May 20, 2019

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When Designer Steel From Lapland Makes Sense, DespiteTariffs

When Designer Steel From Lapland Makes Sense, DespiteTariffs
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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 the Finnish steel maker 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 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,” Mr. 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 American 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 American manufacturers, who have been among the Finnish company’s eager customers.

But the economic rationale behind global supply chains has been scrambled by Mr. Trump’s tariffs. By imposing a 25 percent tax on steel imports from the European Union and other allies, Mr. 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 America 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, Conn.

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

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 Mr. Ulbrich, for proprietary and competitive reasons, declined to name.

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

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

Mr. Ulbrich said he had 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 one-third 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, five 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 the 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.” Mr. 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.

Mr. 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 had 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,” Mr. Keranen said.

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

Jack Ewing writes about business, banking, economics and monetary policy from Frankfurt, and contributes to breaking news coverage. Previously he worked for a decade at BusinessWeek magazine in Frankfurt, where he was European regional editor. @JackEwingNYT Facebook

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