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Chaos theory reigns in global iron ore market

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I must admit, somewhat sheepishly, that I first learned about the mathematical concept of Chaos Theory not from exhaustive graduate study, but from Jeff Goldblum in the movie “Jurassic Park.” To quote his character, the wry Dr. Ian Malcam, always quick with a cynical retort amid encroaching dinosaurs, “A butterfly can flap its wings in Beijing and in Central Park you get rain.” Everything affects something else, unpredictably.

That may well be true, but the main problem in “Jurassic Park” wasn’t wind, but big nasty dinosaurs breaking through flimsy security and gobbling down the ill prepared.

Last week, a ton of iron ore sold for $54.60 in China. That’s a bigger deal than some little butterfly. It means that mines here on Northern Minnesota’s Iron Range can soon expect a ton of taconite rolling off the Mesabi to fetch little more than the cost of making it. In nations where the iron industry is subsidized, mines can continue operating to keep people working. But that’s not the case here, and American mines have long ago learned that ore production must stop during these times of low demand to preserve the health of the industry.

We know that’s why Keewatin Taconite announced its upcoming indefinite shutdown come May, why Magnetation and Mesabi Nugget have announced similar idling plans, and why there almost certainly will be more mine production stoppages throughout the region this year. (Editor’s note: this column was written two days prior to the announced idling of Minntac)

Some, particularly among the Iron Range legislative delegation, were quick to suggest that the state’s controversial wild rice standard was to blame for KeeTac’s shutdown. This would be a little like saying that the problem with Jurassic Park was that the Jeep used to escape the T-Rex wasn’t fast enough. Sure, a faster Jeep would have been nice, but — in case you forgot — T-REX!

The cost for Iron Range mines to meet environmental regulations is significant, to be sure, but it joins myriad other costs, including larger expenses like labor and energy, to factor into the total cost of production. The fixation by many on the “dangers” of environmental regulation has made every problem seem related to this contentious debate.

No, my friends, we need to think about the T-Rex. In this case, you can find a pretty big T-Rex in western Australia, where the Roy Hill Project is about to go online. The Roy Hill Project is a new iron ore mine, complete with workers’ village, sea port and rail network that will produce 45 million tons of pellets annually. For perspective, that’s more iron ore that we produce in all of Minnesota in a typical year. This mine will feed China and other Asian markets, further depressing the price of iron ore.

These really big T-Rex mines in Australia and places like Brazil are happy to forge ahead even amid low prices, because when prices return to normal or better, they’ll have effectively consumed more of the market share in China and, as a result, the world.

Last Monday, the Port of Duluth-Superior opened its 2015 shipping season with the John G. Munson hauling 24,000 tons of taconite out of the harbor. Other ships soon followed. In coming weeks we’ll see what Iron Range mines decide to do with the traditional spring taconite pellet stockpiles, which are larger than average based on conversations I’ve had.

We will see many economic fits and starts here on the Iron Range for the rest of this year, perhaps enduring into the next. More layoffs. More anxiety. There’s no good in panic, but there’s also no excuse for inaction. Ask yourself, what seems like something we — you, me and our neighbors — can do? Figure out how to beat Australia and Brazil at the iron ore pricing game, or diversify the Range’s economy into sectors not so dependent on commodity pricing, relying on our iron industry only during periods of high prices?

Spoiler alert: The T-Rex wins, and Northern Minnesota can’t rely on mining alone to survive to the end of the movie. We must get off this economic island.

Aaron J. Brown is an author and college instructor from the Iron Range. He writes the blog MinnesotaBrown.com and hosts the Great Northern Radio Show on Northern Community Radio. This column first appeared in the Sunday, March 29, 2015, edition of the Hibbing Daily Tribune and is reprinted here by permission of the author.