"The Worst Case Scenario Is Already A Reality": Minnesota's Mining Country Is "Melting"

There’s been no shortage of coverage both in these pages and elsewhere of the impact falling oil prices have had on the American and Canadian oil patches.

Take Texas, for instance, where a year of crude carnage has wreaked havoc upon what, until last year anyway, was the engine driving the “robust” US labor market.  As we showed in November, layoffs in Lone Star land far outrun job losses in any other state. In Houston (which was already staring down a worsening pension crisis), vacant office space is “piling up.” As WSJ wrote last week, “the amount of sublease space on the market in the Houston area hit 7.6 million square feet, or the size of more than two Empire State Buildings.” “The unemployment rate in Texas rose sharply to 9.2% in 1986, an all-time high for the state,” Goldman wrote recently, recalling a previous period of low oil prices in a note entitled “How Bad Can Texas Get?”

“Real house prices fell 30% peak to trough, and the number of bankruptcy filings (including both business and non-business filings) more than doubled from 1984 to 1986,” the bank added.

North of the border, things are even worse. As regular readers are no doubt aware, Alberta is a veritable nightmare as suicide rates rise, the number of jobless multiplies, food bank usage soars, and property crime in Calgary spikes.

But with all of the focus on oil, not much attention has been paid to the impact the commodities downturn has had on other things people pull out of the ground in North America.

Courtesy of the Washington Post, we get an in-depth look at the dramatic effect slumping demand and acute overcapacity in China has had on one corner of America’s Heartland: Minnesota's "iron ridge."

“Over the last 30 years, the bad times last longer and the good times are shorter,” Minnesota lawmaker Tom Anzelc, whose House district includes the city of Iron Junction, says. “This particular time is the worst I have ever seen.”

“The source of the turbulence is China, where famously breakneck growth is coming to an end and no one is sure how painful that will be,” WaPo writes, before noting that China’s hard landing has had an adverse impact on everything from soybean farms in the Midwest to California home buyers to Caterpillar employees bracing for “massive” layoffs. “Whether these pockets of distress can tip the rest of the [US] back into recession remains an open question,” WaPo continues, “but in [America’s Iron Range], the worst-case scenario is already a reality.” Here’s more:

Three of the six iron ore mines here have been idled, forcing roughly 2,000 workers out of a job. Unemployment in Itasca County, in the heart of the range, has shot up to 8 percent over the past year. Many miners will run out of health and unemployment insurance this month.

 

Booms and busts are part of the circle of life here in these frozen northlands, but never before has the cycle started half a world away. And never before have the residents here felt so helpless to stop it.

 

“We’re wounded,” said Dan Hill, 35, a miner who was laid off six months ago. “And you can’t stitch us up.

 

The Iron Range used to be an economic island.

 

 

Workers excavated iron ore in craggy open pits along this two-billion-year-old ridge that cuts across northeastern Minnesota. Then they crushed, cleaned, heated and separated the rocks to make taconite pellets that are rich in iron and small as buckshot.

 

The pellets are the region’s signature innovation — its creator is celebrated in an annual festival here — designed for maximum efficiency in the blast furnaces of U.S. steel mills. The biggest steelmakers also owned some of the mines and their processing plants, creating a closed circle of supply and demand.

 

Then the Chinese tsunami hit.

 

From 2001 to 2011, the international price of iron ore skyrocketed from just about $13 a ton to nearly $200 a ton amid surging demand from developing countries. While America grappled with a severe financial crisis, China in particular was booming. Apartments, factories, railways and roads — its appetite seemed endless. And feeding it required massive quantities of natural resources.

 

When the mines run full tilt, they employ about 4,000 workers and produce nearly 40 million tons of iron pellets. The mostly union jobs paid premium for overtime and came with full health-care coverage and a pension. It was enough to ensconce the region in America’s middle class for decades, and China’s rise seemed to guarantee that would continue for another generation.

 

Hill began putting down roots. He and his wife, Heather, and their two children, Riley and Anna, moved into their house a year after Hill began working in the mines. Their third child, Jacob, was born in 2014. Hill drew up plans to put a screened-in porch on the back of the house, maybe even with a hot tub.

 

But then China slammed on the brakes. Behind Hill’s house, there are still only cement posts.

 

“You can’t ride a wave forever,” he said. “That’s the easiest way I can say it.”

 

(Hill, center, with his father and father-in-law)

 

Hill saw the layoffs coming.

 

Taconite pellets began piling up last spring on the docks on Lake Superior. Hill could see the iron mountain from the interstate in Duluth. One resident estimated that it reached 20 stories high. All the miners knew what such a vast backlog meant for their jobs.

 

The pink slips took effect Aug. 21.

 

“Right now, the docks aren’t empty,” Hill said. “They need to be empty for us to be making pellets.”

 

The simple reason the pellets weren’t moving is that China’s building boom had gone bust.

 

China’s state-controlled steel mills didn’t slow down even when its economy did, as government officials kept the plants running to boost growth. The overproduction has created a worldwide glut of steel. In the mid-1990s, China manufactured just 93 million tons. Last year, it produced more than eight times that amount, though officials have said they plan to taper off this year.

 

“That type of overcapacity is going to wreak economic turmoil,” said Scott Paul, head of the Alliance for American Manufacturing. “The longer it takes to address it, the more painful it’s going to be for everybody.”

 

Any fix — more stringent enforcement of tariffs or resolution of the trade cases — could take years. At night, after their kids are tucked into their bunk beds, Hill and his wife debate what it would take for the U.S. government to stop the shipments.

 

“If they really wanted to turn those boats [of Chinese steel] around, they got a steering wheel on ’em,” Hill said.

 

His wife agreed: “If we are the most powerful nation in the world, why are you killing an industry?

Unfortunately for Hill - and anyone else who was laid off amid the global deflationary supply glut that's driven commodity prices to their lowest levels of the twenty-first century - there's no quick fix for China's acute overcapacity problem.

Even as the National Development and Reform Commission promises to eliminate "zombie companies," alleviating excess capacity comes with risks if you're Beijing. Not the least of which is sparking a rebellion among the hundreds of thousands of Chinese who will invariably lose their jobs as creative destruction is allowed to take its toll on the way to purging misallocated capital. 

And so, barring the type of tariffs mentioned above, the Dan Hills of the world are likely out of luck.

Now if only there were a presidential candidate with a great head of hair who would pledge to slap a 35% tax on foreign goods entering the country...