Australia decides maybe manufacturing worth saving after all

[SYDNEY] After letting swathes of its manufacturing collapse in recent years, Australia may be poised to change tack.

Whyalla, nestled between the desert and the Southern Ocean, is the new ground zero for the debate on whether to salvage what's left of Australia's industrial base. The town's economy revolves around a 50-year-old steelworks whose owner, Arrium Ltd, has called in administrators after a debt-fueled expansion was undone by tumbling commodity prices and a flood of rival Chinese production.

Three years ago, the factory might not have had a chance. Lawmakers at the time allowed the shuttering of a car plant in South Australia, the state where Whyalla is sited, in the final throes of a mining boom.

Now, Australians are more anxious about job security and the outlook for a transitioning economy. In a sign of change, one of the state's most powerful investors cites offshore examples as cases for intervention.

"There's a line in the sand that has to be drawn," said Con Michalakis, who runs Statewide Super, a A$6.5 billion (S$6.8 billion) pension fund in Adelaide, South Australia's capital.

"You might need the government to take over for a period during restructuring - and then return the steelworks to market later," as the US and UK did with different businesses during the global financial crisis, he said.

Efforts to help the Whyalla facility have so far included a move by the federal government to bring forward the upgrade of 600 kilometers of aging railway lines and award the related steel contract to Arrium without a bid. It's also urging other states to procure products from the steelworks for their infrastructure.

South Australia's government said it's prepared to co-invest in Arrium, and the federal opposition Labor party made a similar pledge ahead of this year's national election.

This all contrasts with the demise of other parts of Australia's manufacturing during the resource-export bonanza, which propelled the local currency past the US dollar in value. Shortly before the Liberal-National coalition won power in 2013, it flagged plans to cut A$500 million in car industry subsidies, part of a broader strategy of shrinking the government's budget deficit.

Automaker Demise

Later, General Motors Co's Holden unit - a name with roots in Australia back to 1856 - announced it would shutter its plants, a move that imperiled support industries in the country. The shrinking scale of the auto sector pressured the local operations of Toyota Motor Corp, which decided to quit Australia too.

In 2014, Alcoa Inc announced the closure of an aluminum smelter and two mills with the loss of 980 jobs, as the coalition decided support wouldn't be financially viable.

"The very clear message when the auto industry's closure was announced was that there would be no significant intervention," said John Spoehr, a professor of economics and director of the Australian Industrial Transformation Institute at Flinders University in Adelaide.

"Now we're seeing a ferocious debate on how we can sustain the steel industry both within government and between the government and the opposition."

'Horrible' Sentiment

The threat to the steelworks cascades through almost every home and business in the town, given the risk of a chain reaction of lost confidence, a plunge in spending and a population exodus. Local press reports cite as many as 3,000 jobs at risk, which include positions at Arrium's mining division. That's in a town with a total population of 22,000.

Tom Antonio, the acting mayor of Whyalla, said following meetings late last week in Adelaide that he senses the federal and state governments are prepared to help, but he's not sure how much. In the meantime, the feeling in Whyalla is "horrible", said Mr Antonio, who runs an electronics and computer store and has been in business in the town for more than three decades.

"The anguish, the stress, the anxiety that people have been subjected to, particularly in the last two weeks, has been indescribable," said Mr Antonio, 58, who has three sons and a son-in-law employed at the steelworks.

"A lot of people can't sell their properties because the banks won't allow them - because they've lost so much in value. So they can't even move on to other jobs if they have them. "

1970s Decline

Whyalla has been here before, when Australia contended with the consequences of an increasingly unproductive manufacturing sector before a wave of economic reforms enacted in the 1980s. Thousands of people left the town after its ship-building yard collapsed in 1978.

"The commitment from everyone - from the banks to the suppliers to the state and federal governments - is to try and get some solutions for Whyalla," said Michael Smith, a spokesman for Arrium's administrator, KordaMentha Restructuring.

"It's not going to be easy and it's not going to be quick."

The administrator is currently in talks with both the South Australian and federal governments, said Mr Smith.

Australia's manufacturing sector employs about 878,000 people, or about 200,000 less than 25 years ago, according to government data; over the same period, Australia's population has grown about 50 per cent to 24 million.

The country's industrial sector as a proportion of the economy is the smallest among members of the Organization for Economic Cooperation and Development, after Luxembourg.

China Challenge

Whyalla isn't alone in confronting a wave of cheap Chinese steel; the glut is enveloping mills worldwide. India's Tata Steel Ltd is selling its loss-making division in Port Talbot, Wales, jeopardizing 40,000 jobs and the UK's ability to produce the metal. In response, the British government has declined to rule out a temporary nationalization of the plant to keep it operational.

And there's little respite on that horizon. Li Xinchuang, president of China's Metallurgical Planning Institute, said this month that while export volumes won't increase from last year's record, they won't decline significantly either.

For South Australia, which already has the nation's highest unemployment rate at 7.2 per cent, the closure of Whyalla's steelworks could see the state's joblessness climb into the double-digits, according to Spoehr.

"Whyalla is iconic - it would be an emotional body-blow to lose it," said Sean Edwards, a federal senator for South Australia with the ruling coalition who has advocated exploring new industries including operations to handle waste from nuclear power stations across the world.

His bet: the steelworks will be viable, particularly once China scales back its excess production.

Residents of the seaport established more than a century ago will be hoping he's right.

BLOOMBERG