That might sound like a comment from an arrogant know-all but if you’ve followed the scribblings in this column over the past 10 years you will understand that what’s just happened to the South Australian business falls into the category of “bug-looking-for-windscreen”.
So many bad decisions were made at one of Australia’s oldest iron and steel businesses that it’s hard to know where to start, but here are a few, including:
· Age. Not many mines or manufacturing operations survive for more than 100 years, largely because they fail to modernise or get overtaken on costs and efficiency by younger rivals.
· Size. In mining and manufacturing size counts and the mines of the Middleback Ranges which feed the Whyalla steelworks are tiny compared with rivals in WA or Brazil, and the steelworks is a minnow compared with rival plants in China.
· Costs. Bigger mines and bigger steel mills undercut Whyalla on every measure.
Management. Smart as it might sound after the event but a decision to try and capture a share of the booming iron ore export marker by acquiring iron ore prospects at the height of the market, and converting Whyalla to processing low-grade magnetite ore was a risk based entirely on an assumption that the resources boom would last for decades, and
Debt. An old business facing stiff competition is totally unsuited to be burdened with a heavy debt load, just in case something goes wrong, which it did.
Before going through those factors in detail there is another question for followers of the Australian mining industry to consider: will the collapse of Arrium have an effect on efforts to save Atlas Iron?
Some readers will curse Dryblower for raising the Atlas issue when considering Arrium but it’s not one that can be comfortably hidden from view because it will become a very public event in two weeks when Atlas holds a meeting of shareholders to consider a debt restructuring proposal.
While Atlas is a very different business to Arrium it does share the hot-house flow comparison (born in a boom and wilted in a crash), and it is carrying too much debt for a small business which failed to achieve the growth and profit targets required to service the debt.
But, having drawn a link between the two companies there is a critical difference, and it’s the one which should save Atlas – the collapse of Arrium will ensure that Atlas shareholders vote in favour of the restructuring proposal because they know that a no-vote will send them down the same dead-end as Arrium.
The fate of Atlas is a topic for another day, but it is interesting to think that the failure of one company might save another.
Arrium, as it now stands, has little chance of survival without a concerted effort by government, banks, unions and shareholders to devise a rescue plan.
Aligning the interests of such a dissimilar mob will be a Herculean task because the banks want their money back, the unions want to keep jobs, investors want value restored to their shares, and government wants an orderly rescue plan for a town that could die if/when the steelworks close.
It is the social, political and financial cost of killing Arrium (and Whyalla) which could prove to be the savior of the iron ore and steel business – but not the management team that caused the disaster.
Going back to Dryblower’s five point list of reasons for Arrium’s failure and two of them can fairly be described as unavoidable – age and size. A third, costs, could have been better managed, though probably not by much given the age and size challenge.
The final two are in the unforgiveable category because management at Arrium was well paid to not misread the signals of the iron ore market and to not believe that a mining boom lasts forever; they never have and never will.
But, having fallen into the stronger-for-longer trap triggered by a belief that China’s appetite for iron and steel would rise for decades a decision was made to go on a takeover spree and expand the export of high-value hematite ore so Whyalla could be converted to low-grade magnetite ore – the infamous Project Magnet.
When Dryblower first saw Project Magnet at work he thought he was watching something in West Africa – barge-loading of Cape-size ore carriers rather than the infinitely more efficient jetty-backed loading seen at most bulk-commodity operations.
Handling charges associated with loading and unloading relatively small barges condemned the export stage of Project Magnet from the day it was conceived while a substantial fall in the price of iron ore would always expose the cost structure – which it has.
Converting the Whyalla steelworks to low-grade ore was another cost that was met by permitting Arrium’s debts to blow-out to $2.3 billion, money that the banks want repaid.
Everyone involved with Arrium, and that includes most of Whyalla’s population, will now pay a heavy price for management mistakes. The bug has hit the windscreen.
ARI Price at posting:
2.2¢ Sentiment: None Disclosure: Held
