ARI Arika Resources Limited

By Rhiannon Hoyle 

SYDNEY--Steel from the sprawling Whyalla mill in South Australia state supported Australia's economic rise over decades, with the metal used in everything from military ships to the rail track that opened up the country's vast interior.

Now, the Whyalla plant is emblematic of Australia's difficult economic transition away from blue-collar industries such as steel and autos, as competition from cheap imports and a stubbornly high local currency hurt manufacturers.

Insolvency specialists took control of the owner of the Whyalla steelworks, Arrium Ltd., on Thursday in a move that has raised fresh questions about the future of Australia's steel industry. Arrium is Australia's second-largest steelmaker, after BlueScope Steel Ltd., which has also been restructuring its Australian operations to protect profits.

Like countries including the U.S. and U.K., Australia's steel industry has been struggling to survive amid a surge in global shipments of cheap Chinese steel that's prompted mass layoffs globally and appeals for increased trade protections.

Burdened by large debts and repeated losses, Arrium mulled options including the sale of its best-performing business to keep the company afloat.

In February, Arrium agreed a recapitalization plan with GSO Capital Partners, a unit of The Blackstone Group L.P., for up to US$927 million in funding--a plan the company said would help it restructure to ride out the market downturn. However, its lenders rejected the proposal.

"It has become clear to the board of Arrium that it has, unfortunately, been left with no option other than to place the relevant companies into voluntary administration to protect the interests of stakeholders," said the company, which was spun off from BHP Billiton Ltd. in 2000.

Arrium, worth just 64.6 million Australian dollars (US$49.2 million) when its shares stopped trading on Monday, had a market capitalization of more than A$6.5 billion as recently as 2008. It has more than A$2 billion of net debt.

Australia's steel industry has teetered on the verge of collapse in recent years, firstly as a phenomenal rise in the local currency made products less competitive locally and almost impossible to export, and more recently as surging Chinese exports created a ballooning global steel glut.

Despite waning domestic demand for the material used heavily in skyscrapers, airports and rail tracks, output in China, which produces roughly half the world's steel, has remained near record levels. The country has shipped cargoes of that surplus steel abroad. In 2015, China's steel exports jumped roughly 20% versus the year prior.

BlueScope Steel has been struggling to keep its Australian steel operations running too. After a wide-ranging review last year, the company said it was only able to keep producing steel at its flagship Port Kembla mill, south of Sydney, thanks to a deal it struck with unions to cut hundreds of jobs and freeze wages for remaining workers. The state government also offered it tax breaks.

"The Australian steel industry is facing substantial challenges primarily caused by the significant oversupply of steel," Australia's industry minister Christopher Pyne said earlier this week.

That mirrors the pain in other markets, including the U.K., where Tata Steel Ltd.'s decision to sell its plants is putting pressure on the British government to prop up its own ailing steel sector.

Meanwhile, U.S. Steel Corp., the largest steelmaker in the U.S., will idle plants in Ohio, Texas and Alabama.

The U.S. Department of Commerce in March imposed hefty preliminary import duties of 266% for some Chinese steel products to punish producers that are dumping, or selling below cost, there to improperly gain market share.

In Australia, lawmakers are also raising barriers. The government's Antidumping Commission has too levied tariffs on some China steel products and continues to investigate others.

"We're taking dumping very seriously and our anti-dumping measures are strong and getting stronger," Prime Minister Malcolm Turnbull said last month as the government outlined plans to accelerate a project to upgrade roughly 370 miles of railway in South Australia. The project will require about 72,000 metric tons of steel, most likely to be purchased from Arrium's Whyalla steelworks in that state, said Mr. Turnbull.

But a weak steel market isn't Arrium's only problem.

In 2011, the company then known as OneSteel Ltd. decided to branch out into the iron-ore market to offset already waning demand for its steel. That year, iron-ore prices peaked, and have since fallen roughly 70%.

It has since been forced to cut back mining output and record large write-downs against those investments.

Grant Thornton was on Thursday appointed by Arrium and the majority of its Australian subsidiaries, although the administrator said Arrium's overseas operations--namely its Moly-Cop grinding-products business--should be largely unaffected. Grant Thornton said it would complete an urgent review of the company's core Australian steel and mining businesses.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

April 06, 2016 23:21 ET (03:21 GMT)

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