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June 2007 Incentives Deal of the Month |
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June 2007 Incentives Deal of the Month |
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Alabama Starts
Steeling Itself
"It is transformational," Alabama Governor Bob Riley said from ThyssenKrupp's American headquarters in Troy, Mich., after the board approved the location at corporate headquarters in Düsseldorf. "A project this size, with this amount of economic impact, comes along perhaps once in a generation." Alabama's economic harvest will definitely be hefty: 2,700 full- time jobs at a plant with an annual payroll of about $150 million; 29,000 temporary jobs in the construction of ThyssenKrupp's seven- million- sq.- ft. (630,000- sq.- m.) operation; and an estimated $1.2 billion a year in additional statewide business sales. But there's more coming, likely a lot more. State economic analysts haven't nailed down a firm projection on the plant's full- bore impact – largely because Alabama has never seen anything this big to use as a measuring milestone. Odds are, the titanic steel project will trigger an economic ripple far larger than any of the auto assembly plants that started flowing into the state when
New Terminal Solves Site's Logistical Challenge "We've been working with ThyssenKrupp's logistics team over the past several months on the best approach to building an efficient, technologically advanced terminal," Port Authority Director & CEO James K. Lyons said after the organization's board approved the project. "We've settled on the overall concept, and now we must begin the planning and construction process." The terminal will be located on an 87- acre (35- hectare) tract on Pinto Island. The Port Authority bought the property in March for $8.5 million from Atlantic Marine, which operates a shipbuilding and ship- repair facility on Mobile's Gulf Coast. But the new terminal wasn't part of Alabama's announced $810- million incentive package for the company. Instead, ThyssenKrupp's use fees over a 25- to 30- year period will pay for the operation, the Port Authority is projecting. Nonetheless, the Mobile terminal will meet one of Alabama's biggest challenges in its high- stakes competition with Louisiana, ThyssenKrupp's other finalist state. Located in St. James Parish near the city of Convent, the Louisiana site offered direct Mississippi River access, allowing deep- draft cargo ships to directly unload 58 miles (93 km.) west of New Orleans.
TK Spending $800 Million More, Upping Plant's Output That's where the new terminal comes into prominent play. And the Mobile operation will be doing a lot of loading and unloading. ThyssenKrupp's first American steel plant will import 3.3 million tons (three million metric tons) of crude steel slabs each year from the company's new operation in Sepetiba, Brazil. ThyssenKrupp officials expect that about 60 ships from Brazil will annually dock in Alabama. Even more product will exit the plant each year. The operation will have the capacity to produce about 5.8 million tons (5.2 million metric tons) of high- grade flat carbon steel. The Alabama operation's stainless steel melt will turn out another one million tons (900,000 metric tons) of product a year. About 340,000 tons (306,000 metric tons) of that stainless will go to ThyssenKrupp's plant in Mexinox, Mexico, for processing into finished products, with the rest of sent directly to customers.
Those updated capacity figures represent about 1.35 million more tons (1.22 million metric tons) of steel than ThyssenKrupp initially projected. Concurrently, the company will spend $800 million more on the plant than it was estimating in March. "The increased investment primarily results from a rise in both steel and stainless steel capacity, as well as the installation of additional equipment to allow further diversification of the product portfolio," the company explained in its statement announcing the project. The Alabama terminal will employ ThyssenKrupp- designed magnetic lifting gear, which will be attached to three Port Authority gantry cranes. The operation will be able to unload 27,500 tons (25,000 metric tons) of imported crude steel slabs a day while loading 10 barges. The terminal will also include storage space for as much as 165,000 tons (150,000 metric tons) of steel. Electronic identifiers will bolster the effectiveness of the terminal's inventory tracking system. Each slab's tag will include a unique number, plus weight and location. 'Decisive Factors' Centered on Costs
"This was a very difficult decision," ThyssenKrupp Steel and Stainless USA President and CEO Bob Soulliere said from the company's American headquarters in Troy, Mich. Company officials, however, provided no further particulars. "Decisive factors," the company broadly explained in its statement, "included logistical considerations of the company's supply- chain from Brazil to our projected customers; operating costs such as electricity and labor; and site- specific capital expenditures." Predictably, subsidies were a significant consideration for such an exceptionally capital- intensive project. Both states ponied up highly generous offers. Louisiana's incentive package totaled $1.97 billion. In addition, the Louisiana House approved $100 million more in subsidies, but ThyssenKrupp made its decision before the Senate acted. By comparison, Alabama's $810- million package looks almost puny. (For more on the state's subsidies, see accompanying "Coming to America: TK's Alabama Incentives.") The state, however, is also providing another highly potent incentive that wasn't listed in the subsidies that state and company officials finalized on May 14th – a 30- year capital investment tax credit. Alabama's program allows qualifying companies to annually reduce their state corporate income taxes by as much as 5 percent of a project's initial capital investment. ThyssenKrupp's pricy plant is sure to incur large tax liabilities. Consequently, Alabama's initiative could conceivably enable the company to recoup it entire capital investment – and it has 30 years to do that. For most projects, Alabama's capital investment tax credits are limited to 20 years. State lawmakers, however, earlier extended credits for as long as 30 years for
Alabama's Subsidy Strings The subsidy deal signed on May 14th specifies that the company must begin construction by Jan. 1, 2010, or the entire incentive package can be invalidated. That seems unlikely, though, given ThyssenKrupp's plans to start building by the end of this year and bring the plant online by January 2010. The agreement with the state also stipulates that the company must employ at least 2,000 workers to receive the full $811- million package. The agreement gives ThyssenKrupp three years after the plant begins production to reach the 2,000- job level. The company must then sustain that employment level for at least two years, or repay a portion of its subsidy awards. Some incentives analysts were surprised by the state's decision to limit the requisite hiring level to only two years. Five- year requirements aren't uncommon in such agreements. On the other hand, Alabama may have felt that ThyssenKrupp's financial strength made it a solid financial bet. During negotiations, for example, the state offered the company $900 million in tax- exempt Gulf Opportunity Zone bonds. Authorized by the U.S. Congress, the GO Zone program empowers states hit by Hurricanes Katrina and Rita to allow private firms to issue tax- free bonds at government interest rates. Those bonds are exempt from state and federal income taxes, as well as the federal Alternative Minimum Tax. Consequently, companies can repay debt at interest rates far below conventional charges. ThyssenKrupp, however, declined to accept any of the $900 million in Go Zone bonds, Alabama Development Office Director Neal Wade explained after the company made its location decision. The German firm has no debt, and it didn't want any, he said. Company Added Contract Clause to Protect Plant's Power from 'New Taxes' That provision specifies that "in the event that state legislation is introduced that adds a new tax on energy, carbon dioxide,
Neither ThyssenKrupp nor the state has commented on that contract clause. For certain, though, power costs were a very significant location factor for the steel plant, which will use 500 megawatts of electricity. ThyssenKrupp will pay $5 million less a month for electric power in Alabama than it would've in Louisiana, according to data that the Louisiana Public Service Commission released shortly after the site choice was announced. That very large cost difference traces largely to the sources utilized in power production. Louisiana utility firms for the most part use natural gas to run their generators, while Alabama companies primarily use less expensive coal. The new Pinto Island terminal in Alabama links to another cost issue as well: the discrepancy in the required site- specific expenditures at each finalist location. The big difference rested in the Louisiana site's soft soil. If ThyssenKrupp had built its plant in St. James Parish, it would've faced substantially higher site- preparation costs. More pilings would be needed, for example, to raise the facility to a level capable of surviving a 500- year flood. The Alabama site's firm soil won't require such extensive work. Louisiana's higher site preparation costs may've helped mitigate the extra outlay in Alabama from not having direct deep- water access. With the unloading, reloading and barging, ThyssenKrupp will pay as much as $100,000 more for each shipment into Alabama than it would've unloading in Louisiana, marine industry analysts estimate. Spinning Off Over State Lines Some of those secondary benefits will likely come from the same industries that use the steel made in Mobile County. For some of those firms, locating near ThyssenKrupp's facility could significantly slash logistical costs. Industries that will be major consumers of the plant's steel include the automotive, construction, electrical packaging and utility sectors. The Alabama output will also be used by manufacturers of appliances, engineered products and precision machinery. The plant's spin- off effect will undoubtedly transcend state lines.
The project's regional return prompted February's Alabama endorsement by Florida Gov. Charlie Crist and Mississippi Gov. Haley Barbour. "We believe the Alabama site offers ThyssenKrupp access to the dynamic Southeastern automobile manufacturing market and the resources of three of the nation's fastest- growing states," Barbour and Crist said in a letter that Riley faxed to the company's German headquarters. "We also believe the Alabama site will allow you to become partners with not just one state, but with three states that will enjoy the benefits of this global project." Barbour and Riley again sounded that note of regional cooperation at their joint May 14th appearance in Monroeville in southwest Alabama. The two governors had come to Alabama Southern Community College to discuss a new joint $15- million federal grant for training workers in both states. The training will be concentrated on the border area of southwest Alabama and southeast Mississippi – an area that both Barbour and Riley called ripe for ThyssenKrupp spin- offs. "We have a lot in common, and all that's dividing us is that little old state line," Barbour said. "The tallest mountain we are going to have to get over is providing consistent quality workers."
Mississippi now has the welcome task of helping find quality employees for another major employer: truck manufacturer PACCAR. Though overshadowed by ThyssenKrupp's same- day announcement, the Bellevue, Wash.- based company revealed on May 11th that it will build a 500- employee engine manufacturing and assembly plant and a technology center in Columbus, Miss. The selection of the Magnolia State location ends a 12- state site search for PACCAR, which makes Peterbilt and Kenworth trucks. The plant will be the company's first manufacturing operation in the U.S. Southeast. But, then, a lot of new growth will be coming to the Southeast in the industrial aftershocks that are just starting from ThyssenKrupp's huge Alabama venture. Said Riley in Monroeville, "There's going to be as much development in this area over the next two years as there has been in the last 40 years."
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a.jpg "Alabama Gov. Bob Riley")
b.jpg "Port of Mobile")
c.jpg "Louisiana's industrial site in Convent")
d.jpg "Rendering of ThyssenKrupp Alabama plant")
e.jpg "Steel manufacturer ThyssenKrupp")
f.jpg "Steel manufacturer ThyssenKrupp")
g.jpg "ThyssenKrupp")
h.jpg "Rendering of ThyssenKrupp Alabama plant")
i.jpg "Alabama Power's coal-powered plant near West Jefferson")
k.jpg "Florida Gov. Charlie Crist")
j.jpg "Mississippi Gov. Haley Barbour")
l.jpg "Rendering of PACCAR plant")