Bob Every, a former Arrium chief executive, has criticised the mountain of debt taken on by the steelmaker stating it was never sustainable for such a business.
“The company when I was running it was always sustainable as long as you maintained a low level of debt,” he told AFR Weekend. “As a cyclical company you had to keep the debt levels low. How the company got to this position, I don’t know.”
…”The single biggest area with a question mark is the blast furnace. The business has a sustainable business based around electric-arc furnaces.”
…That is cold comfort for investors, who have now been struck by their own Whyalla wipe-out. Arrium shares traded at 2¢ before the appointment of administrators.
… in 2005, Arrium converted the Whyalla steelworks to feed magnetite ore, freeing up its higher grade hematite ore for export.
The move made Arrium Australia’s fourth-biggest iron ore exporter, but cost $400 million and left the group brutally exposed when the iron ore price plunged.
….Arrium acquired grinding media business Moly Cop for $US932 million ($1.23 billion). Moly Cop has been a strong performer, and has thrown off good cashflow.
That debt and the haemorrhaging Whyalla raw steelmaking business have now proved Arrium’s undoing.
Let’s get a few facts straight. Arrium management is to blame, clearly. It bet on the permanently high plateau for commodity prices, a thesis expounded by, hmmm, absolutely everyone in the elite circle of Australian group think, including the AFR, which breathlessly and repeatedly praised Onesteel/Arrium for going long iron ore throughout the mining boom versus the alleged failure of Bluescope steel which did not and so had its margins crushed for a time.
As for the “haemorrhaging Whyalla raw steel making business” let’s have a look at it:
Steel needs to find $60 million in savings, will benefit from the global spread of anti-dumping trade protections and a lower currency over time and, as Bluescope is showing, with sensible investment and cost-out could make loads of money. The iron ore business on the other hand is doomed with a best case of $380 million to restructure and break even at $40, roughly double where the iron ore price is headed in the next two years (that is, it will soon be losing nearly $100m plus per year). As well, in ARI’s recent labour cost cut vote, it was iron ore miners that rejected pay cuts not steel workers. Moreover, as the iron ore price continues to collapse the steel business will see much better margins so long as it is not mining the dirt.
It’s not Whyalla that’s killing ARI, it’s Australian group think and its great scribble sheet, the Australian Financial Review.
Meanwhile, outside the aylite circle, the Herald Sun is reporting better news:
IN their most bullish comments yet, the administrators of fallen steel-maker Arrium say the loss-making Whyalla operations in South Australia could be saved.
But it will need co-operation from government, management, employees, suppliers and customers, administrator Grant Thornton says.
…While Arrium’s steelworks in Whyalla and its iron ore operations are losing money, the Laverton Steel Mill, which employs 600 workers, could be generating a small profit.
…One insider told Business Daily the banks’ move was not “driven by altruism” but a fear that if Whyalla fell over, they would take an even bigger whack from increasing bad debts as the South Australian economy slows amid job losses. ANZ last month flagged a $100 million-plus increase in its bad debts on the back of exposure to the resource sector.
“There could be a domino effect of bad debts hitting everyone,” the insider said.
It’s still not clear whether banks wanted to save or close Whyalla.
Finally, do-nothing Malcolm is going to do nothing, also from the AFR:
Prime Minister Malcolm Turnbull doesn’t plan to challenge China’s political leaders over their massive steel expansion, which helped send one of Australia’s two steel mills broke, because China is such a big iron ore customer.
Government officials said while “issues around the steel sector might come up”, it would not be a major topic of conversation on Mr Turnbull’s first trip to Beijing as prime minister this week.
He is unlikely to make a point of complaining over the two days in China about the damage done to Arrium, which was placed in administration last week in part because it can’t complete with cheap Chinese steel.
Complaining will not do much. Rather one should smile then enforce anti-dumping law.
