Markets: All pain, no gain for Arrium

Volatility in iron ore prices and weak demand for steel will provide little reprieve for Arrium's shareholders, who have already been buffeted by recent impairments.

Arrium seems caught in a pincer movement between two commodities, iron ore and steel, which the company admits have less than rosy outlooks.

The company’s iron ore mining business is dependent on China. It admits “volatility in prices (will) continue”. Like other iron ore miners, Arrium hopes to offset any such “volatility” by hoping that the iron ore price stays above $50 for it to make a decent margin, and ramping up production to more than 12 million tonnes per annum so the sheer volume of sales will make up for any price weakness.

Arrium says demand for steel in Australia and abroad is “weak”. It expects that to continue throughout the rest of 2013. But hopes for a recovery in steel demand in 2014, at least domestically, will occur, perhaps because steel demand for building will rise due to record low interest rates.

With such a forecast, it’s no wonder that Arrium shares have plunged 11 per cent since August 15. Today’s announcement of the company’s impairment charges on property, plant, equipment and intangible assets associated with its recycling and steel business, which amounted to $930.7 million in 2013, will hardly help the stock. That, as well as restructuring costs of $93.8 million, caused the company to make a $694.7 million net loss in 2013 and is a wake-up call for some investors who have ridden the shares’ 45 per cent surge since June 13.

Few would bet such a share price gain is likely to occur in the next few weeks.