Big River Steel: A Big Steal

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Big River Steel has proposed building a $1.1 billion electric arc furnace steel mill in Mississippi County in NE Arkansas. The proposed plant will be located on a 1,140-acre site about seven miles SE of Osceola. They say they will create 525 full time jobs.

However, just 30 miles up the road, there is Nucor Steel. Nucor has two plants, the first built in 1988, which together employ over 900 people. Nucor is also the only A-rated steel company by both Moody’s and S&P.

Is it a good idea to have two steel mills in Arkansas, within 30 miles of each other, competing for raw materials, energy, labor, rail car, and truck transportation? Wouldn’t adding more production via a second mill affect the selling price of the final products and result in a lower overall profit margin? Nucor currently operates at about 70% capacity and has been in that range since 2008 due to recession and international competition. They have paid over $2 billion of direct and indirect taxes into the state treasury during the 25 years they’ve been in business in Arkansas. And Nucor got NO loans from the State to build their plants in our state.

If BRS is built, they will need not only labor, but also rail cars and trucks to transport their products. Adding this second mill will increase competition for those providers, thus likely driving up costs, and thus increasing selling prices for both BRS and Nucor — in a an already unfavorable steel market.

US companies have already been exporting a substantial portion of their product, but the Chinese have expanded production dramatically. The Koreans have done it, and it is believed that the Russians have as well. There’s more than enough capacity and we’re losing on the export market.

As an example, RG Steel was the fourth largest flat-rolled steel company in the US. They went bankrupt. Mills were closed in Maryland, Ohio, and West Virginia. Four thousand steel jobs lost. RG Steel was a casualty of falling steel prices and oversupply in the US, (Reuters). Excess capacity is one of the main risk factors facing the global industry today. Slim margins already exist in the steel industry due to foreign competition. Globally there was 542 million metric tons of overcapacity in 2012 and it is forecasted to be even higher in 2013. It is expected to take five-seven years to work off the surplus capacity.

Since it doesn’t look like a rosy future for steel plants, putting two of them within 30 miles of each other won’t help matters. And if BRS can’t turn a profit, how does Arkansas get its investment back? BRS will probably come back to the state, needing even more money.

Amendment 82 of the Arkansas Constitution enables the General Assembly to authorize the issuance of general obligation (GO) bonds to attract large economic development projects having a minimum investment of $500 million and creating at least 500 permanent jobs with an average annual salary of $70,000. The Governor and the Arkansas Economic Development Commission wants our legislature to approve an economic incentive package that will cost $125 million in GO bonds as a low interest loan to Big River Steel.

The sheet metal industry has been running about 70% of capacity for well over four years. Their profits have been squeezed. And with a slow economic recovery, if this is a recovery at all, there doesn’t seem to be a turnaround anytime soon.

A consultant hired by the Legislature released their report Friday, March 22: “The large investments and operations do generate jobs, but the size of the incentives erodes much of the tax revenue presented to the state in the form of increased economic activity, payroll, taxable income and business sales. It is up to the state to determine if the positive economic impact is worth some of the fiscal downsides of the project, given uncertainties about the firm’s viability as a private enterprise and how exactly it will claim credits”. Another consultant reported Friday that “the AEDC overestimated the long-term net economic benefits of the state’s incentives for the project and that the costs could exceed the benefits.”

The Board of Conservative Arkansas does not believe it is in the best interests of our state to incentivize another steel plant (BRS) to compete directly with a 25 year established steel plant (Nucor). Nucor came to Arkansas without any bonds being issued and without any loans being made to them by the state. They have been a good employer for the NE part of our state. We don’t see the need for another steel plant when plants in operation today already don’t have enough business to operate at or near full-capacity. And we’re concerned about the labor force. There’s the distinct possibility that Arkansas would foot the bill for the loans while Tennessee and Mississippi residents become a big portion of the labor for this new steel plant.

The Board of Conservative Arkansas believes it is simple: if BRS can afford to build their plant then they should be able to build it. If they don’t have the money, then they don’t build the plant. We do not like government getting directly involved in business, whether the company’s project is expected to be beneficial or not. Government shouldn’t pick winners and losers and our companies shouldn’t be beholden to politicians.

Arkansas needs to spend its time figuring out how to attract legitimate businesses that can afford to build their own facilities that employ Arkansans.

There are a lot of details involved, and we’ve tried to summarize as best we can. If you have questions, or want more information, please let us know. We urge our members to contact their state representative and senator with their thoughts on this project. The Joint Agriculture/Economic Development Committee begin hearings on the BRS project Monday, March 25.

The Board of Conservative Arkansas

5 comments to Big River Steel: A Big Steal

  • T Wyles Coleman

    Not my tax dollars. All risk and little chance of reward when it is all sorted out. Fix our tax problems in Arkansas so companies will come to us with out paying them in one hand and taxing them with the other. The near term future outlook IS NOT GOOD for most businesses. Cyprus helping anyone?

  • Mark B.

    “We do not like government getting directly involved in business, whether the company’s project is expected to be beneficial or not. Government shouldn’t pick winners and losers and our companies shouldn’t be beholden to politicians.”

    I certainly understand your position, but it ignores the fact that in the competitive world of economic development and job recruitment, these companies often go where the incentives are. Mississippi has a similar incentive package that it has used numerous times, and it has been approved by their legislature every single time. If we fail to approve the use of these incentives on the first chance out of the gate, it will send a message to site selectors that AR is no longer “open for business.” I can just hear the Econ Dev Departments of Mississippi and other competing states now: “don’t waste you’re time trying to go to Arkansas, they couldn’t even get their last incentive package approved by the legislature. Come to Mississippi where we can guarantee the incentives will pass.”

  • Matt Manos

    As the article states, consultants are reporting things like “the AEDC overestimated the long-term net economic benefits of the state’s incentives for the project and that the costs could exceed the benefits.” It is starting to become clear that Arkansas’ $125 million could be better spent elsewhere. By your logic, should we subsidize BRS’s investment (and risk losing millions) in hopes that some other company will come along in the future to take advantage of the state’s incentive program and build facilities that will be of more benefit to the state? In short, should we get hosed now in hopes of a rosy future?

  • Christine

    Just because Mississippi wants to make a risky loan, SO WHAT? Does that mean we should take risks also? Reminds me of the old saying parents used to say when kids say “but everyone is doing it”: “If all your friends were going to jump off a bridge, would you do it, too?” Arkansas taxpayers are already overextended and on the hook for bond investments. This is not worth more risk. There are far better ways to attract business to the state than “pre-bailouts” like this.

  • Pete K

    Who are the investors behind Big River? The Indians (Welspun) are in Little Rock. Who is behind Big River? The Chinese?

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