IRON JUNCTION, MINN. — The railroad tracks that connect the 50-year-old iron mine here to the rest of America are hidden by a blanket of snow. On a normal day, a train would be plowing through the snow every three hours, carrying thousands of tons of iron ore destined to be melted into the steel frame of a car or the beams of a skyscraper.

But nothing has been normal in this region for nearly a year, when the mines began shutting down, victims of a global plunge in the price of natural resources that is upending the world economic order. Brazil is in recession. Australia is struggling to pay its debts. South Africa’s currency is plummeting.

And here in America’s Iron Range, the snow on the railroad tracks lies smooth and undisturbed.

“Over the last 30 years, the bad times last longer and the good times are shorter,” said state lawmaker Tom Anzelc, whose House district includes the region. “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. The country that had helped power the world economy for years is now sowing fear across international financial markets.

In the United States, China’s hand is most obviously felt on Wall Street, which booked the worst start to a year in its history. But the country’s influence is also reshaping many corners of the U.S. economy: Soybean farmers in the Midwest are worried that demand from their best customer could begin to wane. Home buyers in California are competing with Chinese investors stowing their money in real estate far from Beijing. Factory workers in central Illinois are bracing for massive layoffs amid plunging sales at Caterpillar, which manufactures heavy machinery and is one of the region’s largest employers.

Whether these pockets of distress can tip the rest of the country back into recession remains an open question. But in this region, the worst-case scenario is already a reality.

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.

“They were, for lack of a better word, hoovering up every last bit of iron they could get their hands on,” said Jorge M. Beristain, an analyst at Deutsche Bank.

On the range, mining companies were able to command higher prices even if their ore never left U.S. borders, Beristain said. Government data shows that American mines ramped up exports to about 20 percent of production to take advantage of the higher prices. Companies such as Cliffs Natural Resources, where Hill used to work, invested heavily in foreign mines from Canada to Australia.

A third-generation miner, Hill was worried that the towns here would not be able to rely on iron forever, so he studied aviation maintenance at a nearby community college. Knowledge and skills were replacing machines and labor as currency of the economy — at least, that was the conventional wisdom. But when the recession hit and Hill lost his aviation job in 2009, it was the mines that were hiring.
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 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.

A vaunted $350 million bridge to North Korea sits unfinished. Empty “ghost cities” are filled with apartment buildings, shopping centers, even libraries — but no people. The price of natural resources such as iron ore has plunged as China lost its appetite. The declines are dampening growth in countries like Australia, Brazil and Zambia that rode Beijing’s coattails to new prosperity, creating a vicious cycle of weak economies and weak prices.

Cliffs Natural Resources has been hit particularly hard, losing billions of dollars. The international price of iron ore has fallen back down to below $40 a ton — less than it costs Cliffs to mine it.

Click here for more information!
“It’s like a bad virus,” Cliffs chief executive Lourenco Goncalves told the Sydney Morning Herald last year.

But perhaps even more pernicious are the indirect ways that the global marketplace is wreaking havoc on the Iron Range.

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.

Much of the excess supply has ended up on U.S. shores, with the nation importing a record amount of cheap steel from overseas. That has forced American steel companies to idle their mills and lay off thousands of workers. Trade lawsuits against China are winding their way through international courts.

“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.”

At the end of the line is the Iron Range. With the blast furnaces turned off at U.S. steel mills, there’s little demand for the taconite pellets that are the crux of the local economy.

One of the first mines to shut down was Keewatin Taconite, which has been idle for more than nine months. United Taconite, where Hill was working, followed in August. In December, Cliffs closed its other mine in the region, Northshore. The official head count of 2,000 unemployed doesn’t include the larger ecosystem of contractors, suppliers and local businesses that depend on the mines.

Hill’s wife is working fewer shifts as a nurse at the local hospital as residents draw out their medical appointments. At Blomberg’s gas station, early morning business has dried up because miners are no longer driving to work. And after 93 years, local grocery store Falkowski’s is locking up.

“To be the one to have to make the choice to close the doors, that was extremely painful,” owner Mike Jarvi said. “But at some point you just have to face up to the reality that this isn’t going to turn around quickly enough to keep going.”
Late last month, Cliffs management said United Taconite would remain shut down until spring but reopen later this year. Hill is dubious. He has tried checking manifests for ships coming through Los Angeles, San Diego and Seattle to figure out how much steel is coming onshore but had little luck.

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?”

***

Inside Hill’s wallet are the tattered papers that were supposed to be his passport to the global economy.

There’s a laminated card proving that he completed four years of training to become a millwright journeyman, qualifying him to work on any factory floor. His certification in aviation maintenance took two years. His latest entry is his Class A truck driver’s license, which he earned after 30 hours behind the wheel and two weeks of classes at the local community college after he was laid off from the mines.

“How much more diversification can we get?” he said.

After the mines shut down, Hill searched for jobs across the range, hoping to land work before his health benefits expire this month. But his options were slim, and the chances of finding pay and benefits comparable to what he earned at United Taconite were even more remote.

There’s a paper mill in the north that’s suffering from the same global forces that have felled the mining industry. The large corporate call center pays much worse hourly wages. One of Hill’s friends from the mine took a job at Erbert Gerbert’s sandwich shop.

Hill eventually found work as a plane mechanic about an hour away in Duluth. It’s less money, and he is scheduled to work every weekend this year. But it was one of the few places that offered health care — and Hill and his wife are expecting another baby.

On a recent morning, Hill drove his red Ford truck over the quiet railroad tracks near the mine where he used to work. He’s not allowed onto the property while it’s shut down, but he hopped out of the car to dig in the snow for forgotten taconite pellets, dislodged from the rail cars as they rumbled back and forth from the mine.

The temperature was below zero, but Hill took off his gloves and cupped the pellets in his bare hands.

“Boy, that feels good,” he said.

They left behind a dusty residue — taconite black, locals call it. Hill wiped his hands with his gloves, but taconite black is tough. It never comes entirely off.

Financial turmoil half a world away is melting Minnesota’s iron country

Ylan Q. Mui

The Washington Post     February 3, 2016