IHS Global Insight says AEDC Overestimates Benefit of Big River Steel

Written by Sandy Williams

Nucor pushes back at potential competitor

Written by: Sandy Williams

Arkansas lawmakers are still delving into the feasibility of offering Big River Steel a $125 million incentive package. IHS Global Analysis was hired by the State of Arkansas to provide a third-party review of the Arkansas Economic Development Commission (AEDC) cost-benefit analysis for the proposed Big River Steel project. The findings were as follows.

Steel Market Sizing
Research by IHS concluded that over the next ten years the U.S. market available to Big River Steel for its steel products is slightly less than 9 million short tons. IHS determined that the industry-wide average operating profit for an EAF in the U.S. is $90/ton, or an operating margin of 12 percent. The steel industry can absorb BRS (Phase 1 and 2) from a capacity standpoint, but if any other major facilities are added within the industry, besides those already announced, the industry would be in a “highly competitive, zero-sum environment,” said IHS. In such a case, BRS production goals would not be achieved thus reducing production and sales and leading to less tax revenue for the state.

Financial Cost-Benefit Analysis

AEDC considered two 20-year cost-benefit scenarios for its cost-benefit analysis: 1) no early payoff of the $50 million incentive loan, and 2) an early payoff. Estimated net economic benefits on a net present value basis were $54.2 million for scenario 1 and $49.8 million for scenario 2. IHS found slightly lower economic benefits. Depending on the discount rate used by the AEDC, 3 or 5 percent, IHS found the cost benefit would either be similar to AEDC findings at +$50.4 million (using the 3 percent rate) or about half of the AEDC estimate at +$30.13 million (5 percent rate). IHS said the AEDC methodology for determining cost-benefit was sound but it did not take into consideration uncertainties that could affect the long term economic benefit of the incentive:

1.    whether BRS can operate consistently at its projected levels and employment to yield overall economic impact and enough increase in tax revenue to pay off the bonds,
2.    the timing and size of the Recycling Equipment tax credit will prevent state from receiving an increase in corporate income tax revenues until late in the project,
3.    the share of inputs and supplies that will be purchased from Arkansas vendors, and
4.    the share of BRS income that will be subject to corporate income tax since most of plant production will be sold out of state

In IHS sensitivity analyses to evaluate benefit impact should BRS underperform (e.g., lower capacity utilization, ramp up time, decreasing tax rates, pricing changes), in all scenarios net benefits were barely positive and, in some cases, negative.

The incentive offer contains a 15 year claw-back period that allows the state to recover costs if BRS fails to meet its performance goals. In addition, the bond will not be issued until BRS escrows $300 million and secures financing for $700 million. Big River must spend $250 million of its own money before spending the state funding.

REMI Findings

Regional Economic Models Inc. was also asked to look over the AEDC findings. REMI found that the net economic benefits of the BRS project were generally positive for the state, adding$ 400 million in gross domestic product during construction and $150 million per year after that. The report, however, raised concern about the size of the Recycling Equipment tax credit saying that the credit erodes much of the tax revenue the state is hoping for. (Source:

The Nucor Campaign

Nucor has been waging a campaign to block the Big River Steel project. Most recently, it has circulated a five-page memo to Arkansas legislators outlining Nucor’s opposition to a competitor of Big River’s potential in its region.

The memo states that if Big River is built, Nucor would seek to maximize profitability which may mean shifting workers out of Arkansas if the cost to produce sheet metal drops below its other locations. The Nucor Yamato steel facility in Blytheville could see production moved to South Carolina if BRS pushes up raw material costs. Nucor also said expanding NSA, located thirty miles from BRS, with processing lines purchased from RG Steel may also be jeopardized.

Nucor says that Big River’s likelihood of paying annual wages of $75,000 per year is problematic in an industry that operates at 75 percent capacity.

Nucor is also playing its loyalty card, asking how Arkansas could back BSR when Nucor has been a major contributor to the Arkansas economy for the past 25 years. The company says it is unfair for the state to give unique advantages to competitors that will jeopardize already successful businesses.

“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,” says the Nucor memo. “If this is such a good deal, with their overstated rate of return, why aren’t steel mills popping up all over the place?” (Source: TalkBusiness).

Nucor also takes aim at the Koch brothers who will have a 40 percent stake in BSR in return for a $125 million investment. According to Nucor the Koch brothers will be entitled to $96 million of the 30 percent recycling tax credit which reduces their leverage ratio to $24 million for a 40 percent stake in a $1.1 billion entity. Nucor says that although it’s a good deal for the Koch brothers it “doesn’t mean this is a viable project or a good investment for Arkansas.”

Arkansas is counting on its ability to profit from supplying scrap steel to Nucor and Big River Steel. Nucor, however, expects to start-up its new DRI plant in Louisiana in mid-2013—a catalyst that could change the dynamics of the scrap steel market in Arkansas as Nucor begins substituting high quality DRI for scrap. Potentially, Big River could want that DRI for its facility as well, reducing further the scrap demand in the state.

In its final argument to Arkansas legislators, Nucor asserts it will win the competition if BRS comes to Mississippi County, but not without “high senseless costs to NSA and BRS and the taxpayers of Arkansas.”

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