Whyalla’s rushed steel rescue will end up costing the Prime Minister much more

Billions of dollars in taxpayer cash have been promised for Whyalla but it’s all on unproven ‘green’ steel bets. The real cost will be keeping the lights on through a drawn-out administration.

Creditors to SA’s financially crippled steelworks at Whyalla are scheduled to meet on Monday. Picture: Brett Hartwig

Anthony Albanese could soon be forgiven for feeling a bit of buyers’ remorse over his monster rescue package for Whyalla’s steel mill.

By late Monday night he will discover more taxpayer funds are likely to be needed just to keep the blast furnace running.

The Prime Minister was quick to endorse the South Australian government’s reckless move to force Sanjeev Gupta’s Whyalla steelworks into administration two weeks ago. The two governments are now on the hook politically and financially from what they are about to discover. It is likely to be more than the $2.4bn rescue package already pledged.

As part of the package, just $384m has been earmarked to fund the steelworks during the administration period. But with global steel prices falling, and any administration set to be drawn out, this figure could soon fall short.

Prime Minister Anthony Albanese and SA Premier Peter Malinauskas speak with Whyalla steelworks workers in February. Picture: Tim Joy

Administrator KordaMentha will hold its first creditors’ meeting in Whyalla on Monday afternoon. It’s through this that creditors will get their first insight into who is owed what from the collapse of the long-products steel marker.

It will also offer an early insight into the health of the business, which has essentially been starved of investment for the past five years.

It is expected that for there to be any chance of a sale, more funds will be needed by the steelworks just to continue with business as usual for the foreseeable future.

The SA government sought to get ahead of the queue of creditors to the Whyalla steelworks by forcing the plant into administration. If SA emerges as only a modest creditor, Premier Peter Malinauskas will have plenty to answer for – as the vast scale of taxpayer funds expected to be needed to keep the plant going will far outweigh any debt.

The combination of Canberra and SA jumping in early has already crowded out a private sector solution for Whyalla before the sales process has had a chance to begin. This includes big creditors agreeing to help shoulder the cost of running Whyalla during the administration.

Some work has continued at the steelworks despite the business being placed into administration. Picture: Brett Hartwig

The taxpayer commitment can’t be endless, and a longer-term solution for Whyalla is needed. At this stage it involves taxpayers investing heavily in Whyalla, with all this value being transferred to some future buyer down the track.

KordaMentha was appointed administrator to the Whyalla Steelworks. This is the second time it’s done the job; the firm ran the administration process when the then ASX-listed Arrium collapsed in late 2016. Gupta’s GFG Alliance acquired both the steelworks and nearby iron ore mine nearly a year later.

The bulk of the Albanese plan involves $1.9bn of funds for the conversion of Whyalla into a so-called “green” steel producer – just as Gupta had promised. This would involve a new electric arc furnace, a DRI plant and any work needed building out capacity of the existing Whyalla gas transmission pipeline and other upgrades.

The problem is that it has never been done on this scale. Gupta had previously promised $1bn to build an electric arc furnace, but work never got past concept stage, thanks to cashflow problems across his entire empire.

Gupta last week told staff he is owed $500m by Whyalla, however the creditors’ update is expected to show that at the same time Gupta owes a lot more to Whyalla – up to $1bn. However, it is not yet known how firm these credit commitments are.

Sanjeev Gupta claims he is owed more than the $500m from Whyalla.

Building an electric arc furnace is wholly ambitious, and having one based at a remote location like Whyalla is even more so. Due to its reliance on scrap metal for feedstock, the acquisition and transport of scrap far from the east coast markets simply adds to the end cost of steel making.

Rival flat-products steelmaker BlueScope crunched the numbers on an electric arc furnace in recent years and found it hard to stack up, because of the shortage of scrap. Scrap is also used in conventional coal-fired blast furnace steelmaking.

BlueScope also piloting a low-emissions DRI project with BHP and Rio Tinto, and much of this will involve an additional step as there’s the need to for high-grade ore which it will need to acquire on market.

Malinasukas has plans to build a hydrogen-based steel furnace on the site, despite the technology not yet commercially proven.

For Albanese the collapse a second time around of Whyalla’s steelworks represents a risk – and not only to the city of Whyalla where the steelworks employs one in three people. There’s the bigger strategic issues at play.

The long steel produced at the plant is used for bars, rail lines and in infrastructure construction. The long products are also used for structural sections critical for Australia’s long-term ambitions to become a submarine builder.

The problem is that like last time, few buyers will willing to put up the capital needed for an ageing steel plant with limited options to scale up volume.

The Covid-19 pandemic exposed Australia’s vulnerability to global supply chains. However much of the past decade Whyalla has been on the other side of trade ledger and this means battling cheaper steel imports.

This will be Albanese’s problem as he inherits another industrial-sized headache.

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Originally published as Whyalla’s rushed steel rescue will end up costing the Prime Minister much more