Caught in a Steel Trap (from wsj)

17-Aug-2011

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There’s an output boom in steel with global production up 15% last year to a record 1.42 billion tons.

So why is the steel sector in Australia—source of the lion’s share of the raw materials for this transformation—struggling to make ends meet?

BlueScope Steel Ltd., the country’s largest steel maker, is set to announce a loss of 1 billion Australian dollars (US$1.04 billion) later this month and may close one of its blast furnaces. OneSteel Ltd., its smaller rival, is embarking on its second round of job cuts in as many years, and losing A$188 million a year from its core steelmaking business.

Analysts are recommending the companies shut more of their facilities, or even amalgamate. If this boom is protracted, it is hard to see either company emerging in anything like its current form.

[ausherd0816] Bloomberg NewsGlobal steel production was up 15% last year to a record 1.42 billion tons.

Blame the distortions that a once-in-a-generation demand spike can make on a small, open economy.

Australia provides 40% of the iron ore and 56% of the steelmaking coal that is traded by sea. That’s created a bonanza for the largest miners—analysts expect BHP Billiton Ltd. and Rio Tinto PLC each to chalk up a net profit of about $20 billion this year—but squeezed margins for users of the materials, such as BlueScope and OneSteel.

Count the factors. Miners and energy companies hoping to benefit from the surging global demand are ready to start construction on A$173 billion in major projects, which is driving labor and other costs higher across the economy. Fearful of inflation, the Reserve Bank of Australia has raised interest rates to 4.75%, and may not be done.

The high yields are attracting overseas investors, compounding the commodity-export boom’s upward pressure on the currency. The Aussie dollar has strengthened 24% against its U.S. counterpart over the past two years.

For large swaths of Australian industry, the result is a spot on the losing side of what locals are terming a two-speed economy. Mining rolls in the fast lane, propelled by overseas demand; everything else is stalled alongside, hampered by weak domestic demand, cheap imports, and high financing costs.

When compared with what’s plaguing the moribund economies of the Northern Hemisphere, Australia’s problems seem low key. But this commodities boom, like all those that preceded it, will end one day. When it does, there may be too little left in this hollowed-out economy to take up the slack.

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