Posted on 21 Jun 2016
As the impact of China’s flagging demand for steel plays out across the globe, Australia has become the latest battleground. It was among the biggest beneficiaries of China’s building boom and now finds itself a principal victim of the decline. And all of this can be seen in a struggle over a single South Australia steel company: Arrium.
In April, Arrium was put into administration along with its principal unit, the Whyalla steelworks. But the story is playing out on multiple levels, not all of them visible, as Australians prepare to go to the polls on July 2. South Australia’s state Labour government plans to inject A$50m (US$37m) into the ailing company, with Liberal party leader Prime Minister Malcolm Turnbull agreeing to contribute almost the same to keep the plant going. “It is essential we retain our sovereign steel making capability,” South Australia’s Premier, Jay Weatherill, told parliament earlier this month.
Like other steelmakers, from ArcelorMittal to Tata Steel in Europe and Nippon Steel in Japan, Arrium and Whyalla have been wounded by slowing demand for steel. They have also been hit hard by competition from cash-strapped state-owned steelworks on the Chinese mainland that are less sensitive to the need for profits than they are for supporting jobs.
Overcapacity in China has triggered social divisions and political pressure well beyond its borders, fuelling protectionism and friction with trading partners. At the same time, the troubles of commodities producers, whether in iron and steel or oil and gas, have left banks and other lenders with bad loans — especially for those careless enough to not take collateral on the money they lent out. Falling commodities prices have also triggered fierce disputes among creditors, as is the case at Arrium.
Arrium owes the big four Australian banks A$1bn but has total debts to other lenders — including noteholders in the US, trade creditors and its own workers — of A$3bn. It directly employs 8,300 staff, of which 1,600 are in Whyalla itself, while several thousand more depend on Whyalla indirectly.
At the end of last year, potential buyers led by international private equity and alternative asset firms, including Blackstone, Brookfield, Carlyle and KKR, took a look at the Whyalla operations. But their offers were so low that the process was suspended, several potential buyers say.
Most of these groups were attracted not to the steel operations but to Arrium’s Moly-Cop metal grinding unit, bought in 2010, which could be worth A$1.5bn.
Then, earlier this year, the mood among various creditors turned ugly when Blackstone’s credit arm came in with $100m in rescue financing and a proposal — launched jointly with Blackstone’s private equity arm — to give the company $750m in new debt and commit to underwrite a $250m rights offer. However, that plan would give Blackstone control of the company, with the support of management, and require the banks to accept losses of 50 cents on every dollar they lent to the company.
In the end, management was unable to persuade the lenders to accept such massive losses. Instead, the banks supported putting the company into administration.
To critics, Blackstone represented the ugly face of American capitalism: it extended a struggling company expensive funding and took rich fees in the process. But people close to the company say Blackstone came in at the request of management, only after the banks declined to extend more money. They argue that the problem was more the banks’ failure to demand collateral for their loans, and their decision to force the company into administration.
Administrators are now entertaining new proposals for Arrium, which could mean breaking the group in two, or listing Moly-Cop. In an echo of the fight over Tata Steel’s troubled UK empire, some would-be buyers are hesitating to take on Arrium’s steel assets given the political opposition to any drastic restructuring involving lay-offs. South Australia’s provincial government insists shutting Whyalla is not an option. “It is so politically charged that it will be a hornet’s nest,” one potential bidder predicts.
“The Blackstone plan was an outcome at least as good as what they are trying to do now,” says one person sympathetic to the Blackstone bid. Whether that is accurate will be determined after Arrium’s fate becomes clear.
