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Re: [sharechat] Investing in Steel


From: "tennyson@caverock.net.nz" <tennyson@caverock.net.nz>
Date: Tue, 10 Dec 2002 18:01:11 +0000


Time for a look at this industry, not based on any fantasy.

Global steel prices have touched historic lows in the past year.
Profitability is being squeezed by a consolidation of raw 
material suppliers for both iron ore and coke.  Evidence of this is 
the coal price negotiations being lead by a 'lead negotiator' in the 
form of BHP Billiton up against the leading Japanese buyers.  In the 
old days the smaller players, like 'Austral Coal' (AUO) might have 
been tempted to come in and undercut the industry leader.  These days 
they work together to squeeze out the best price for their product.  
A further profitability squeeze is due to the consolidation of end 
line customers, a most obvious example of this being the automotive 
industry, in the last few years.

The global steel industry is highly fragmented, with little of the  
consolidation seen in other metal industries, such as      
aluminium.  At the close of 2001, the top five steel companies 
accounted for less than 20 per cent of the world steel market.
By comparison, the top five aluminium producers accounted for almost  
50 per cent of the world aluminium market.

Worldwide, average plant utilization is only 80%: far too low 
for a high fixed cost business like steel.  An interesting aside here 
relates to coal and coke suppliers.  If the Steel Industry needs 
the best grade coke to get the best efficiency out of their 
production plants, but the world doesn't need their full production 
capacity, what incentive is there for the steel manufacturers to buy 
the high grade coke?

Struggling with overcapacity in the industry, the USA has slapped a 
30% tariff on certain imports of steel.  Frightened that this may see 
a torrent of exports diverted to the European Union, an 18% tariff 
has gone on certain steel imports there.  Even Thailand and Malaysia 
have joined the tariff wagon.  Long term investors. looking two to 
three years out, might be tempted to think that this tariff war is 
simply medium term noise which is masking a much improving bigger 
picture.  Perhaps there is a window of opportunity to invest here?  
Long term investors might be similarly soberized when they realize 
the price for hot rolled coil, the best profitability indicator for 
BHP Steel, has declined from $US450 per tonne to at one stage under 
$US200 per tonne in 2002 over fifteen years or 3.5% per year in 
dollar terms.  This figure would look a lot worse if you tried to put 
it in real terms!  Part of this long term reduction in the price the 
market is prepared to pay for steel can be blamed on increasing 
competition from substitute materials: concrete, aluminium, plastics, 
glass and timber.

World trade in steel is best understood when you study the mismatch 
between steel production and steel consumption.  These are the year 
2000 statistics:

Country, (Share of Production, Share of Consumption): 

European Union (P19%,C20%); China (P15%,C16%); Japan (P13%,C10%); 
USA (P12%,C16%); Russia (P7%, C3%), Ukraine (P4%, C0%)

Australia and New Zealand produce a mere 1% of the world's steel, and 
don't even rate a mention in this league.  You can see from the 
figures that the USA is the main world importer of steel, and 
that Russia, Japan and the Ukraine are the main net exporters.  BHP 
Steel touts itself as being in the lowest quartile on the cost curve 
of world steel production.  However, given that they must compete 
largely with Russia, the Ukraine and Japan in export markets long 
term we need to focus on whether they compete in production costs 
with those countries, not the world industry in general.

Worldwide demand for steel is highly cyclical and tends to correlate 
with general economic conditions.  Consumption activity in the 
construction sectors and in consumer durables give an indication as 
to how steel is going.

Focussing on Australia now, the highest margin steel products that 
have the least volatility in price are the coated steel products.
Port Kembla is the significant raw material processing plant owned by 
BHP Steel, and close to 50% of its output goes to produce 
'COLOURBOND' pre-painted steel and other metallic coated steel 
products.  Exports tend to be lower margined and, as you can see 
from the nature of the exporting nations that Australia is up 
against, are likely to remain so.

Purchases of iron ore and coating materials are done in the 
industry in $US.

There are other ways to invest in the steel processing industry 
within Australia and New Zealand.  'Ross' reminded me in an offline 
message about ASX 'SMS' Simsmetal Ltd

Simsmetal Ltd is a ferrous scrap metal dealer. It has Kiwi
connection is their joint venture with Pacific Metal Industries 
(Fletcher Building subsidiary) to collect scrap in New Zealand. 
(thanks for this Ross).

But it is my intention to focus now on the leading player in an 
industry where manufacturing efficiency and scale is all important.  
Within Australia and New Zealand that company is very clearly BHP 
Steel.

SNOOPY





---------------------------------
Message sent by Snoopy 
e-mail  tennyson@caverock.net.nz
on Pegasus Mail version 2.55
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."



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