The good, bad and ugly of Arrium

WITHOUT a fundamental change in business operations or a clever, government-supported restructure, the outlook for Arrium’s Whyalla operations is grim.

• INTENSE PAIN: Arrium’s viability under the scanner
• IN-DEPTH: Historic city SA can’t afford to lose
• JOHN SPOEHR: Worse than automotive shutdown
• DARRYL GOBBETT: Warning for SA’s whole economy
• EXPLANATION: What is voluntary administration?
• DANIEL WILLS: Governments have no choice but to unite on this

WITHOUT a fundamental change in business operations or a clever, government-supported restructure, the outlook for Arrium’s Whyalla operations is grim.

There has been much talk about the issues created by Arrium’s large debt load in recent days and assertions made that the underlying businesses are profitable.

This does not stack up. Both the Whyalla mining operations and the Whyalla steelworks lost money in the most recent half year accounting period, before debt was factored in.

The company was selling iron ore for less than it cost to dig it up, and said it needed to strip $60 million out of the steel business, on top of an earlier $100 million, to achieve cash break-even.

Whyalla residents (l-r) Daniel and Crystal Klicek, Kate Walkom with her children Bethany,5, and Oscar,7. pic Tait Schmaal.

Without the contributions from the profitable Moly-Cop division of the company, we would have arrived at the current impasse sooner.

The administrators, Grant Thornton, have already said that “good Arrium”, the Moly-Cop business, should get on with things and not worry about the administration process. That business will be snapped up eagerly by someone willing to exploit its profit stream.

“Bad Arrium” is another matter.

The administrator’s role is to dispassionately assess whether the mining and steel divisions can make money, perhaps in a restructured form with a light debt load. The mining operation might be able to strip out more costs and continue to operate at current iron ore prices, but it would be a punt.

The steelmaking operations are more problematic. The world is awash with cheap Asian steel. which the company is finding it difficult to compete with — and a costly reline of the blast furnace looms in coming years. Any buyer for the plant would also need to assume likely large liabilities for a post-use clean-up of the site.

There are good strategic reasons to maintain the capacity to produce structural steel in Australia. But without some sort of assistance package from the state and federal governments it is hard to see how the steelmaking operations can survive.