Whyalla Steelworks in Deep Financial Crisis: A Desperate Prepayment Strategy
The Whyalla steelworks, part of Sanjeev Gupta’s troubled GFG Alliance, is in the midst of a severe financial crisis. KordaMentha, the appointed administrators, have faced enormous challenges since taking over the steelworks and its associated iron ore mines in the Middleback Ranges on February 19, 2025. Mark Mentha, the administrator, stated that the business is currently losing $1.5 million a day, making the process of restructuring particularly difficult.
The root of the financial turmoil lies in a decision made in the months leading up to the collapse of the business: prepaying customers for steel that had not even been manufactured. This desperate measure, aimed at generating cash flow, was not enough to stave off the looming disaster and has complicated the efforts of KordaMentha to stabilize the plant. When the company was still operating under Sanjeev Gupta, customers were offered discounts for prepayments, which allowed the steelworks to pull forward cash in the short term. However, as Mentha explained, the prepayments were spent quickly on operational costs, leaving little liquidity for the ongoing operations.
This prepayment strategy created a severe cash flow problem, as the steel that was paid for was either still in production or had not even been produced yet. According to Mentha, the prepaid sales amounted to up to $144 million, but those funds had already been absorbed by ongoing losses in the business. As a result, the company has been left in a position where it has to fulfill obligations to customers without having the financial resources to produce the steel. For many customers, the goods they prepaid for hadn’t even gone into the blast furnace, which is a critical step in the steel production process. Mentha highlighted that this created significant challenges, as customers have already paid but the company is unable to deliver products that were promised.
The Financial Toll: Losses Mounting and Unfair Pricing Agreements
In addition to the prepayment strategy, the financial situation at Whyalla steelworks has been exacerbated by poor pricing agreements for its steel products. OneSteel Manufacturing, the entity overseeing both the Whyalla steelworks and the associated iron ore mines, reported a loss of $319 million for the seven-month period ending January 31, 2025. The plant’s steel output, specifically steel billets – basic forms of steel used in various manufacturing processes – was being sold at too low a price, and this pricing strategy has been a drain on the plant’s finances.
Currently, Whyalla sells its steel billets to InfraBuild, a Gupta-owned business in the eastern states of Australia. However, Mentha noted that the steelworks was using a pricing model based on the Black Sea billet index, which is lower than the South-East Asian billet prices that are more commonly used in the region. The price difference between the two pricing models is around 7%, meaning the Whyalla steelworks has been selling its products at a discount, thus undervaluing its output and further contributing to the plant’s financial losses.
To remedy this, Mentha suggested that Whyalla needs to renegotiate its billet supply agreement with InfraBuild. This renegotiation is scheduled for March 2025 and could potentially result in a better deal for the steelworks, which would help to stabilize its finances. Given that InfraBuild accounts for 80% of the steel output from the Whyalla plant, the company holds significant bargaining power in the negotiation. Mentha emphasized that Whyalla must push for a better price structure based on South-East Asian billet pricing in order to maximize its revenues and reduce losses.
Rescue Package and Negotiations: Can the Steelworks Be Saved?
In response to the severe financial crisis at Whyalla, the Australian government stepped in with a $2.4 billion rescue package announced on February 20, 2025. This substantial financial support is designed to help stabilize the steelworks and its operations while the administrators work to restructure the business and get it back on track. The government’s rescue package aims to provide immediate financial relief and help cover the ongoing losses at the steelworks, but it is clear that more work needs to be done to get the plant back to a sustainable operating level.
Beyond financial support, Mentha is exploring the possibility of finding a new buyer for the Whyalla steelworks. One of the key players in this process is BlueScope, an Australian steel manufacturer. BlueScope was previously involved in a bidding process when Gupta first acquired the plant in 2017, but at the time, the company chose not to proceed due to other priorities, specifically focusing on its North American expansion.
However, Mentha remains hopeful that BlueScope will reconsider its position. If BlueScope does step forward as a potential buyer, it would likely help to stabilize and restructure the steelworks, potentially ensuring the plant's long-term survival. Mentha acknowledged that it could take up to six months before the Whyalla steelworks is in a position to be sold, as the company first needs to demonstrate improved financial performance and minimize losses before it becomes an attractive investment.
In the meantime, BlueScope has agreed to act as a technical adviser, offering valuable expertise to the administrators. Mentha expressed appreciation for BlueScope’s willingness to assist, particularly because the company is an industry leader with deep experience in blast furnace operations. This assistance will be vital for navigating the operational and technical challenges of running a steelworks of this scale.
Challenges of Separating the GFG Group Operations
One of the more complicated aspects of the Whyalla steelworks’ recovery is the need to separate the Whyalla operations from the broader GFG Alliance. GFG, which employs over 35,000 staff worldwide, has plants and assets spread across Europe, the United States, and the United Kingdom. The interconnected nature of GFG’s global operations, particularly in terms of its central treasury, presents a significant challenge in untangling the operations of Whyalla from the broader group.
Mentha explained that the financial and operational ties between Whyalla and other GFG businesses are deeply integrated, particularly in terms of global supply chains and financial connectivity. Disentangling these relationships will require methodical planning and will likely take months to complete. However, this step is critical for creating a path forward for the Whyalla steelworks to operate as a standalone entity and potentially find a buyer.
Key Takeaways:
• Whyalla steelworks is suffering $1.5 million daily losses, exacerbated by a prepayment strategy where customers paid for steel not yet produced.
• Prepaid sales of up to $144 million have been used to cover operational costs, creating liquidity issues as steel has yet to be manufactured.
• The OneSteel Manufacturing entity, including the steelworks and iron ore mines, lost $319 million over the seven months ending January 31, 2025.
• The steelworks has been selling steel billets to InfraBuild at below-market prices, leading to financial strain; a renegotiation of the supply agreement is planned for March 2025.
• The Australian government has introduced a $2.4 billion rescue package to support the steelworks and facilitate restructuring.
• BlueScope is being considered as a potential buyer for the steelworks, with a six-month timeline for a potential sale after financial stabilization.
• BlueScope is also providing technical advisory support to assist with the operational challenges at Whyalla steelworks.
• Separation of the Whyalla operations from the larger GFG Alliance will be a complex and lengthy process due to interconnected global operations.
