# Help Whyalla adjust, but don't prop up Arrium



## barryqwalsh (Apr 9, 2016)

Help Whyalla adjust, but don't prop up Arrium




*OPINION COLUMNISTS*


OPINION

Apr 8 2016 at 12:00 PM 

Updated Apr 8 2016 at 4:25 PM 

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Arrium faces a global glut of steel making capacity. David Mariuz
by Alan Mitchell

People in Sydney and Melbourne don't understand the severity of the situation," lamented Whyalla's mayor, Tom Antonio, as he faced the possibility of the Arrium steel plant's closure.

He's probably right but, if they did understand problem, it's likely the people of Sydney and Melbourne probably would not lift a finger to help Arrium.

There are two layers to Arrium's problems.

The first layer, which saw the company go into voluntary administration on Thursday, is its $2.8 billion debt and what the critics say are a number of poor investments.





World steel production capacity and demand
If that was all that was wrong, the solution might be fairly benign, as has been suggested by the Industry Minister, Christopher Pyne. The present owners and creditors would lose money, but the underlying business and its steel workers could continue with new owners.

However, there appears to be a more serious problem at Arrium. Despite Pyne's claims to the contrary, the underlying business appears not to be viable in its current form without ongoing government support.

The world is awash with excess steel-making capacity following a dramatic increase in investment, most of it subsidised, in China and other emerging market economies.

Over the past two decades, global production capacity has doubled with China's share of steel output growing from 13 per cent to almost 50 per cent.


ARI
*ARRIUM FPO (ARI)*
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As the Productivity Commission explained in a research paper on anti-dumping assistance two months ago, Chinese demand for steel was growing by 25 per cent a year in the early 2000s. By the middle of the decade China was the largest steel consumer in the world.

*Then came the Global Financial Crisis*
But then came the global financial crisis and the painfully slow recovery in the advanced economies. In 2014, global steel demand grew by less than 1 per cent. This led to a new supply glut with prices falling to a 30-year low.

In Australia, the effect of global oversupply was exacerbated by the loss of competitiveness caused by the strong Australian dollar.


The global recovery eventually should reduce the oversupply of steel making capacity, but the Organisation for Economic Co-operation and Development warns that adjustment could be "long and arduous". The recovery of demand will be slow and many governments are determined to keep their uneconomic steel mills going.

Will Australia be among them?

Arrium and BlueScope Steel restructured their businesses to improve their viability. They also sought structural adjustment assistance to help them accommodate ongoing competitive pressures.

The companies received temporary payroll tax concessions and royalty contribution waivers worth about $120 million from the NSW and South Australian governments. They also have sought protection against cheap imports in the form of anti-dumping assistance. By 2014, 65 per cent of Arrium's sales base was subject to anti-dumping investigations. Currently there are six anti-dumping actions in force against Chinese steel product exporters. 


However, it looks like Arrium and BlueScope will need more than just temporary adjustment assistance.

Like other manufacturing, steel production has been migrating from high-cost advanced economies to the emerging market economies. It's not just China: there has been a boom in steel investment in south-east Asia, and new capacity has been built or is planned in India, eastern Europe, Russia and the Commonwealth of Independent States, the Middle East and Brazil. The share of world steel production capacity outside the OECD is expected to reach 71 per cent by 2017. At the same time governments will continue to subsidies their old, uneconomic mills.

Australia's steel producers are likely to need indefinite life support.

The Turnbull government is stumbling headlong into plain old fashioned protectionism. Dumping is just a (deliberately) emotive term to describe a common form of price competition. When applied to an intermediate product like steel, anti-dumping assistance raises the costs and undermines the competitiveness of all the Australian industries that consume steel.

The other form of assistance being canvassed by the government – imposing expensive Australian steel on government defence contracts and other projects – will add to the burden on taxpayers.

*There's no magic pudding  *
There's no magic pudding. The standard advice from economists is this: if the taxpayers of China and other emerging market economies want to subsidise their steel exports, we should accept the gift and use their cheap steel to expand our other industries.

By all means help the steel workers and the city of Whyalla to adjust to the changes in the global market, but don't lumber the Australian economy with yet another zombie industry.

If Australia wants an innovative and productive economy, companies like Arrium have to live or die on their ability to keep ahead of the rapidly changing global market – and regions like South Australia have to stand more on their own feet.

Australia can't both insulate itself from the historic changes taking place to our north and fully capitalise on them at the same time. 


*RELATED ARTICLES*

*Chinese investment doubles to $46.6b*
*Arrium hit by ANZ credit freeze*
*Ghosts of BHP loom large as Whyalla faces dark days*
*Crisis credit rationing threat for banks that are not prudent*
*Arrium's landlords need steely resolve*
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