12 Oct 2017

Pitfalls of steel company's import strategy

7:56 am on 12 October 2017

A New Zealand company's strategy of importing cheap but high-quality steel from China has contributed to its undoing, industry players say.

Christchurch construction.

A file photo of construction in Christchurch in 2015. Photo: RNZ / Alexander Robertson

Challenge Steel was set up after the 2011 earthquake with an ambitious but untested business model. It would get nearly all of its steel made in China cheaply but put a New Zealand inspector in the factory to maintain quality.

The Christchurch firm is now in voluntary liquidation owing creditors $10 million. Rob Penney, who heads inspection firm Southern QA, provided the independent quality assurance for Challenge Steel at the factory in China.

"[Challenge Steel's] quality commitment was great, they were unwavering in that commitment", he said.

However, that commitment would have incurred higher costs, he said.

Mr Penney said Challenge Steel did not cut corners, even when under financial duress.

He is now one of 42 unsecured creditors owed a total of $6.1 million - but said he had no regrets.

"Our driver to get involved in the first place was not financial. We felt that if there was going to be imported fabricated steel coming into New Zealand it was important that we brought our QA [quality assurance] speciality to the table so the buildings would be good."

Liquidator BDO's first report, based on unverified information from Challenge, said a key factor in the company's failure was extended delays at a major unidentified building project which was not not Challenge's fault but put it under severe cashflow strain.

There were also unresolved claims on another big project, BDO said.

Dr Wolfgang Scholz, director of the Heavy Engineering Research Association, believes Challenge did not fully appreciate the cost of ensuring Chinese steel met New Zealand's seismic standards.

Dr Scholz said it was about more than just the price of the fabricated steel; the cost of additional quality control and delays also had to be factored in. Pricing in these risks would show there was little difference in price between imported and locally-fabricated steel.

Four of Challenge Steel's six big projects in Christchurch already have most of their steel. These are the city's new library, the airport Novotel, the Medcar and the Health Research Education buildings.

Christchurch City Council said it had all the steel on hand to complete the library and did not expect delays. Fletcher Construction said the Novotel development would not be affected by Challenge Steel's collapse.

At another project, the Sudima Hotel in Christchurch, developer Neil Barr said two loads of steel were on their way and there was time to source more. A major contractor at the Alexandra Park Apartments in Auckland declined to comment on the impact there.

Liquidator BDO said there was not enough information yet to say how much money creditors might get back.

Its report showed Govan Property Group, run by Bert Govan who helped found Challenge, is owed $4.8 million and is the first secured creditor in line.

Mr Govan said in a statement his property group was prepared for its claim to "stand behind" unsecured creditors.

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