobe Steel is of the same quality as pig iron produced in a blast furnace. Partners in the project include four private companies and two large sources of public funding. The four private companies are Cleveland-Cliffs; Steel Dynamics, Inc., an operator of mini-mills; Ferrometrics, Inc., a value-added iron development company; and Kobe Steel. Large amounts of public funds are invested in the project from both the IRRRB, whose interest in the project is obvious, and the United States Department of Energy, which has identified the project as valuable enough to invest $5 million as part of its “Industries of the Future” research and development strategy. Over the course of the project thus far, the IRRRB and other departments of the state of Minnesota government have contributed very significant funding in the form of loans, grants, and investments. In total, Minnesota has contributed $46 million in financing out of a total of $140 million in capital requirements.
As of this writing, the Mesabi Nugget project seems to be enjoying some success. A test plant in Silver Bay, just outside the region on the shore of Lake Superior, has proven the technology successful, thanks in part to Minnesota funding over 50 percent of the financing for the project. The company has moved to construct a full-scale commercial facility on the location of the now Cleveland-Cliffs-owned closed taconite mine at Hoyt Lakes. After a brief but intense row over the length of the environmental permitting process in Minnesota in which the company threatened to construct the first commercial-scale plant in Indiana, where Steel Dynamics has a mini-mill and where permitting times are much shorter, the construction of the plant seems to be on schedule to begin in April 2005. The row was settled when the Minnesota government passed a special law to minimize the environmental review process specifically for the Mesabi Nugget operation.
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An iron nugget produced by the test plant at Silver Bay. Source: MPR.
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Will nuggets be the next taconite for the region? Perhaps. There are three major impediments to a taconite-like resurgence for the range, however. First, while taconite appealed greatly to the vertically-integrated captive ore producers, iron nuggets will not appeal to this segment of mining operations, which produces 75 percent of ore on the Range, as it would require the parent steel companies to reinvest in an entirely different steel-producing technology. Nowhere is the lack of interest of these integrated steel producers in iron nuggets more evident than in the fact that, despite being the majority presence on the Range, they were not involved in the Mesabi Nugget project. Instead, Cleveland-Cliffs, which would most benefit from iron nuggets as the company is an iron ore merchant to steel companies rather than a steel company itself, a mini-mill operator, and the Japanese company that developed the technology were the private partners in the project. The second major impediment to an iron nugget long-term revolution is that taconite pellet production opened up an entirely new natural resource on the range – low-grade ore. Iron nuggets would use the exact same low-grade ore, which as mentioned above, could run out within the next 40 years or so. Finally, iron nugget production has not proven itself to be a source of a large amount of employment on the Range. Even if, in the best of worlds, the Mesabi Nugget operation in Hoyt Lakes is very successful, it would still only employee about 50 people. Add that to the existing 50 employees at Silver Bay, and the new technology would only provide the Range with 100 new jobs. For a technology that is supposed to revolutionize the Range, 100 jobs is simply not enough. Perhaps if the pig iron industry were to take off, more jobs would appear, but there has been no mention of such a phenomenon thus far from even the most optimistic of politicians. However, there is no reason that if the plant at Hoyt Lakes proves successful, that more plants could be constructed at other locations on the Range. Probably the first locations to receive an iron nugget facility after Hoyt Lakes would be the Cleveland-Cliffs properties at HibTac, Northshore, and United Taconite, as Cleveland-Cliffs has no significant interest in existing non-nugget integrated steel works.
Whether or not iron nuggets become the taconite of the future for the Iron Range, the battle to become the leading producer of the nuggets highlights an important aspect of the role that Minnesota plays in the economic geography of the steel industry. Since the beginning of its participation in the industry, Minnesota has battled to increase its role in the steel-making process. For many years, Minnesota was content to simply retain a large portion of the bottom tier of a three-tier value-added process of steel production. This is shown in the below figure, in which the process to the left of the red line took place in Minnesota and the process to the right took place elsewhere.
With the onset of the taconite industry and its four-tier production process, Minnesota managed to move that red line to the right by one step. Instead of just shipping ore, Minnesota inserted itself into the taconite pellet production tier of the steel-making process. It is interesting to note that, despite the fact that Minnesota was shipping out ore of the same iron concentration, it had increased the amount of value it adds to the ore.
In this context, it is easy to see why Rangers would see such value in making sure that the iron nugget process finds a home in Minnesota, even if it does not provide the same kind of employment as the taconite industry does. If the Range manages to become a large contributor of iron nuggets, it will keep its place in the middle of the new four-tier steel-making process. If it loses the nuggets to another state, say Indiana, it would be reduced back to its role as a solely a producer of raw, low-grade ore. Despite the problems mentioned above with the proposed construction of an integrated steel blast furnace within Minnesota itself, this framework provides an understanding of why Minnesota would want to engage in such an endeavor. Having steel production itself on the soils of Minnesota would place the red line to the right of the third tier, allowing the state to capture a much higher position in the value-added chain.
There are other potentially profitable endeavors for mining on the Range. There has been much talk and some exploration in the non-ferrous sector. Almost 150 years after the failed gold rush of Lake Vermillion, there may yet be gold extraction, thanks to an interesting find by a DNR geologist doing standard tests. If the aggregate reserves more centrally located to the Twin Cities dry up, it will be possible for mining companies to sell their tailings at a profit to the Twin Cities market. Moreover, there are some interesting new markets for taconite developing, one of which involves using taconite instead of salt to clear ice from roads. Given the important history of technology saving the Range (see the section on taconite), it is important to recognize and encourage these technological endeavors. However, it is the foreign-developed nugget process that seems to have the most potential, and that is furthest down the road to actually going to market.
