Early-morning light streams into the University Club`s vaulted gothic-style dining room high above Chicago`s Michigan Avenue. As Australian Brian Loton talks in his matter-of-fact way, it is hard to see him as anything other than the self-described corporate manager.
But he is more than that. There is a reason Loton empathizes with what he calls Chicago`s ”open, confident air,” why he likes the ornate turn-of-the- century buildings on Michigan Avenue.
No wonder he`s comfortable with the exuberance of these buildings. As managing director of Broken Hill Proprietary Co. Ltd., he heads a huge company that had its rough and tumble beginnings in the Australian back country around the time those Michigan Avenue skyscrapers were built.
Moreover, this unassuming man is a monopolist of sorts. Broken Hill, Australia`s largest company, has a position in Australia`s steel and oil markets that would be the envy of some of Chicago`s business founders.
Perhaps more unusual, Broken Hill recently has been making money in the steel business. Making a profit selling steel is a rare turn of events in developed countries, even when subsidies are involved. After some rough years, Broken Hill`s steel division made $49.2 million last fiscal year and is expected to do better this year, Loton said in a recent interview.
As far as Loton is concerned, when an industry such as steel has problems, it`s a shared responsibility.
”If an industry gets in trouble, you can`t just single out somebody and say it`s his or her fault,” Loton said. ”Everybody`s in it: the government, the people, the communities, the bankers.”
Formed exactly 100 years ago as the result of boundary rider Charles Rasp`s discovery of the world`s largest silver-lead-zinc deposit in a remote part of New South Wales, Broken Hill now supplies about 80 percent of Australia`s steel and, in a joint venture with Exxon Corp., 60 percent of its crude oil. Its sales represent 2 percent of the country`s gross national product.
Over the last century, Broken Hill has evolved into what Morgan Stanley analysts Barton Biggs and David Bodenberg described in a recent report as
”one of the premier resources firms in the world.” In recent years, however, its earnings results have been somewhat mixed, buffeted by a variety of domestic and international factors.
Its resources include iron ore, coal, manganese, alumina and, to a lesser extent, gold, nickel and tin. As the two analysts see it, Broken Hill stands to benefit from a coming surge in industrial commodity prices.
While Broken Hill, with $3.67 billion in sales for the year ended May 31, is no giant when compared with Exxon or International Business Machines Corp., Loton emphasized that Broken Hill has outgrown Australia and plans to continue expanding globally.
”We are always on the lookout for investments outside Australia,” Loton said. ”We`d like to increase our asset base in the U.S., but certainly we`re not rushing around looking for acquisitions. We`re carefully looking at areas where we might have some knowledge.”
Certainly, with Broken Hill`s operations currently generating excess cash at a little under $1 billion annually, the company has the wherewithal to go shopping.
Examples of what Broken Hill and Loton have in mind are its acquisitions of General Electric Co.`s Utah International Inc. unit, a major supplier of coal in Australia and the U.S., for about $1.7 billion and Energy Reserves Group Inc., an oil and gas exploration firm, for around $240 million.
Both acquisitions were completed last year, and together they broaden Broken Hill`s mineral resource base in the U.S. and Australia. The company has also embarked on a massive mining project in Papua, New Guinea, where it owns 30 percent of the OK Tedi Mining consortium, which has already spent $1 billion seeking to mine Mt. Fubilan`s copper base and gold crown.
Loton readily admits it hasn`t always been easy to keep this preeminent position, especially in steel. This has been particularly true in recent years as the developed world`s steel industry has slid further into a recession characterized by overcapacity, spotty demand and strong competition from producers in developing countries.
Broken Hill got into the steel business in 1911. Starting out, the company even came as far as East Chicago to hire engineers and workers, some of whose families still work for Broken Hill.
By the time Broken Hill ceased mining Charles Rasp`s rich mother lode in 1939, the firm had branched out into almost every aspect of the steel business, from raw materials to integrated steelmaking.
Over the years, its steel business, for the most part, prospered. Luckily, however, it got into the oil business in 1965, when a joint venture with Exxon made a huge discovery in Australia`s Bass Strait. Petroleum products have become the company`s most profitable sector, providing about two-thirds of its fiscal 1984 earnings of $418.9 million.
Only two years ago, Broken Hill found itself in a position not dissimilar to that of its U.S. counterparts. A strong Australian dollar had made competing steel imports cheap and its exports of steel, iron ore and coal more expensive.
Unlike U.S. producers, Broken Hill exports some of its semifinished production to Japan, China, Taiwan, Korea, Indonesia and the U.S., which meant the strong Australian dollar hurt its business even more.
Loton likened Broken Hill`s current size to that of Inland Steel Co., the fourth-largest steel producer in the U.S., and said 750,000 tons of its 5.5 million tons of production went for exports last year.
Domestically, Broken Hill`s traditional control of 80 to 95 percent of the market had been reduced to around 70 percent at a time when the market was shrinking drastically after a three-year boom.
The situation, which culminated in a $98 million steel loss in fiscal 1983, called for drastic measures. As part of a major restructuring, Broken Hill reduced its steel operation by a third and cut its steel work force to 28,000 now from 44,000 in fiscal 1982.
Loton pointed out that as a result of these and other measures, productivity has increased dramatically, rising 35 percent to 243 tons of raw steel per employee last year. Moreover, Broken Hill was not burdened with the huge severance pay costs that have hit some American producers.
Broken Hill`s severance pay averaged $8,000 to $10,000 per employee, and Loton said the cutbacks in all created a $40 million charge against earnings. But then Broken Hill also recently benefited from the weakening Australian dollar and a deal it made with the government.
According to the government`s five-year plan, it intends to keep Broken Hill`s share of the domestic steel market in the 80 to 90 percent range through price bonuses to Broken Hill`s customers.
As part of the deal, the unions agreed to wage restraints and some further work-force reductions, while Broken Hill has pledged to continue modernizing its steel plants.
”The unions certainly haven`t liked what we`ve done. They certainly don`t agree with it. But they have not been unreasonable or obstructionist,” Loton said.
