There couldn’t be two places more distant, physically or metaphorically, than the dusty, South Australian steel town of Wyallah and the glitzy, South Korean business district of Gangnam.
As conveyed by its best-known cultural export, the cheesy internet sensation ‘Gangnam Style‘ – where a Korean rapper sings praise of horses, shiny suits and sexy ladies – the group of suburbs that comprise Seoul’s equivalent of Beverly Hills is more or less the binary opposite of the sentiment channelled by Craig Emerson’s ‘No Wyallah wipeout‘.
While no known record of a Gangnam vs Emerson mashup yet exists, a deal has been lodged by one of Gangnam’s biggest corporate tenants – Korean steel giant POSCO – for Whyalla’s biggest employer, Arrium, formerly known as One Steel. Although fresh after sharp falls in the iron ore spot price and amid speculation over the sector’s longevity, the offer does portend greater things to come.
In conjunction with Hong Kong-based commodity trader Noble Group, the National Pension Service of Korea, the Korea Investment Corporation and the Korea Finance Corporation, POSCO’s $1 billion or 75 cent per share offer sent Arrium’s stock soaring in trade yesterday, but has been rejected out of hand as being low and opportunistic.
The prerogative and duty of management is to always get the best deal for shareholders, but for those of us sceptical of Australia’s iron boom, let alone the sustainability of heavy industries while labour costs and the Australian dollar are so high, the offer appears like a god out of the machine; as unexpected yet oddly welcome as pop music’s Korean wave to an otherwise tired industry.
As both a steel producer and an iron ore miner, Arrium, like the Korean rapper Psy, has got it both ways. A high ore spot price – Arrium perhaps optimistically sees it returning to $US120 per tonne – benefits the mining division’s value, assuming that it could easily be spun-out, whereas a falling spot price benefits the production division.
The bid is naturally being spun by Arrium chairman Peter Smedley, a veteran of hostile takeovers, as opportunistic. Yet while it undoubtedly takes advantage of a low share price and depressed market for bulk commodities, for wiped-out Whyallans and the industry at large it signals a positive future.
One of Arrium’s core assets is its distribution business and although Australia is undoubtedly a mature market for steel, long-range forecasts for infrastructure expenditure and population growth provide relative attractions. And besides its debt, Arrium’s problem has been its costs, but with POSCO’s blast furnace technology, which it uses in Korea, the Whyalla facility could once again return to world-class competitiveness.
In the eyes of the Koreans then, it is unsurprising that Arrium is seen in a better light than it has been on the ASX. Yet the real challenge won’t be in finding an optimum price, but battling the voices of protectionism and resistance to foreign takeovers.
The fact of the matter is that oftentimes foreign takeovers are not only better than the alternative, but can transform companies and industries in otherwise declining economies. Under Indian ownership, Jaguar Land Rover has seen its fortunes turnaround, with thousands of new British jobs. With an injection of cash from majority shareholder Fiat, Chrysler’s revenues have rebounded and the company’s notoriously gas-guzzling cars have been improved with Italian engineering.
Beyond the car industry, there are more such examples ranging from BG Group’s 2009 acquisition of Queensland Gas, to Rio Tinto’s merger with CRA. Both companies have thrived since what were originally controversial deals. Far from sacking divisions and stripping assets, cross-border takeovers have been essential in keeping economies productive and markets competitive.
An influential 1992 paper in the Journal of Financial Management found that foreign takeovers tend to generate a higher wealth effect than domestic ones, a trend that appears to be supported by research published last year in the Australian Journal of Management finding that foreign bidders tend to pay a higher premium for research-intensive firms. And though steel making and iron ore mining may appear relatively quotidian, technology and innovation are essential to the industry’s future.
Most of all however, foreign capital is declaring that there is still life in Australian heavy industries and that the mining boom hasn’t crowded everything out. One of the less known features of Dutch disease is the “Rybczynski theorem” which posits that Australia’s endowment of minerals will rob other sectors of capital. In the case of steel it helps explain an absence of the investment that would already have improved the productivity of firms like Arrium. It is reassuring that foreign capital can help redress the imbalance.
Obviously, there is always scope for a review of macro-prudential tools and trade policy, not to mention putting out positive messages about Australia as an investment destination, but just as reports of industry’s death have proven premature, the hysteria over Australia’s perceived sovereign risk looks greatly exaggerated.
If and when interest rates do fall and the dollar eases in line with slowing conditions in Asia, new opportunities for business and investment will come up just as they always do. As the business cycle changes and capitalism’s process of creative destruction moves on, there will be new and better prospects for the economy.
Those still singing that Australia is only a quarry, or that we should stop selling the farm, are increasingly out of tune with the times. There is new music being played and we may as well dance with it, just like the guy in the video, Gangnam-style.
Michael Feller is an investment strategist with Macro Investor. This week Macro Investor will be looking at a number of Australian companies embracing a global outlook in a changing economy. A 21-day free trial is available at the site.