Monday, August 22, 2016

Bluescope Steel makes profit

A year ago, BlueScope Steel Ltd. worried that its Port Kembla steelworks—Australia’s biggest with more than 4,000 workers—no longer had a future.
China was flooding the global market with steel made at a fraction of the cost of material produced elsewhere. Governments from the U.S. to Australia risked a global trade war by imposing tariffs on steel imports, fearing inaction would lead to steep job losses. BlueScope’s domestic rival Arrium Ltd. became insolvent.
BlueScope Chief Executive Paul O’Malley offered Port Kembla’s labor unions a deal: support a radical cost-cutting plan that included 500 job losses, a three-year wage freeze and suspension of bonus payments, and BlueScope would keep the steelworks south of Sydney open. That bet paid off when BlueScope told investors in October an agreement had been reached.
With manufacturing operations spanning the U.S. to Southeast Asia, BlueScope has achieved a turnaround that has eluded many of its biggest rivals so far. On Monday, BlueScope reported annual net profit of 353.8 million Australian dollars (US$270.3 million)—its biggest since 2008 and a near tripling on the A$136.3-million profit in the prior financial year.
“There is nothing more satisfying than saving 4,500 jobs,” Mr. O’Malley said. “Twelve months ago we weren’t sure whether the steelworks had a future.”
In contrast, U.S. Steel Corp. continues to be loss-making despite cutting thousands of jobs and idling plants. In Europe, German conglomerate ThyssenKrupp AG has held talks withTata Steel Ltd. of India and other steel groups over a potential tie-up as those companies seek to strengthen in rocky markets. London-based Caparo Industries PLC initiated bankruptcy proceedings last year for 16 of its 20 steel businesses. 
The global steel industry’s woes have become a major issue for many governments, given the jobs at risk. The U.K. government has met with Tata Steel as it weighs the future of its operations in the country, which employ 11,000 people at nine plants. The U.S. and Europe have imposed hefty tariffs on imports of certain steel products in an effort to shore up profits of local producers.
Most complaints of lawmakers and industry executives are directed at China, the world’s No. 1 steel producer, which has been churning out steel at a record daily pace. China’s first-half exports hit 57.12 million metric tons, up 9% on-year. China’s premier, Li Keqiang, recently said the steel supply glut is a global problem and “not triggered by one country.”
“I think we should plan for global oversupply occurring for some time,” Mr. O’Malley said.
He said Port Kembla will need to keep reducing costs to stay open for the long run and warrant the next big upgrade that will be required a decade down the line.
Still, he expects BlueScope’s underlying earnings to rise by 50% in the six months through December, compared with the January-June period. Work  
BlueScope’s recovery has benefited from the U.S. tariffs, which sent local steel prices sharply higher. U.S. benchmark hot-rolled coil is up almost 60% this year to roughly US$596 a ton, according to The Steel Index. Prices in Europe and Asia are also sharply higher.
During the year, BlueScope bought out Cargill Inc. from their U.S. venture North Star for US$720 million.
When BlueScope bought the rest of North Star in October, management targeted net-debt-to-earnings, a key fiscal metric, of less than 1.0 times within 12 to 18 months. In late 2015, net-debt-to-earnings was recorded as 1.6 times and halved to 0.8 times by the end of June.
“They had very strong profitability despite what we agree are very weak operating conditions,” said Moody’s Investors Service analyst Matthew Moore.
BlueScope has faced painful decisions before. A strong Australian dollar, caused by a mining boom, made its products less competitive. In 2011, BlueScope abandoned its unprofitable export business that historically accounted for around half its sales.
It also snubbed the strategy pursued by Arrium, spun off from BHP Billiton Ltd. in 2000, which bought iron-ore mines to counter the rising cost of steelmaking ingredients. Arrium’s strategy unraveled as a 70% slump in iron-ore prices left it struggling to repay debts, forcing its lenders to call in insolvency specialists earlier this year.  
BlueScope hasn’t ruled out buying parts of Arrium’s business, although Mr. O’Malley was circumspect about a deal. “To be honest, investing in North Star at the moment is probably as good as it gets in steelmaking,” he said.
BlueScope has also kept paying dividends, including a final payout of 3 Australian cents a share, despite the global headwinds.
Sandon Capital analyst Campbell Morgan was among those who advocated closing the Port Kembla steelworks. Now, he thinks the deal reached by BlueScope and unions is a “fantastic outcome.”
When BlueScope’s share price tumbled toward A$3 a share in the middle of last year, from almost A$7 a year earlier, Sandon Capital bought up almost 700,000 shares over May and June 2015 for an average price of A$3.30 each.
“It’s always a hairy experience when you are buying commodity companies as they’re bumping along the bottom of the cycle,” said Mr. Morgan. BlueScope’s stock has more than tripled to A$8.72 since reaching a 2½-year low in late June last year.

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