BlueScope Steel has given its unionised workforce eight weeks to accept 500 job losses or it will shut down Australia's largest steel plant, Port Kembla, which has been operating almost 100 years.
BlueScope CEO Paul O'Malley made the ultimatum to the Australian Workers' Union and said he was prepared to shut Port Kembla, at a cost of 5000 direct and indirect jobs, unless it helped cut costs by $200 million.
"The steelworks is on a knife edge ... both options are very much on the table," he said.
"The next six to eight weeks will really tell ... In the next three months we will know if we have the support to move the plan forward or we will have to move to plan B [closure]."
Despite a fall in the dollar to US73¢ from $US1.10 boosting BlueScope's competitiveness against imports, the world is awash with steel and prices have collapsed.
Between 2010 and 2013 China's finished steel export doubled to more than 100 million tonnes a year, an increase equivalent to 20 times the output from Port Kembla, a historic plant in Wollongong one hour south of Sydney.
China makes half the world's steel and as the world's second-biggest economy builds fewer railways, high-rise buildings and other steel-intensive construction, it is selling more steel overseas.
BlueScope reported on Monday that full-year underlying profit rose 9 per cent to $134.1 million, but said depressed steel prices and excess supply were undermining its competitiveness. On a statutory basis, which takes account of restructuring and impairment charges, BlueScope swung to a profit of $136.3 million from a loss of $82.4 million last year.
More than 95 per cent of workers on the shop floor at Port Kembla are members of the AWU and the union will meet BlueScope on Thursday. They plan mediation next week. The AWU is negotiating with BlueScope over a new workplace agreement.
AWU branch secretary Wayne Philips said he understood the industry was suffering but he wanted BlueScope executives to share in the pain of any cuts.
"We understand the critical nature. We've got eight to 10 weeks to really try something," he said.
"If they are saying 500 jobs that's fine, as long as everyone from the CEO down is looked at. Currently all they are doing is going through with a machete on the shop floor."
NSW Liberal MP Gareth Ward, parliamentary secretary to Premier Mike Baird, who represents the Illawarra region, said the union needed to hurry up and conclude the agreement.
"The union still thinks it is the 1970s. Welcome to the harsh realities of 2015," he said.
"I'd be very sad to see 500 jobs go but it is better than 5000 jobs. It is incumbent on the union not to slow down the process."
Mr Ward confirmed that he and Mr Baird had met BlueScope and said the state government wanted to do what it could to help.
Mr O'Malley said indicative Asian hot-rolled coil steel spreads were below $US200 a tonne, down from an average of about $US295 a tonne over the five years to June 2014.
There is 761 million tonnes of excess global steelmaking capacity now. In the 1980s and 1990s oversupply of Japanese steel took a decade to fall back in line with demand.
"There's a bucket load of steel available all around the world and prices are the lowest they have been since the global financial crisis," Mr O'Malley said.
"Significant losses continue in commodity steelmaking and those losses have been ongoing, so we do need to take action."
The Port Kembla plant has dominated NSW's Illawarra region for almost 100 years. It is the nation's biggest steel plant, with capacity to make 2.6 million tonnes of raw steel every year.
The 2500 direct employees at the site manufacture rolled coil and plate products and also the high-margin coated and treated product like Colorbond and Zincalume.
BlueScope said 500 jobs would be shed to help deliver the $200 million cost saving and keep the plant open.
"It will be challenging but is going to save 4500 jobs. Option B would be devastating," Mr O'Malley said.
In 2011-12 BlueScope mothballed its No. 6 blast furnace at Port Kembla, shedding 1000 jobs and footing a $380 million cash cost. The company estimates that closing the remaining No. 5 blast furnace would cost twice as much.
BlueScope's New Zealand business, which lost money this year, is looking for $NZ50 million ($45.5 million) of savings.
Investors reacted well to the tough talk on costs, sending BlueScope shares up 8.6 per cent to $3.67, while the market suffered its worst day since the global financial crisis and fell to a two-year low.
Perpetual head of equities Paul Skamvougeras, who controls 14.2 per cent of BlueScope, said the company delivered a strong operational result in a very difficult environment.
"We support BlueScope management in engaging with all stakeholders to improve the profitability of the Australian and New Zealand steelmaking operations," he said.
BlueScope has identified $30 million of savings, or 15 per cent of its target, that could come from reductions in payroll tax, workers insurance, and other regulatory imposts.
Mr Philips said he was dismayed that BlueScope would not support the AWU's campaign to have Australian governments use local steel on local projects.
BlueScope makes good money on its domestically dispatched steel and particularly in what Mr O'Malley calls the "premium branded steel business", which includes its Colorbond and Zincalume products.
It losses hundreds of million of dollars on the 700,000 tonnes of steel it sells overseas once Australian demand has been met. It is also suffering huge losses in its iron sands operations, which are also under review.
Earnings in the New Zealand iron sands business, which has been hit by a drop in iron ore prices, plummeted 144 per cent to a $33.2 million loss.
BlueScope said its break-even cost in iron sands required an iron ore price "in the mid-$US60s a tonne". It is working to get this down to mid-$US50s a tonne. The steelmaking commodity is currently fetching $US56 a tonne.
In June, BlueScope said its costs of manufacturing steel were too high and it needed a "game-changing approach" to reduce costs.
The admission sparked debate about the future of BlueScope's remaining No. 5 blast furnace at Port Kembla and of the Australian steel industry."The strategic review is well under way and we are committed to the delivery of the targeted savings," Mr O'Malley said.
"If this target is not achievable we will have no option but to move to external supply of quality hot rolled coil and billet steel feed, with mothballing or closure of steekmaking."
BlueScope said it would pay a final, fully-franked dividend of 3¢ on October 19.
Source: Sydney Morning Herald
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