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All eyes on Arrium

Just look at the trend line and it says it all. For the past 10 years, 5 years, 3 years and 1 year Arrium (ASX: ARI) (formally OneSteel) has failed to impress investors, providing an average annual loss of 2.8%, 31.7%, 34.4% and 22.2% respectively.

In what seems an attempt to avoid bad publicity, Arrium changed its name from OneSteel, but it has not done much good. Now, the company is looking to dump its steel-making division altogether.

Inbound Chief Executive Andrew Roberts told a conference in Sydney last week that the high Australian dollar, slowed domestic construction and even slower local manufacturing has pushed the steel-making business enough to make it consider divesting or exiting the business. Arrium was predominantly a steelmaker but is now involved in iron ore mining and mining consumables.

Whilst the company has fallen from over $7 since 2008, it’s not the only steel company facing the gauntlet. Bluescope Steel (ASX: BSL) has fallen from a pre-GFC $75 per share to open today at $4.69 – some of which can be attributed to a weak steel market and heavy debt burdens.

Many questions need to be asked of our big and small mining leaders. One question in particular is their ability to effectively counter market cycles. Unrealistic expectations about the resource boom had to find their way back to earth sometime and although BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Arrium have now decided to sell non-core assets, it makes one wonder why they waited till now to do it? Surely, selling the assets when the companies were bullish would have been a much profitable alternative.

Foolish takeaway

Another important decision by Arrium that could come under scrutiny is its decision to move into the iron ore market. With the price set to fall dramatically in coming years, bigger miners who can cut costs easily are going to be able to sell the steel-making ingredient at a reduced price and still turn a profit.

Volatile prices caused by the oversupply of iron ore will extend until 2017 and with a debt nearly double the company’s market value,  we could see Arrium fall even further, particularly if Mr Roberts’ plan to double iron ore sales doesn’t deliver.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto.

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