From Malcolm Turnbull:
The Turnbull Government is delivering on its election commitment to support South Australia’s steel sector and workers at Arrium.
The Export Finance and Insurance Corporation will provide a loan under the National Interest Account of $49.2 million for new machinery at the Iron Knob and Iron Baron mines.
This will enable Arrium’s OneWhyalla business to process iron ore to export quality and is expected to boost Arrium’s cash flow by more than $200 million over the next five years.
The investment builds on the Turnbull Government’s ongoing commitment to support Australia’s steel industry, including:
- Using Australian steel across our naval shipbuilding program
- Upgrading 1200 kilometres of rail line between Adelaide and Tarcoola, worth approximately $80 million to Arrium
- Strengthening Australia’s anti-dumping system
The Turnbull Government will continue to work closely with the administrators as they prepare Arrium’s businesses for sale.
So, let’s break those numbers down. $200m over five years is a $40m per year cash flow boost. ARI will produce 10mt of ore so the margin per tonne lift is $4. Here’s what ARI said about its iron ore division before it went under:
Let’s be exceedingly generous and say that the Turnbull loan is enough to reduce the ARI cash break evens (that is not even “all-in”) to $40/dmt. Here is the Singapore futures outlook for iron ore over the next five years:
The Turnbull loan just bought ARI iron ore two years at the very best. Let’s not forget that this price deck is currently at its most bullish in some time, influenced upwards by the iron ore bubble. On the MB outlook, ARI will be losing money on its new machinery before it’s even installed.
So, what has Turnbull’s bailout achieved? Based on futures markets, a year or so after installation, the new washers will be losing ARI money, not just sunk costs but real money (as in cash). No doubt just as the last management did, this debacle will be hidden under transfer pricing with the steel mill for a little while. Perhaps it’s a condition of the loan, which has now loaded up the balance sheet just that little bit more, making it even harder to sell the steel mill.
As well, by failing to place this loan or any alternative support within a rhetorical framework of a rescue package designed for the long term, one that will reset the business for good by demanding across the board community contributions, Turnbull is unable to bring pressure to bear upon workers, from Yahoo:
Arrium workers in South Australia have signalled they won’t accept a 12 per cent pay cut to help save the Whyalla steel plant.
Administrators KordaMentha have proposed a three-year pay reduction for workers across the mining and steelworks operations which would include a two per cent increase in the final year.
It’s understood the deal, which would save the business $20 million, has been pitched as their final offer.
The Australian Workers Union have put forward a counter offer of a 7.5 per cent pay cut which would also pare back overtime entitlements.
AWU organiser Scott Martin believes there is scope for compromise when the parties meet again on Wednesday.
“We don’t believe it is a first and final offer,” he told ABC radio on Friday.
Sticking with the general theme, there is also the small fact that by preserving the uncompetitive iron ore business, ARI will now keep the iron ore price just that little bit lower. Given Australia’s WA juniors are the global marginal cost producers now, that means the jobs saved will simply be lost further west.
There are lots of iron ore idiots in the world (just look at Aurizon) so perhaps the loan will be enough to sell the the ARI assets. Let’s hope so because the next time ARI comes knocking for public cash the polity will throw up its hands and say “no way” given Turnbull’s $50m will only have succeeded in demonstrating it’s a basket case even with public support.
Meanwhile, as the iron ore price falls, a renovated steel mill could be making money hand over fist as margins expand on falling input costs, just like Bluescope is right now. Yes, it would have taken a proper investment to repair the mill (some $300m). And perhaps a new owner will do it instead. But it’s less attractive now than it was a week ago; the pump and dump strategy of the Turnbull Government hasn’t fixed anything, it has simply loaded in more debt, emboldened stakeholders and made future public support less likely.
Turnbull has fixed Arrium in the same way he fixed the Budget, Australia Post, the NBN and his own prime ministership. He has an uncanny knack of choosing the easiest short term path which only feeds a longer term doom loop.
