The impact of slow conditions in manufacturing and construction around the world continues to impact building industry suppliers in Australia as mining and steel manufacturing company Arrium announces write-downs of $480 million after tax in asset impairments and restructuring charges.
In its latest announcement to the Australian Stock Exchange, Arrium says it intends to put its US recycling business and its non-integrated merchandising business for sale on the market – causing a write-down to the value of $360 million as the amounts realised from sale of these assets is not expected to equal their current book value.
Further write-downs of $100 million and $20 million are the result of a regular review of asset values in its steel division and restructuring charges associated with the merging of its steel manufacturing and distribution businesses, the company says.
The latest downgrade comes amid increasingly challenging conditions in the global steel industry.
In its latest update, UK based steel industry research firm MEPS says average world prices dropped for the fourth consecutive month in June amid weakening manufacturing conditions in China and a lack of demand elsewhere in Asia.
Compared with two years ago, prices are now down by almost a quarter (see chart).
Arrium Managing Director and Chief Executive Officer Andrew Roberts says moves to offload the above-mentioned businesses – which follows similar moves with regard to the Australian Tube Mills business in February, are being driven by an underlying drive to reduce debt and improve cash-flow.
“We have a priority to reduce the company’s overall level of debt” Roberts says. “Today’s announcement reflects initiatives in our steel and recycling businesses, with our focus on improving earnings and cash generation.”
Whilst being non-cash in nature and having no impact upon underlying earnings, the latest write-downs are expected to increase the company’s gearing ratio by around three percent.
Previous assurances given in February about management being comfortable with gearing ratios not breaching debt covenants following earlier write-downs at the time of the announcement regarding the tube mill business were notably absent from the latest announcement.
The company’s gearing ratio stood at 32 percent as at June 30 last year.
The latest write-downs also come as Arrium is undergoing an overhaul of its steel division in which it is combining its manufacturing and distribution businesses in an effort to streamline operations and is divesting non-integrated businesses (as per this latest announcement) and properties.