When im­port­ing steel is sen­si­ble, de­spite tar­iffs

The Palm Beach Post - - BUSINESS - ©2018 The New York Times

Jack Ewing TORNIO, FIN­LAND — You must have a very good rea­son to toil in iron-melt­ing heat an hour’s drive south of the Arc­tic Cir­cle.

But there is an eco­nomic logic be­hind Fin­nish steel­maker Ou­tokumpu’s huge com­plex in this small city, where rein­deer fil­lets are reg­u­lar fare. Its cen­tral­ized pro­duc­tion line of high-grade stain­less helps to ex­plain how global sup­ply chains work — and why Pres­i­dent Don­ald Trump’s trade war could be dis­rup­tive.

Ou­tokumpu’s story is one of find­ing com­par­a­tive ad­van­tage and ef­fi­cien­cies. And it be­gins hun­dreds of me­ters be­neath a La­p­land for­est in­side a man-made war­ren of in­dus­try. On a re­cent day, a miner, Kalle Kilpelanaho, was perched in the cab of a large bor­ing ma­chine deep in­side a tun­nel, twist­ing a joy­stick that could ma­neu­ver a drill 20 me­ters into the rock floor.

“We want the dark brown,” Kilpelanaho shouted over a me­chan­i­cal roar, re­fer­ring to the pul­ver­ized rock churned up by the drill. Brown in­di­cates chromium ore, the el­e­ment that turns or­di­nary steel into rust-re­sis­tant stain­less steel. It shines the drums that spin in­side U.S. wash­ing ma­chines or beats back rust in cars.

Ou­tokumpu has a bounty of it.

The dis­cov­ery of cop­per in eastern Fin­land a cen­tury ago and then chromium here in the 1950s — an es­ti­mated 100 mil­lion tons un­der­ground as of 2012 — made Ou­tokumpu an eco­nomic en­gine for Fin­land.

Gen­er­a­tions of fam­i­lies have worked in its fac­to­ries and lived off its chromium de­posits as the de­mand for high-grade stain­less has in­creased glob­ally. The gov­ern­ment owns a 26 per­cent stake. To­day, there are 2,300 work­ers, sep­a­rated by just a few miles, in­volved in min­ing or smelt­ing or truck­ing miles-long rolls of fin­ished steel to a nearby com­pany-owned sea­port in the Gulf of Both­nia.

The steel is shipped through the Baltic Sea and then across the At­lantic to U.S. man­u­fac­tur­ers, who have been among the Fin­nish com­pany’s ea­ger cus­tomers.

But the eco­nomic ra­tio­nale be­hind global sup­ply chains has been scram­bled by Trump’s tar­iffs. By im­pos­ing a 25 per­cent tax on steel im­ports from the Euro­pean Union and other al­lies, Trump has forced cus­tomers of com­pa­nies like Ou­tokumpu to obey a logic de­fined by his poli­cies rather than mar­ket forces.

The pres­i­dent’s aim is to raise the price of im­ported steel and force com­pa­nies to buy steel from com­pa­nies in the United States. There are some com­pli­ca­tions — and con­tra­dic­tions — for buy­ers. Mod­ern steel is a de­signer prod­uct. Depend­ing on what a cus­tomer wants, steel-makers mix in in­gre­di­ents like nickel, molyb­de­num or ti­ta­nium to cre­ate dif­fer­ing de­grees of hard­ness, pli­a­bil­ity or re­sis­tance to cor­ro­sion.

Many kinds of steel, in­clud­ing va­ri­eties made in Tornio, are sim­ply not avail­able from sup­pli­ers in the United States. And no one is much in­ter­ested in mak­ing them in the U.S. be­cause the de­mand is too small to jus­tify the in­vest­ment. Ou­tokumpu has mills in small cities in Alabama and South Carolina as well as Mex­ico, but no site pro­duces stain­less as ef­fi­ciently as the Fin­nish plant can.

Per­haps most im­por­tant, there are no ac­tive chromium mines in North Amer­ica.

The pres­i­dent’s tar­iffs on im­ported steel have cre­ated headaches for peo­ple like Chris Ul­brich, chief ex­ec­u­tive of Ul­brich Stain­less Steels & Spe­cial Met­als in North Haven, Con­necti­cut.

The fam­ily firm buys steel from Ou­tokumpu and pro­cesses it fur­ther for use in prod­ucts like air­craft en­gines and au­to­mo­bile air bags.

One of the va­ri­eties of steel that Ul­brich buys from Ou­tokumpu is called Type 305 Stain­less and con­tains at least 12.4 per­cent nickel. The recipe is tai­lor-made for a cus­tomer whom Ul­brich, for pro­pri­etary and com­pet­i­tive rea­sons, de­clined to name.

Ul­brich, the third gen­er­a­tion of the fam­ily that founded the com­pany, said he searched for the same prod­uct among the hand­ful of U.S. com­pa­nies that still make stain­less steel. He fi­nally found one will­ing to pro­duce the steel. But the sup­plier in­sisted that Ul­brich buy many times more of it than he needed.

“We do 160 grades of me­tal here, they are all dif­fer­ent,” Ul­brich said. “This 305 item has a spe­cial chem­istry and is not made in the U.S.”

Ul­brich said he has lit­tle choice but to pass the tar­iffs on to his cus­tomers. Even­tu­ally con­sumers will wind up pay­ing the tab. “In­fla­tion will start to pick up,” he said.

Why should some kinds of steel come only from north­ern Fin­land, where it is so cold in win­ter that the sea freezes and ice­break­ers must clear a path to the har­bor? De­spite its lo­ca­tion, as close to Rus­sia’s Arc­tic port of Mur­mansk as to Helsinki, Tornio of­fers a fa­vor­able com­bi­na­tion of con­di­tions.

Ou­tokumpu’s land­scape — the prox­im­ity of mines, fac­tory and sea­port — saves time in pro­duc­tion and on trans­port that al­lows for “an enor­mous ef­fi­ciency gain,” said Roe­land Baan, the com­pany’s chief ex­ec­u­tive.

The most im­por­tant fac­tor is the chromium wealth be­neath Kemi, a town about 15 miles from Tornio. An am­a­teur ge­ol­o­gist dis­cov­ered the chromium de­posit in the 1950s when he no­ticed a rock em­bed­ded with tell­tale sil­very flecks.

At the be­gin­ning the ore was dug from an open pit, and when the shov­els couldn’t go any deeper Ou­tokumpu be­gan tun­nel­ing un­der­ground. To­day a grid of tun­nels reaches down 500 me­ters, or about onethird of a mile.

The mine is its own un­der­ground world, with a lec­ture hall for train­ing ses­sions and a subter­ranean em­ployee cafe­te­ria, where the main course on a re­cent day was liver stew.

A cav­ern blasted from the rock serves as a main­te­nance garage for a fleet of ve­hi­cles, rang­ing from pick­ups to haulers that pump con­crete re­in­forc­ing for tun­nel walls. There is even a small boat used for cross­ing flooded ar­eas. The brightly lit space is big enough that, to mark ex­trac­tion of the 50 mil­lionth ton of ore in Fe­bru­ary, Ou­tokumpu had a party there and hired a Fin­nish heavy me­tal band for en­ter­tain­ment. Cue the jokes about “hard rock.”

An un­der­ground road, 5 miles long and wide enough for two trucks to pass, con­nects to dozens of side tun­nels where the ore is dug. In the chill air at the end of one tun­nel, a worker wired ex­plo­sives em­bed­ded in the rock face. He was pre­par­ing to blast out a section of ore, which would then be dug out, crushed and hauled up a cen­tral shaft to the sur­face.

It is only a short drive from the mines to the huge fur­naces in Tornio, where the ore is melted with other in­gre­di­ents to cre­ate fer­rochrome, a cru­cial in­gre­di­ent in stain­less steel.

The fer­rochrome, still molten, trav­els on rails a few hun­dred me­ters across the fac­tory com­plex to be mixed with ad­di­tional chem­i­cals and min­er­als to make stain­less steel. The short dis­tance be­tween mine, smelter and steel fur­nace elim­i­nates the need to re­heat the fer­rochrome and adds to the cost sav­ings.

The Ou­tokumpu fac­tory also pro­vides a les­son on why some kinds of steel are im­pos­si­ble to buy in the United States. Every batch of steel has its own recipe, con­cocted for spe­cific cus­tomers. There are some recipes for the steel sold to German high-end ap­pli­ance maker Miele for drums that ro­tate in­side wash­ing ma­chines and oth­ers for the blades of Swiss Army knives made by Vic­tori­nox. Ou­tokumpu sup­plied tex­tured stain­less for a build­ing in the new World Trade Cen­ter in Man­hat­tan.

“It’s like bak­ing cook­ies, but on a dif­fer­ent scale,” said Nik­las Wass, who over­sees the Tornio works. “You need to spe­cial­ize in cer­tain things.” Wass stood on a scaf­fold over­look­ing a fur­nace and watched a worker, strapped with a re­mote con­trol ap­pa­ra­tus, pre­pare a la­dle of molten ore. “You only have so many melts. You need a cer­tain vol­ume to be eco­nom­i­cal.”

The process was mes­mer­iz­ing. The worker po­si­tioned a la­dle full of white-hot liq­uid fer­rochrome in front of a huge oven. A door slid open to re­veal a mix­ing vat glow­ing red from in­tense heat. The worker tipped the la­dle, which was hang­ing from pul­leys, so that the fer­rochrome poured into the vat. The stream of liq­uid shone so brightly that a visi­tor was ad­vised to watch only through tinted film, as if it were a so­lar eclipse.

Once mixed, the steel cools for days be­fore it is flat­tened into half-mile long strips. The steel is later rolled and hoisted into ships at a port, which Ou­tokumpu op­er­ates, within a 10-minute drive from the fac­tory.

Wass and other Ou­tokumpu ex­ec­u­tives were guarded about what ef­fect the tar­iffs might be hav­ing on the Tornio op­er­a­tions. Toni Ker­a­nen, a la­bor rep­re­sen­ta­tive, said so far there have been no ma­jor ef­fects.

But there is an un­der­cur­rent of ap­pre­hen­sion among work­ers, he said.

“They are aware of the tar­iffs and they are fol­low­ing the sit­u­a­tion, and they are talk­ing about it,” Ker­a­nen said.

Any dis­rup­tions could be dire for Tornio. It is not un­usual for three gen­er­a­tions of a fam­ily to work at the fac­tory, Ker­a­nen said. “Right now, Ou­tokumpu feels like a safe em­ployer. If there was no Ou­tokumpu, there would be noth­ing.”

JUHO KUVA / THE NEW YORK TIMES

Re­mote Fin­nish steel man­u­fac­turer Ou­tokumpu has ac­cess to min­eral de­posits that give it a clear ad­van­tage over makers in the United States. But Pres­i­dent Don­ald Trump’s tar­iffs are rais­ing prices for Amer­i­can cus­tomers.

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