SYDNEY—Steel from the sprawling Whyalla mill in South Australia
state supported Australia's economic rise over decades, with the
metal used in everything from military ships to the rail track that
opened up the country's vast interior.
Now, the Whyalla plant is emblematic of Australia's difficult
economic transition away from blue-collar industries such as steel
and autos, as competition from cheap imports and a stubbornly high
local currency hurt manufacturers.
Insolvency specialists took control of the owner of the Whyalla
steelworks, Arrium Ltd., on Thursday in a move that has raised
fresh questions about the future of Australia's steel industry.
Arrium is Australia's second-largest steelmaker, after BlueScope
Steel Ltd., which has also been restructuring its Australian
operations to protect profits.
Like countries including the U.S. and U.K., Australia's steel
industry has been struggling to survive amid a surge in global
shipments of cheap Chinese steel that's prompted mass layoffs
globally and appeals for increased trade protections.
Burdened by large debts and repeated losses, Arrium mulled
options including the sale of its best-performing business to keep
the company afloat.
In February, Arrium agreed a recapitalization plan with GSO
Capital Partners, a unit of The Blackstone Group L.P., for up to
US$927 million in funding—a plan the company said would help it
restructure to ride out the market downturn. However, its lenders
rejected the proposal.
"It has become clear to the board of Arrium that it has,
unfortunately, been left with no option other than to place the
relevant companies into voluntary administration to protect the
interests of stakeholders," said the company, which was spun off
from BHP Billiton Ltd. in 2000.
Arrium, worth just 64.6 million Australian dollars (US$49.2
million) when its shares stopped trading on Monday, had a market
capitalization of more than A$6.5 billion as recently as 2008. It
has more than A$2 billion of net debt.
Australia's steel industry has teetered on the verge of collapse
in recent years, firstly as a phenomenal rise in the local currency
made products less competitive locally and almost impossible to
export, and more recently as surging Chinese exports created a
ballooning global steel glut.
Despite waning domestic demand for the material used heavily in
skyscrapers, airports and rail tracks, output in China, which
produces roughly half the world's steel, has remained near record
levels. The country has shipped cargoes of that surplus steel
abroad. In 2015, China's steel exports jumped roughly 20% versus
the year prior.
BlueScope Steel has been struggling to keep its Australian steel
operations running too. After a wide-ranging review last year, the
company said it was only able to keep producing steel at its
flagship Port Kembla mill, south of Sydney, thanks to a deal it
struck with unions to cut hundreds of jobs and freeze wages for
remaining workers. The state government also offered it tax
breaks.
"The Australian steel industry is facing substantial challenges
primarily caused by the significant oversupply of steel,"
Australia's industry minister Christopher Pyne said earlier this
week.
That mirrors the pain in other markets, including the U.K.,
where Tata Steel Ltd.'s decision to sell its plants is putting
pressure on the British government to prop up its own ailing steel
sector.
Meanwhile, U.S. Steel Corp., the largest steelmaker in the U.S.,
will idle plants in Ohio, Texas and Alabama.
The U.S. Department of Commerce in March imposed hefty
preliminary import duties of 266% for some Chinese steel products
to punish producers that are dumping, or selling below cost, there
to improperly gain market share.
In Australia, lawmakers are also raising barriers. The
government's Antidumping Commission has too levied tariffs on some
China steel products and continues to investigate others.
"We're taking dumping very seriously and our anti-dumping
measures are strong and getting stronger," Prime Minister Malcolm
Turnbull said last month as the government outlined plans to
accelerate a project to upgrade roughly 370 miles of railway in
South Australia. The project will require about 72,000 metric tons
of steel, most likely to be purchased from Arrium's Whyalla
steelworks in that state, said Mr. Turnbull.
But a weak steel market isn't Arrium's only problem.
In 2011, the company then known as OneSteel Ltd. decided to
branch out into the iron-ore market to offset already waning demand
for its steel. That year, iron-ore prices peaked, and have since
fallen roughly 70%.
It has since been forced to cut back mining output and record
large write-downs against those investments.
Grant Thornton was on Thursday appointed by Arrium and the
majority of its Australian subsidiaries, although the administrator
said Arrium's overseas operations—namely its Moly-Cop
grinding-products business—should be largely unaffected. Grant
Thornton said it would complete an urgent review of the company's
core Australian steel and mining businesses.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
(END) Dow Jones Newswires
April 06, 2016 23:35 ET (03:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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