OneSteel's step change

In the race to create an Australian steelmaker with a global presence, OneSteel is the pivotal company in an unfolding industry consolidation. With BlueScope Steel watching from the wings, OneSteel is planning to merge with Smorgon Steel.

The deal has yet to be approved by the Australian Competition & Consumer Commission, but OneSteel chief executive Geoff Plummer tells Robert Gottliebsen today the deal could save $70 million while securing the future of Whyalla, the South Australian town that is almost entirely dependent on the steel sector.

The interview

Robert Gottliebsen: In the next few days the ACCC will decide whether OneSteel and Smorgon can merge. I have with me today the chief executive of OneSteel, Geoff Plummer. Geoff, are you optimistic?

Geoff Plummer: I think we’re certainly looking forward to it because it’s really a key milestone in terms of bringing the transaction to a conclusion. We’re optimistic that we will get a satisfactory decision from the ACCC but we’ve learnt that we need to respect their processes and work through those processes with the ACCC. I don’t think it’s appropriate to get too far ahead of what they’ll decide until we actually have some more understanding.

Who will be your competitors after a merger?

Pretty much still the same as now, and that’s really our key competitors across the board are imports. In all our key products, all our key market segments, there’s a strong presence of imports and that’s been the reality really since the Asian crisis. I can’t see that changing. If we don’t supply good service and have a price that delivers value our customers can find other options and often that’s an import option.

Did the customers oppose the merger?

Most of our customers, I think, are actually supportive of the merger because I think they can see that in the long run they’re better off with a business that has shortened supply chains, improved service opportunities but a lower cost base. They have confidence that if we got out of line on pricing or something else then they have other options, but they can see that if we improve our cost and competitive position, in the long run that will be good for them.

Geoff, what will the Smorgon merger do to your business?

I think it really allows us to reset the businesses. It’s a significant change that I think shouldn’t be under-estimated. We do have the opportunity to significantly improve our cost base. There’s $70 million in net synergies. That will come through a range of ways: there’ll be cost reductions through some change to facilities. There’ll be significant opportunities in shortening our supply chains and improving our ability to manufacture close to market, but also we’ll have a business that has a wider range of growth options or have the people and the balance sheet I think to resource those options effectively. So it’s a great opportunity.

So you will shut some plants?

I think we’ll have to look at some rationalisation but that sort of thing’s been occurring in industry generally, but in the steel industry for some time, and I think it’s a natural part of keeping apace with the competitive environment we’re in.

What are the growth options for OneSteel?

Well we’re currently working on not just the Smorgon transaction but Project Magnet, which is a great opportunity in terms of development in our Whyalla steelworks and the mining associated with that. Smorgons have under way a great opportunity, I think, with the LiteSteel Beam, which they’ve put into Australia; and they’ve announced an investment in the US and I think that’s a really exciting product. They’ve been investing in recycling in specialty products like grinding media and those are not just in Australia but elsewhere in the world. So we get a range of opportunities that come from this not just in terms of what OneSteel was doing but in products that were previously beyond OneSteel in terms of both geography and the nature of the industries.

So you could become an international business as a result of this merger?

There’s certainly an increase in the international exposure and that will be one of the things that we’re going to have to carefully consider – how we effectively manage that – but I think we’re also still going to be very much focused on Australia and Australian businesses as the key part, and the Australian markets will be critical for us.

What effect will the Whyalla expansion have on the OneSteel business?

It’s a fantastic opportunity. It takes us from being a steel company to a company that also has a strong position in terms of iron ore. Next year we’ll sell four million tons of iron ore and that’s a really exciting opportunity in the current environment. Additionally, we changed the feed for the steel works and that allows us to reduce the costs of our steelworks by about 5% and extends the life of the steel works by nearly 10 years, out to 2027, which is not just good for OneSteel but good for the town of Whyalla and all of South Australia.

So it will boost your profits?

Certainly will. We’re very confident that it will have the material impact on our earnings going forward and it’s going to be a good investment.

Geoff, what effect will Smorgons have on your profits?

We think it’s going to be a very good investment also. What is does is realise $70 million net in terms of synergies, provides a platform for growth, but also I think it provides a platform that – through good times or bad – we’re going to have a business that’s far better able to compete; a lower cost base; manufactures closer to market; broader range of activities; very strong in market positions. I think it will be a more robust business and a far more resilient business.

Geoff, are you worried about possible steel surpluses in China?

I think there will be surpluses from time to time, whether it’s from China or elsewhere, but I think the issue is for us to build a business model that can meet those challenges. Certainly, there’s going to be times when it’s tougher than others, but I’m an optimist for China. I think they’ve managed growth pretty well for nearly 20 years now. I think people under-estimated just how successfully they’ve done it and I think there’s every degree for confidence that they’ll keep continuing to grow solidly and successfully and, on balance, will be a positive impact on our regional economy in particular.

Robert Gottliebsen is a national business commentator with The Australian.