LITTLE ROCK — The $1.1 billion Big River Steel mill proposed to be built near Osceola would rely on at least five factors to be successful, a research report prepared for the state says.
Delta Trust Investments of Little Rock prepared the report, which says the steel mill has a “reasonable” chance of success. The report was written for the Arkansas Economic Development Commission and the Arkansas Teacher Retirement System. The retirement system plans to invest $60 million in Big River Steel. The plant would employ 525 people at salaries averaging $75,000.
The retirement systemprovided a 13-page executive summary of the report to the Arkansas Democrat-Gazette, but the commission refused to provide the entire report.
According to the executive summary, Big River Steel’s strengths include:
An experienced management team with a proven history in the steel industry. The management team is led by John Correnti, a former chief executive officer at Nucor Corp., who has helped develop at least five “minimills” similar to the Osceola plant.
The production of highend products for which demand is increasing and supply is scarce. The markets the mill will focus on are oiland gas drilling and transmission; electricity generation and transmission; and lightweight, high-strength steel for the automotive industry.
The mill will be able to meet its debt payments even if the plant runs at only 62 percent capacity.
$125 million in economic incentives offered by the state. The incentives must be approved by the Arkansas Legislature under the guidelines of Amendment 82, a measure passed by voters in 2004 that allows bonds to be issued to finance large economic-development projects. The Arkansas Economic Development Commission delivered a letter of commitment by the state and Big River Steel to the Legislature on Thursday, giving lawmakers 20 days to make a decision on the project. Gov. Mike Beebe and Correnti announced the proposal Jan. 29.
Availability of significant electric power, as well as access to river and rail transportation.
But succeeding in today’s competitive market will not be simple, two industry experts said.
Correnti must produce steel with a significant price or quality advantage, said Richard Fruehan, the U.S. Steel professor in the Department of Metallurgy and Materials Science at Carnegie Mellon University in Pittsburgh.
Correnti agreed that Big River Steel will need both advantages to compete with mills in the U.S. It will compete primarily against the larger, older integrated mills in the U.S. and foreign suppliers, Correnti said in an interview last week.
“Why should we lock horns with Nucor or Steel Dynamics” since both use the mini-mill concept? Correnti asked. “We’ll go afterthe low-hanging fruit. From a cost standpoint, we’ll compete with foreigners and integrated mills in Chicago or Pittsburgh or Cleveland.”
There will be products that Big River Steel can manufacture because of newer technology that Nucor and Steel Dynamics don’t make, Correnti said.
If a mill has an advantage over its competitors, this is a good time to build, Fruehan said.
“If [Correnti’s team] can beat the import price, there is a market [for the new mill],” Fruehan said. “He can only displace foreign steel if he has a quality advantage or a price advantage. And it’s going to be hard to have a quality advantage so he’s going to have to have a price advantage.”
About 20 percent of today’s U.S. steel market is imported steel, Fruehan said.
Correnti believes that he will have a price advantage over foreign steel and a quality advantage over some foreign producers.
Correnti “is not dumb,” said Fruehan, who consulted on behalf of Nucor in a lawsuit against Correnti’s Columbus, Miss., plant. The lawsuit tried to restrain Correnti from making certain grades of steel, Fruehan said. The Mississippi plant settled in 2008 with Nucor, agreeing to refrain from making the specific grades of steel for a year.
“He knows what he’s doing,” Fruehan said of Correnti. “If he didn’t think he could make money, I’m sure he wouldn’t do it.”
One potential customer for Big River Steel is India-based Welspun, which opened a plant in Little Rock in 2009 and manufactures steel pipe.
Big River Steel could be a supplier, said Rajesh Chokhani, general manager of Welspun plant.
“I’m not sure at this moment because I’m not sure what kind of technology they’re going to put in and what kind of high-grade steel they’ll manufacture,” Chokhani said.
Welspun uses about 300,000 tons of steel a year and will increase that by 100,000 tons with a new facility, Chokhani said.
The primary competitive advantage Correnti may have with the new mill is receiving $125 million in incentives from the state, said Thomas Danjczek, president of the Steel Manufacturers Association.
The association represents all but two U.S. electric arc furnace manufacturers - which heat electrically charged metal with an electric arc - and producers ofabout 75 percent of the steel made in the U.S., Danjczek said. Association members include Nucor and a Severstal mill near Columbus, Miss., two steel firms that will compete with Correnti’s Big River Steel.
“If you have three gas stations on the corner, you don’t need the state building you another gas station,” Danj czek said.
Correnti said the reason Danjczek doesn’t want the fourth “gas station” on the corner is because there would be cheaper gasoline, which would benefit the consumer. In other words, Correnti indicated, another steel mill will help lower costs for buyers.
But Correnti, who lives in Blytheville, also said that for years mini-mill operators have sought and received incentives from states. Arkansas offered incentives to Nucor for its Mississippi County plants as far back as 28 years ago, said Correnti, who worked for Nucor at the time.
An approximately $250 million second phase of the Big River Steel plant could begin production 1.5 to 3 years after the first phase begins operating, Correnti said. That would require hiring 150 to 200 more employees, he said.
If the Big River Steel plan is approved by the state, construction on it could begin by August and it could open in late 2015.
In phase two, Big River Steel would have a second electric arc furnace and a second line to produce steel, Correnti said.
The United States has the capacity to use about 125million tons of steel a year, Danjczek said. But there were only about 98 million tons made last year, he said, leaving room for more steel production.
Correnti and Global Principal Partners of Miami would develop the Osceola plant. The two built and financed the $880 million SteelCorr plant - later sold to a Russian companycalled Severstal - in Columbus, Miss.
Global Principal Partners built and financed a Steel Dynamics mill in Butler, Ind., but Correnti was not involved in it. Steel Dynamics went public in 1996, two years after the plant opened, increasing by 2.3 times the price paid by early investors. Steel Dynamics has annual revenue of more than $7 billion.
Correnti began his career with U.S. Steel in 1969, where he was later put in charge of construction of plants. He joined Nucor in 1980 and succeeded in dramatically reducing the time needed to start up a mill.
He oversaw the development of Nucor Yamato and Nucor Hickman in Arkansas, Nucor Crawfordsville in Indiana, Nucor Hertford County in North Carolina and Nucor Berkeley in South Carolina. From Correnti becoming Nucor’s president in 1991 until his resignation in 1999 as chief executive officer, the company’s sales almost tripled from $1.5 billion to $4.2 billion.
He has been a venture capitalist for the past decade.
The Big River Steel management team includes Correnti and three managing directors with Global Principal Partners.
In addition to the Teacher Retirement System’s $60 million investment, a subsidiary of Koch Industries of Wichita, Kan., is expected to invest $120 million. Correnti and Global Principal Partners would invest $90 million, according to Delta Trust’s report. Capital Partners, a Greenwich, Conn., investment fund, will put up $30 million, Correnti said, fora total investment of $300 million.
Correnti and Global Principal Partners will borrow $761 million from an “international bank group that has previously supported the group,” according to the Delta Trust report.
That bank is not identified in the summary of the report, but GE Capital was the lead lender on the Columbus, Miss., plant.
In addition to the $125 million in state incentives under Amendment 82, the report says the state would provide an estimated $6.2 million in income tax credits and up to $240 million in tax credits for the purchase of equipment for recycling materials over the life of the plant, which could be as much as 40 years.
The biggest risk the Big River Steel plant faces is the difference between the cost of scrap metal and the price of finished steel, the report says.
Big River Steel will need 97,000 tons of scrap steel a month, or almost 1.2 million tons a year.
“One of the things you have to be leery of and do a lot of market research on - and I’m sure [Correnti] has done that - is where is he going to get the scrap from,” said Fruehan.
Scrap is a local commodity, Fruehan said.
“If you’re producing scrap in Chicago, it stays there,” Fruehan said. “It’s very transportation dependent. As you get farther and farther away, the shipping costs become more and more complex. There is only so much scrap out there, and once that scrap is gone, the next ton of scrapyou buy is going to be very expensive.”
But because Big River Steel will ship scrap on the Mississippi River, it will be less expensive to ship Chicago-area scrap, for example, than for an Illinois company 50 miles away to have it transported by truck, Correnti said.
The executive summary, dated Feb. 1, says the Teacher Retirement System could reap a return on its investment of 20 percent to 30 percent.
Danjczek is skeptical of such high returns.
“A [30] percent return in the steel industry, unless you’ve got diamonds or gold in the steel, is ludicrous,” Danjczek said.
But French Hill, Delta Trust’s chief executive officer, said the 20 percent to 30 percent projected return assumes an increased value of the plant if it is sold.
Correnti said, however, that he believes the plant can return 20 percent to 30 percent without being sold.
He declined to comment about the possibility of selling the plant in the future.
“We’re not going into this with the intention of building and selling,” Correnti said.
Front Section, Pages 1 on 02/24/2013