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Published August 26, 2013, 08:56 AM

Ex-Im loan request pits Caterpillar against iron ore miners

DULUTH, Minn. -- It’s not that Minnesota’s congressional delegation doesn’t like Australia, mate. But the idea of a U.S. government bank loaning money to an Australian iron ore mine that will compete with Minnesota taconite?

By: John Myers, Forum News Service

DULUTH, Minn. -- It’s not that Minnesota’s congressional delegation doesn’t like Australia, mate. But the idea of a U.S. government bank loaning money to an Australian iron ore mine that will compete with Minnesota taconite?

That’s what they don’t like.

U.S. Sens. Al Franken and Amy Klobuchar and U.S. Rep. Rick Nolan, all Minnesota Democrats, are on record opposing a plan in front of the U.S. Export-Import Bank to invest in equipment for the giant Roy Hill iron mine in Australia’s northwestern Outback.

The Export-Import Bank is considering a request for $650 million in long-term financing to aid the export of $522 million of U.S.-made mining equipment to mine and process ore at Roy Hill. The rest of the money could be going to install the U.S. equipment on site at the mine.

Cleveland-based Cliffs Natural Resources, with four mines in Minnesota and Michigan, has led the charge to stop the loan, saying it threatens U.S. mining jobs and, with new Asian steel produced from Australian ore, eventually threatens U.S. steel industry jobs.

Details of the loan, including the name of the beneficiary U.S. company, are supposed to remain secret to prevent foreign competitors from getting a leg up. But the Duluth News Tribune has learned that the U.S. manufacturer is Caterpillar Inc. and that the equipment includes giant trucks, bulldozers and shovels made in Illinois and Wisconsin.

And that means the Export-Import Bank now is being squeezed by two titans of U.S. industry.

The bank is currently conducting an “extensive economic impact study” on the loan, said Phil Cogan, vice president of communications for the Washington-based bank.

The deal is expected to reach the bank’s board for a vote in the next few weeks, and that’s why lawmakers and some Minnesota mining interests are weighing in as the bank accepts public comments. Nolan, in a letter co-signed by Michigan Rep. Dan Benishek, said the loan would be “unacceptable” and threatens thousands of jobs in the two states.

“We strongly urge you to deny the Roy Hill application,” the letter said.

“While we understand and appreciate the desire to help facilitate the export of manufactured goods, it is hard to comprehend how the Bank could ignore the competitive implications of helping to establish a single new mine that is larger than the entire U.S. industry,” the congressmen wrote.

Huge new mine

The Roy Hill project is so big and so remote that entire new cities, ocean ports, roads, an airport and a 220-mile railroad are being built for a single mine that will produce 55 million tons annually — more iron ore than all U.S. mines combined.

It’s a $10 billion project by the richest person in Australia, Gina Rinehart, and funded in large part by Asian banks. It’s expected to flood the global market with iron ore as early as 2015, most of which will go to steelmakers in Asia in general and China in particular.

And that’s in direct competition with some U.S. iron ore producers, especially Cliffs. Unlike other Minnesota taconite iron ore producers that mine mostly what they use in their own steel mills, Cliffs has no steel mills, and sells not only to domestic steel producers but also globally, shipping some North American ore to Asia.

Cliffs makes more taconite here, and more money, when iron ore demand and prices are high.

The company began rallying lawmakers to the cause in iron ore-producing states — only Minnesota and Michigan — in June.

Cliffs owns United Taconite in Eveleth and Northshore Mining in Silver Bay, and it co-owns and operates Hibbing Taconite. It also owns the Tilden/Empire operation in Michigan’s Upper Peninsula. Cliffs also produces iron ore in eastern Canada and, ironically, at its Koolyanobbing mine in Australia, not far from Roy Hill.

It’s not the Australian mine that Cliffs can stop, but the investment by a U.S. government-sanctioned bank tilting the playing field.

“Roy Hill’s production will substantially injure U.S. iron ore producers,” Cliffs officials said in a summary of the issue. The new capacity will cause global iron ore prices to fall by increasing the supply of iron ore, displacing U.S. iron ore exports headed to Asia.

And it’s not just global-market iron ore producers that could be hit. All that new Asian steel produced with cheaper Roy Hill iron ore will hit U.S. steel producers as well, said Raga Elim, Cliffs vice president of global communications and government affairs, by competing with and reducing sales of U.S.-made steel. And if less U.S. steel is produced, that means reduced demand for all Minnesota taconite.

“It is estimated that, over the eight-year life of the loan, Roy Hill’s output would displace nearly $600 million of U.S. iron ore exports and would cause a reduction of approximately $1.2 billion in U.S. domestic sales, for a total loss to the U.S. iron ore industry of $1.8 billion,” Cliffs said.

Caterpillar battles back

Caterpillar officials say the Roy Hill mine almost certainly will be built, with or without the U.S. loan. But without the loan, the equipment used in the mine probably would come from Korea or Japan.

“We’re hoping that the mine uses U.S.-produced equipment that is made by U.S. workers from steel made in the U.S., which happens to be made with iron ore from Minnesota and Michigan,” said Bill Lane, director of global government affairs for Caterpillar.

The $650 million contract to provide giant haul trucks, bulldozers, lift shovels and more “is a big deal” for Caterpillar — a huge contract that will spur jobs in places like Decatur, Aurora and East Peoria, Ill., and Milwaukee, and that’s moving Caterpillar to fight back against Cliffs.

Lane said that in coming days, Caterpillar will enlist members of Congress from Illinois and Wisconsin to weigh in in favor of the loan.

“Does the U.S. want Australia to use U.S.-produced products or Asian-produced products? That’s the simple question,” Lane said. “Frankly, we’re befuddled that there’s this opposition. … This (battle) is pitting Minnesota against Illinois and Michigan against Wisconsin, and that’s not good.”

Bank’s loans usually praised

The Export-Import Bank of the United States is the official export credit agency of the U.S. federal government and is self-funding, using no tax dollars. The bank was founded by executive order of Franklin Delano Roosevelt in 1934 and transformed by Congress into an independent agency in the executive branch in 1945.

The bank’s goal is noble enough: to finance and insure the purchase of U.S products by foreign customers who are unable to foot the bill on their own. That encourages exports of U.S.-made products.

The bank also provides loan guarantees and export insurance for U.S. companies that take chances selling goods abroad on the chance they don’t get fully paid.

By its charter, the bank cannot compete with private-sector lenders but takes on deals that otherwise wouldn’t happen.

“Ex-Im Bank enables U.S. companies — large and small — to turn export opportunities into real sales that help to maintain and create U.S. jobs and contribute to a stronger national economy,” the bank’s website says. The bank claims to have supported $550 billion in sales of U.S. goods to other nations.

The bank’s Cogan said even the most harmless-looking efforts to help U.S. exporters get close scrutiny. In this case, if the damage to U.S. iron ore producers is greater than the support to the U.S. mining equipment manufacturer, the bank may not do the loan, he said.

“The old saying that for every action there is an equal reaction is true in this business,” Cogan said. “We have to be very careful that what we do to help one U.S. company’s exports isn’t inadvertently hurting others. … In the end, it’s whether the deal has a net positive impact on the U.S. economy that decides the case.”

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