Forum Archive Index - May 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

I've been updating my research on what is happening in the world of 
steel:

http://www.meps.co.uk/index-price.html

http://www.steelonthenet.com

and things are looking interesting!   It looks like the great steel gurus of 
the world have revised their opinion on the 'hot rolled coil steel price', 
and now say that it is likely to remain relatively strong until the end of 
the year.    The 'hot rolled coil steel price' is a proxy for what is 
happening to the BSL (BHP Steel) share price.  So this might explain 
why the BSL share price has not plunged as I, swallowing the gurus 
earlier views in good faith, previously suggested it might.   

The world's steelworks are currently working at 83.5% of capacity.  
This is the highest capacity utilisation since 1989!    There is a 
suggestion that one explanation for this is that China are building up 
their steel stocks.   This means that a consequent bottoming of the  
'hot rolled coil steel price' has been pushed out to 2005.     

If you are a believer in buying in gloom (which I am) and you believe 
that the stock market tends to move based on events that are 18 
months to two years away (which I do)  then we are currently entering 
a window of opportunity for investing into the global steel industry.

Regular readers will know that I am not interested in investing in a 
commodity business like steel per se.    I am interested in investing in 
the very well run distribution channels for steel, however.     Steel & 
Tube (STU)  in New Zealand and/or OneSteel (OST) in Australia  ( 
50% owner of Steel and Tube) are the two most notable 'local' 
examples.

If you turn to the attached graph you will see that the tracing effect of 
the BSL share price in comparison with the OST share price over the 
last six months is almost uncanny.  It looks to me like Mr Market is 
treating them as twins!  This fact I believe will potentially enable us to 
take advantage of 'Mr Market' over the next few weeks/months and 
might just allow us a rare chance to move into OST at a very good 
price.

Taking into account the potential total return over three years, what 
would constitute a 'very good price'?   For New Zealand 33% rate 
taxpayers (ignoring exchange rate fluctuations)  and assuming NZrs 
will be able to claim Australian imputation credits courtesy of Onesteel 
subsidiary Steel and Tube, the returns are:

Total After tax income + Capital Appreciation; Compounding Rate of 
Return over 3 years (after tax)

STU: 19+23 +23+ (330-336)= 59c; 5.5%
OST: (6.5+8.0+9.5) + (196-168)= 52c; 9.4%

This is based on 26th May closing price of STU ($3.36) and of OST 
($1.68) and various other earnings assumptions outlined in my 
'Investing in Steel' series in late 2002.  I am hopeful of being able to 
buy into OST at a little less than $1.68 which will enhance my expected 
return further.  This analysis shows that investing in OST will likely 
give a significantly better return than investing in STU directly.

Returning to the attached graph, we can see the Hot Rolled Steel price 
has remained quite flat yet the share price of BSL/OST has declined 
markedly since the beginning of the year.  If the Hot Rolled Steel Price 
is truly a proxy for BSL, how can this be?    I believe the explanation 
for this is the rising Australian dollar.    Even though the world price for 
hot rolled coil has remained stable, in $A terms it has declined.  This 
has lead to a falling off in the share price of BSL and by association 
OST.     While I would expect some decline in the price of OST due to 
the 'hot rolled coil' effect, OST is half manufacturer/half distributor 
which means it should not be as sensitive to the hot rolled steel price 
as full steel manufacturer BSL.    The fact that the market is treating 
both BSL and OST the same will, I hope,  give us our good buying 
opportunity to get into OST.

Another factor in the steel scene is that the steel producers worldwide 
have put the screws on their coal fuel suppliers (like AUO).   The world 
price of furnace coal has been pushed down with a consequent boost 
to the profitability of steelmakers.    Perhaps Gerry if he reads this 
might be good enough to give us his view on the outlook for coal in this 
context.

Returning to the attached graph for one last time, and given that the 
share price of BSL is approximately twice that of OST, have a look at 
the volume of shares traded.    You will see that during April and May 
the dollar value of BSL shares traded is consistantly higher (relative to 
OST) than in the four months before that.     This is possibly due to the 
BSL  share buyback and this may be supporting the BSL share price at 
near current levels.    This view is further supported by the observation 
that as soon as BSL shed its dividend the share price recovered 
almost immediately!   By contrast the OST share price, not supported 
by a buyback, took the expected dip.     

BSL is only able to buy back 10 million shares before July 12th.    If 
BSL completes the buyback of 10 million shares before that date, and 
there s an associated lull in the buy back, then the share price may slip 
bringing down the price of OST with it.    Somewhere around late June 
and early July is where I believe, fellow investors, we may just get our 
best opportunity to become an OST shareholder.

SNOOPY

discl:  No meaningful position in OST yet!  Waiting Patiently.



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