03/12/2015 - 14:58

Pressure grows on Rinehart, Palmer

03/12/2015 - 14:58

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At first glance there does not seem to be much connecting Gina Rinehart with Clive Palmer, but a closer look reveals a common thread … made of steel.

Pressure grows on Rinehart, Palmer
Gina Rinehart

At first glance there does not seem to be much connecting Gina Rinehart with Clive Palmer, but a closer look reveals a common thread … made of steel.

Both Mrs Rinehart and Mr Palmer have business interests almost totally dependent on steel, whether it is made in China or somewhere else in Asia.

Mrs Rinehart’s exposure is the most obvious because her iron ore assets, including the material loaded this week on the first shipment from her new Roy Hill mine, feed directly into Asian steel-making furnaces.

Mr Palmer’s exposure is less obvious, but his Yabulu nickel refinery effectively has one customer – Asian steel mills specialising in the production of stainless steel, which is the major use of nickel.

Mrs Rinehart and Mr Palmer have, until recently, also shared another connection; they routinely appeared on lists of Australia’s richest people, with both said to be billionaires.

The commodity price crash that has dented the Australian economy has also knocked a hole in the fortunes of both people. How deep a hole is currently unknown, but this should become clearer over the next few weeks.

Over the past 20 years, demand for steel, especially in China, has surged to stratospheric levels as it has enjoyed an industrial revolution similar to those that modernised Europe and then the US.

As happened with those earlier revolutions, the Chinese version has ended one phase and entered another, with the new era being less steel-intensive than the first. In other words, China has laid its steel and concrete foundations and is now moving in a different direction.

The effect of this change can be seen in the price of iron ore, which has been in freefall for the best part of three years – plunging from $US180 a tonne to its current level of $US42.24/t, with forecasts of a slide into the $US30/t range over the next few weeks.

Very few iron ore mines are profitable at this level. Australian mines are feeling an extra squeeze because the currency benefit that had been delivering some breathing space is fading from the equation, as the Australian dollar rises when everyone had been expecting it to fall.

Mrs Rinehart’s fortune is almost totally linked to iron ore, with all her cash streams – including the fabulous Rio Tinto royalty, profits from her half-owned Hope Downs mine, and prospective profits from Roy Hill – taking a hit.

The high quality of these assets will enable her to ride-out the downturn, but her fortune will take a haircut and she might even achieve her wish of forfeiting the title of Australia’s richest person when the next review of fortunes is conducted.

Mr Palmer is in a less-fortunate position than Mrs Rinehart because his Yabulu nickel refinery is being crushed by a nickel price that has fallen from $US13 a pound five years ago to its latest level of $US4/lb – with a fresh multi-year low of $US3.75/lb reached a few days ago.

An estimated 50 per cent of the world’s nickel mines are operating at a loss at the current nickel price, and while Yabulu is not a mine, it is trying to sell processed nickel into a market flooded with excess material and declining demand from steel mills.

Mr Palmer’s second problem is that he had been expecting to receive royalties from iron ore produced at the Sino Iron project of the Chinese company CITIC Pacific Mining.

A bitter war of words between Mr Palmer and Citic continues to be fought in courtrooms across the country, with the latest reports from the battle zone indicating that Mr Palmer’s Yabulu nickel project needs an urgent cash injection or it might be closed.

If it is steel that connects Mrs Rinehart and Mr Palmer as suppliers of raw materials to that industry, it is cash that separates them.

Mrs Rinehart has the cash to meet the daily demands of her business, though it would not be surprising to see a cull of executive and employee numbers once Roy Hill proves that it can operate successfully – though perhaps not yet profitably.

Mr Palmer lacks the cash flow that Mrs Rinehart enjoys; and the lack of a solid cash-flow business has always been a weakness in a corporate structure with plenty of assets and little evidence of liquid funds.

What happens next to both people will be quite interesting.

Mrs Rinehart, after the excitement of building Roy Hill, is likely to face a period of cost cutting.

Mr Palmer, given the problems at Yabulu and the ongoing dispute with Citic, might face even tougher times.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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