Big River Steel Sold to U.S. Steel, Was it Worth it?

 

U.S. Steel has agreed to purchase the remaining half of Big River Steel for $774 million. It had purchased the first half two years earlier for $700 million. BRS was a tax-payer supported effort. We gave them incentives whose cost totaled around $240 million, plus another $50 million in Teacher Retirement Funds was used to buy stock in BRS. The total initial project cost was 1.1 billion dollars. This was in 2015. This closes the books on an experiment in government going into private industry. Let's look at the history and its conclusion to decide if this is the kind of thing the state should make a habit of....

Shortly after the project was completed, steel prices collapsed. In August of 2017 BRS took out a 1.255 billion dollar loan against their assets as I reported here. In other words, they borrowed an amount in excess of their net worth when they began just two years earlier. They borrowed an amount equal to all of their initial net worth, plus about half of the $240 million in subsidies that Arkansas had provided them. 

At this point, I was concerned that the People were going to lose all of their money and the company would wind up with a net worth of zero. Thus the Democrats and former Governor Mike Beebe, who united with the so-called "conservative, free market Republicans" (most of whom favored Marco Rubio in 2016) seemed to me at this point to have perpetuated a financial disaster on the state. They were rescued from the shame of this by a man that many of them loathe, either openly or secretly. When Donald Trump imposed large tariffs on steel imports midway into his term, it was a boon to U.S. steelmakers. This boon was at the expense of higher prices paid by U.S. consumers of steel products.

By 2019, U.S. Steel bought a 49.9% stake in BRS for the aforementioned $700 million. Now they are buying the rest of it. Disaster was averted as the 1.1 billion spent in 2015 has ended up generating 1.474 billion dollars for the sale of the company. So that is a gain of 34% over six years. And we added several hundred good jobs to Osceola and the surrounding area. That is a good deal for Arkansas and is evidence that we are ruled by wise and benevolent people, right?

Well, if you just count the pluses and ignore the minuses, or "opportunity costs" that case can be made. But then a lot of things look good if you just count the pluses and ignore the minuses. Again, if most of them had gotten their way, Donald Trump would not have been the President of the United States and those steel tariffs would never had been imposed. In which case, BRS might be worth nothing right now. So "lucky in spite of themselves" might be a better description of the outcome here rather than "wise and benevolent."

Secondly, counting the pluses without the minuses isn't a realistic way to look at things. For example, if you add in the $240 million worth of subsidies mentioned earlier, the true start-up cost was 1.34 billion dollars, not 1.1 billion dollars. Thus the actual gain in real total investment (including taxpayer subsidies) was 0.134 billion dollars, or $134 million dollars. So the real return was 10% over six years. This is a 1.66% annual return. The lowest Ten Year Treasury rate in 2015 was 1.88% So this highly risky investment still earned less than essentially risk-free U.S. Treasury Notes.

A better comparison might be with the S&P 500. What did the gains of the S&P 500 look like during this time? Well, from the end of 2015 till now the S&P has more than doubled. This 10% return must be compared to the 100% + return of the broader market during the same period. IOW, the deal made a little money in an environment when mainstream investments made a lot of money. So for example, the Arkansas Teacher retirement fund may have turned their initial $50 million investment into $55 million dollars six years later. That doesn't sound so bad by itself, just looking at the pluses and ignoring the minuses, but if that same money had just been used to buy the S&P 500 then that $50 million would have been worth over $100 million, and that number does not include dividend income! The Teacher Retirement fund therefore lost an estimated $45 million dollars in potential gains. 

All of this measures gains in dollars, but dollars themselves have been shrinking in value. If you think that inflation is greater than 1.66% a year, then in terms of real purchasing power the value of BRS could have still been negative. 

The rest of the deal is hard for us to evaluate. We don't know how much the average consumer has been hurt by higher steel prices. We know that Osceola got hundreds of good jobs, but I think I figured at the start that the subsidies for each job, given the estimated 525 of them, was something like $34,000 per year per job. If we had left that money in the hands of people in the state they would have spent it elsewhere and that money would have still produced or saved jobs. You can't just say "look at the jobs we created with that money over here" and ignore the jobs that same money would have supported if it had been left in the hands of the people who originally earned it. 

My conclusion is that the state absolutely dodged a bullet over the BRS project. By that I mean it was just a bad deal for us when it could have been a disaster. I don't advise our state government to go to the roulette table again. If a project is worth doing, the free market will do it without their intervention. The politicians who "win" these deals tend to be the one who overbid the most.