South Australian government wrong to think putting GFG into administration will give it control

Sanjeev Gupta’s opaque empire is built on smoke and debt, but the unprecedented intervention of South Australia will ultimately cause bigger losses for taxpayers.

Premier Peter Malinauskas stands on Hummock Hill lookout overlooking Whyalla Steelworks. Picture: Brett Hartwig

Sanjeev Gupta’s global empire has been crumbling slowly since the collapse of his ambitious Australian financier Greensill four years ago.

It was only the post-Covid boom, where massively inflated steel prices saw Whyalla keep Gupta’s global operations going for so long.

The aging Whyalla steelworks have long been starved of investment, and have been mined for cash over the past few years – propping up all parts of Gupta’s debt-laden and very opaque manufacturing and coal mining empire.

It is a high-risk push by the South Australian government to force its collapse, and for Gupta it could be the final blow for a business build on smoke and debt.

Greensill’s cashflow financing model gave Gupta the confidence to go out and borrow to pay over the odds for second tier assets around the world.

The two had a symbiotic relationship. Gupta’s GFG Alliance relied on Greensill to stay alive, while Greensill needed GFG to flatter its balance sheet in the lead up to a $US7bn stock market listing that never eventuated.

At the time of Greensill’s collapse, it was estimated to have a $US5bn exposure to the GFG Alliance. Ever since, Gupta has been surviving hand-to-mouth, keeping his operations here and in the UK alive.

Beyond Whyalla, there’s also the Infrabuild steel recycling and distribution business in Australian that is on the financial edge. Its debt has been trading at 80c in the dollar, suggesting a one in five chance of default.

While Gupta has been careful to financially ring-fence the different parts of his empire, the collapse of Whyalla will raise major concerns Infrabuild will be the next big domino to fall.

Even with the financial stench, it’s an almighty bet by the South Australian government to be the one to go around banks and pull the pin on the state’s Whyalla steelworks. It’s extremely rare for a state government, which sits well down the pecking order of creditors, to push a company under.

South Australia is a creditor like many others to GFG Alliance, and clearly Premier Peter Malinauskas has become sick of Gupta’s failure to pay millions in mining royalties and water bills.

He, like many others, has stopped listening to Gupta’s promises to pay. The most recent was the windfall of funds from another equally opaque sale of Gupta’s stake in NSW’s Tahmoor coal mine.

Mr Malinauskas believes going down this path and appointing KordaMetha will give his state control of the process.

It does just the opposite.

The Premier becomes another creditor to Whyalla behind a long list of secured creditors, including very likely the Australian Tax Office and senior bondholders that have preference. Ultimately it will be these banks and bondholders, not Mr Malinauskas, calling the shots.

Donald Trump’s decision to slap tariffs on steel imports might be good for domestic US producers – including BlueScope with operations there – it is very bad news for the rest of the world.

China produces around 110 million tonnes of steel annually and if its slowing economy can’t absorb that, it soon makes its way to Australia – at a deep discount.

Unlike BlueScope, Whyalla is a long steel manufacture – used in construction and building – and it is almost entirely domestic focused.

And unlike BlueScope, Whyalla is a high-cost producer with no room to value add, meaning it is entirely at the whim of the local market. This will make it even harder to find a prospective buyer – and it won’t be BlueScope.

To highlight the pressure, Gupta’s Whyalla and Infrabuild operations have been leading applications to the Federal government’s Anti-Dumping Commission in the past year.

The vulture funds that have been playing with the GFG bonds have less patience about the revival of Whyalla.

Like the collapse of Rex, Mr Malinauskas could find he has to commit much more of his taxpayer funds to ultimately buy out Whyalla. It was a mess to begin with, and a mess to end with.

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Originally published as South Australian government wrong to think putting GFG into administration will give it control