Why Arrium Won’t be the Last Aussie Steelmaker to Shut Shop

There’s not much support for Australia’s steelmakers, at least not in Whyalla. Last week, Arrium [ASX:ARI] went into administration. Arrium owns the Whyalla steel mill, based in South Australia.

It’s not a story I followed closely, but my guess is that a combination of a number of things brought the company down: ageing infrastructure, poor management (the company massed $2.8 billion in debt), and relentless pressure from China’s excess steel capacity.

China’s excess steel production should be a worry for all first world steel production plants. It makes it that much harder for them to compete. But it doesn’t look like improving anytime soon. From the Financial Times:

Significant overcapacity will remain in China’s steel sector even after planned restructuring, industry executives said at the weekend, suggesting no let-up for the beleaguered industry’s plant closures and job losses across the globe.

Luo Tiejun, an official with China’s industry ministry, said at a conference that planned cuts would reduce annual steel capacity to about 1.1bn tonnes by 2020 while domestic consumption was unlikely to exceed 700m tonnes.

“We need to cut [an additional] 200m tonnes for the situation to become acceptable,” Mr Luo said, noting that China also currently exported about 100m [tonnes] of steel annually.

Hmmm. So even after the planned cuts, China will still have the capacity to produce 400 million tonnes of excess steel by 2020. They currently export 100 million tonnes (apparently), which means there is still the potential for 300 million of excess production needing a home.

That’s not great news for Western steel mills trying to compete with cheap Chinese exports.

Given the strategic nature of steel making, I smell a trade war coming on…

The lack of growth in Chinese domestic steel consumption is behind this flood of steel trying to find a home in the export market. Note from the quote above that domestic consumption was unlikely to exceed 700 million tonnes by 2020. Last year, Li Xinchuang, president of the China Metallurgical Industry Planning Association, said that local demand would fall to 600 million tonnes by 2030.

Yet BHP, Rio and Fortescue all invested to expand their iron ore production on the premise that Chinese demand for steel would hit 1 billion tonnes by 2030.

Like the Aussie banks, the effect of easy money tripped up these iron ore majors. And the demise of Arrium is an example of what happens when easy money comes full circle. It won’t be the last.

Greg Canavan,
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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