Arrium's slow, sad super song

Australia's listed equity market is very narrow and will only shrink further with a sale of Arrium. But unlike the steelmaker's suitors, Australian investors remain bent on short-term returns.

It is astounding that in a superannuation pool of nearly $1.5 trillion, there was no one prepared to recapitalise the steel, mining materials and iron ore business called Arrium when its market price got to below $1 billion.

Instead, a consortium of Korean companies plus a Chinese-backed commodity trading house, has swooped and the directors have their backs to the wall. There is little doubt that Australia’s super funds will sell Arrium to the consortium known as Steelmakers Australia; they are just waiting for chairman Peter Smedley to get them a few dollars more, which he will duly do.

It is not a matter of nationalism – simply that the custodians of Australia’s pension savings are running out of things to own without currency risk.

Australia’s listed equity market is very narrow and becoming more so. There are very few technology businesses in which to invest, or new media, or infrastructure businesses, or biotech and not many basic manufacturers. It’s all about banks and big miners.

Once the Koreans own Arrium, that will remove a large part of the steel industry from the lists, and when Posco introduces its Finex technology to that company’s steel works, it will put enormous competitive pressure on the rest of the Australian steel industry, currently run by Bluescope (a snip at 43 cents).

Arrium has been languishing at below 60 cents a share and an enterprise value of less than $3 billion (including $2 billion in debt) following the recent drop in the iron ore price, with no takers among Australia’s long-term pension fund investors.

It owns a global mining consumables business (mainly grinding balls), a good portfolio of steelmaking, rolling and merchandising operations, plus two iron ore mines and a strategically valuable port. True, it has too much debt and the steel business is losing money, but its assets are irreplaceable.

The problem is that in Australia, superannuation is invested by the quarter in assets that can be sold fast.

Those assets are not generally matched to the funds’ liabilities, but to the business risks of the managers appointed to look after them. So ironically, despite having one of the largest pools of pension assets in the world, Australia has one of the shallowest listed equity markets and one of the highest levels of foreign ownership.

Arrium, like all other listed companies, is regarded by its owners as a liquid asset to be traded for a quarterly return – not a collection of businesses that need to nurtured and capitalised for the long term.

The Korean consortium will recapitalise Arrium and introduce new technology into the steelmaking operations, taking a long-term view of its businesses.

Posco, the big Korean steelmaker, has already shown a desire to invest in iron ore mines by backing Gina Rinehart’s Roy Hill project in Western Australia, and commodity trader Noble Group is probably watching the Glencore acquisition of Xstrata with some interest and trepidation, and looking to emulate its vertical integration into mining.

Come to think of it, we’re probably better off having them investing in the steel industry than feckless Australian pension funds.

Follow @AlanKohler on Twitter



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