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Global economic realities fuel Essar's delays
Few people were surprised when Essar Steel Minnesota execs said in August that completion of the firmís pellet plant had been delayed by 12 months.
Those close to the project realized construction wasn't where it needed to be, and there was nothing to indicate financing had been obtained to complete the project.
The development will cost $1.7 billion, and company officials say theyíve raised $1.1 billion to date. CEO and President Madhu Vuppuluri said Essar is in the "advanced stages" of securing the final $600 million. Meanwhile, locals are left wondering what barriers remain and when the final financing will come through.
As news about the delay spread, Project Director Steve Rutherford and Director of Government Affairs Kevin Kangas attended a Nashwauk City Council meeting to address concerns.
Rutherford said the project went into a slowdown in December to allow representatives from the seven India-based banks that have invested in the project to analyze the financials.
Their concern stemmed from Essar's 2012 decision to raise production from 4 million to 7 million tons annually. While that was welcome news here, investors raised eyebrows.
"It's a lengthy process to go through everything to try to get the funds you need," Rutherford said. "It takes time."
And that pushed Essar past its own schedule. Rutherford said the mining company has a process in place to ensure the plant can be operating by the second quarter of 2014 if everything goes according to plan. Until now, however, very few elements of the plan have done so.
Kangas responded to the delay in a more nuanced fashion.
"It will happen as fast as it possibly can," he said. "There are a lot of people working very hard to make sure this financing gets done and we move forward."
By many accounts, Essar is in good position. The company has contracts in place to sell its taconite pellets. Essar Steel Algoma in Canada and ArcelorMittal both are ready to buy pellets when they are produced.
Yet, Essar has played its financial situation close to the vest. Executives didn't publicly discuss the latest delay until Minnesota Power Co., which will provide electricity for the plant, told its shareholders the project is behind schedule.
The financing challenge
The Iron Range taconite plant will be Essarís first in the United States. Seven banks in Essarís home country of India have invested in the development during a decade of global economic challenge.
"A lot has happened in the past few years," said Jim Skurla, director at the University of Minnesota-Duluth's Bureau of Business and Economic Research. "We've had a slowdown in China; their project changed, and the entire banking industry has changed dramatically. Banks are needed, but they don't always give you what you want. That's true in India. It's true in the U.S. It's true everywhere."
Expectedly, Essar's change in project scope has triggered a review by investors. Skurla said he wasn't surprised by the construction slowdown. Further, in an increasingly global and interconnected world, financial institutions have become cautious.
Indiaís own financial realities may be coming into play as well - and the current reality isn't pretty.
The rupee, Indiaís national currency, is in a free fall to historic lows. The Washington Times reported in late August that the nation faces huge budget deficits and spiraling prices. The growth rate last year was five percent, the slowest in a decade. Government critics complain of "policy paralysis," and there are concerns about a middle class crunch due to inflation of food and fuel prices.
All this is just five years removed from the era of the "roaring rupee," when experts proclaimed India the fastest-growing free market democracy.
The situation isn't much better for India's businesses. The economy has been hit hard by rising delinquencies in agriculture, small to medium businesses and mid-sized corporations. According to the magazine "Moneylife," an analysis of India's top corporations, of which Essar is one, put debt levels at an average of 15 percent.
Furthermore, some of these large corporations have big repayments due in 2014, including Essar Oil ($200 million) and Essar Steel ($260 million).
India's bankers are in difficult times. Faced with an overseas project that increased its scope by 30 percent, Indian bankers had questions they wanted answered.
Locally, Essar officials say the financial review is well-underway, although some community leaders feel the firm may have to work with a well-capitalized steel industry partner to complete the work.
"We believe they've been through that process and we're moving forward," Kangas said. "We have an appropriately-sized project. We're able to look for different funders, and we're all eager to get this done."
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