Posted on 19 Jun 2015
AUSTRALIA’S car industry is painfully winding down and our ship and submarine building industries are threatened with suffering the same fate.
So it is cold comfort to realise that Australia’s steel production might also be living on borrowed time.
Neither of Australia’s steelmakers — BlueScope Steel and Arrium — have conceded defeat on closing their furnaces at Port Kembla and Whyalla but increasingly the debate among analysts is not whether our steel makers will import raw steel for processing and distribution, but when.
When there were claims that Port Kembla was getting ready to close earlier this month, BlueScope said that no decision had been made but stressed that costs needed to fall.
“Our costs of manufacturing steel are too high and we are seeking a game-changing approach that will significantly reduce costs.’’
They
are brave words and also part of an enterprise bargaining environment but in an
international context, Australia’s steelmakers are suffering many of the same
problems of a small domestic market lacking scale and efficiency that assailed
the car industry.
Although Australia is one of the world’s leading suppliers of the main steelmaking ingredients of iron ore and metallurgical coal, the global footprint and competitiveness of our industry has shrunk dramatically in recent years.
China now produces almost half of all the world’s raw steel after its industry multiplied its output more than 20 times since 1980.
Other nations including Europe, Japan, the US, India, Russia and South Korea are all large scale and efficient producers.
In contrast, Australia’s steel production has slid by almost 40 per cent since 2007 as furnaces were shut down and now represents just 0.28 per cent of world production at 4.6 million tonnes a year.
With world steel prices falling faster than the key ingredients courtesy of a market oversupply, most of BlueScope’s exports are thought to be made at a loss.
That is the case even after the company took the brave step to cut production and close down its number 6 furnace in 2011.
To thrive, Australian steel needs to move beyond supplying the domestic industry and support investment by being internationally competitive against the global steel giants — an achievement some analysts simply can’t see happening.
Primary among them is the activist investment firm Sandon Capital which has put out a report claiming that BlueScope is the cheapest steel company in the world, despite having excellent assets.
Its conclusion is relatively simple — the sum of the parts within BlueScope add up to significantly more than its current market worth of just north of $1.7 billion.
BlueScope’s half share in the US North Star joint venture is valued by Sandon at up to $1.4 billion and the building products joint venture with Nippon Steel at around $870 million.
Add in Australian tax losses of $2.8 billion which can be used up before the company needs to pay any tax plus the value of surplus land and excellent remaining businesses and the Sandon analysis is that there is a massive gap between BlueScope’s price and its value.
Sandon’s formula to close that gap is to mothball the remaining number 5 blast furnace at Port Kembla to prevent further steel export losses, particularly after car manufacturing stops in 2017.
Instead raw steel could be imported and used to continue to produce BlueScope’s high margin metal coated and painted products.
Other parts of BlueScope’s empire such as the global building solutions business and the North Star joint venture in the US and excess land could be sold to new owners, transforming its profitability.
That analysis might be dismissed as the normal sort of slice and dice agitation of a hopeful asset stripper except that the market performance of both BlueScope and Arrium have been forgettable.
DESPITE raising significant amounts of capital in recent years and having some highly profitable business units, BlueScope shares are down almost 43 per cent in the past year.
Shares in the more debt and iron ore export troubled Arrium are down by almost 79 per cent.
They are not the sort of numbers that shareholders like to see and with international steel prices not showing many signs of life, the call for action to stem loss-making parts of the businesses will continue.
Arrium, which produces long steel products such as reinforcing bars and rods, structural steel and rail and wire products, also has its own iron ore mines to supply its steelmaking and for export which were profitable when iron ore prices were above $US100 a tonne.
Now those mines are scrambling to remain viable. Adding salt to the wounds, Arrium’s US dollar debts are muting any advantage from a lower Australian dollar.
In Arrium’s case its highly profitable grinding materials business is being eyed for a potential sale as a way of cutting debt.
