NZ steel operations deliver strongest earnings lift for Aussie multi-national BlueScope

Monday 13th August 2018

BlueScope Steel's two Kiwi businesses, New Zealand Steel and Pacific Steel, delivered an 84 percent lift in underlying earnings in the year to June 30, outstripping strong gains across the rest of the multi-national Sydney-based business and delivering the highest return on capital in the group.

Once the Cinderella of the group, the New Zealand operations delivered underlying earnings before interest and tax of A$111.7 million for the year, compared with A$61.1 million a year earlier. Its return on invested capital (ROIC) was 31.6 percent, compared to 20 percent for the group as a whole.

BlueScope's earnings statement to the ASX also included New Zealand among territories in which it would "continue to review further appropriate (organic) growth opportunities".

However, it notes that "commodity steel-making in Australia and New Zealand is a valuable option provided it can deliver targets results and is cash flow break-even at the bottom of the cycle". The group confirmed an "intent to maintain capacity to fund a shutdown of steel-making if not cash positive" - a statement notable for including its Australian operations as well as New Zealand's. Australia is grappling with reduced energy security, higher prices and a climate change dilemma created by the country's dependence on coal for electricity generation.

At a group level, BlueScope reported net profit after tax of A$1.569 billion, including abnormal items of A$743.1 million. Underlying NPAT was A$826 million.

Underlying earnings before interest and tax, a better comparative measure of performance, came in at A$1.269 billion, up A$164 million on the previous year.

In a call with news media, managing director Mark Vassella cited the strength of the US economy following recent federal tax cuts as justifying the possible US$500 million to US$700 expansion of its US-based steel business, North Star. He cited strong growth in logistics, data warehouses and distribution warehouses as drivers of North American demand.

He dodged a question about whether US President Donald Trump had been "a plus or a minus" for BlueScope, whose Australian steel production is exempt from Trump's globally imposed tariffs as part of his escalating trade war with China. Those tariffs do apply to New Zealand-produced steel exports and the New Zealand government has been criticised for failing to gain the same exemptions from the White House as Australia.

However, asked by BusinessDesk whether the US tariffs were likely to have a material impact on the New Zealand operations' earnings, Vassella said: "No."

The New Zealand domestic and Pacific Island markets remained the main focus of output from both NZ Steel's Glenbrook mill and the flat-rolled products facility operated by Pacific Steel, in Auckland.

He noted the New Zealand government appeared to be re-examining whether to open anti-dumping inquiries relating to Chinese steel imports to New Zealand, which the Ministry for Business, Innovation and Employment has previously rebuffed.

The New Zealand division's total steel dispatches totalled 650.1 million tonnes for the year, up from 604.9 million in the previous year. Exports accounted for 207.1 million of the total, compared to 151.1 million in the 2017 financial year.

Total revenues were A$833.6 million, from A$747.5 million, reflecting strong demand and activity levels, and higher regional steel and vanadium prices.

Ongoing productivity improvements and cost savings will be a "constant, essential focus for the business", even with strong demand continuing and steel prices expected around their current levels in the year ahead.

BlueScope announced an increased final dividend of A8 cents per share and said it is targeting a larger than anticipated A$250 million share buyback programme.

"The company currently expects 1H FY2019 underlying ebit to be around 10 percent higher than 2H FY2018 (which was A$745 million)," the company said, subject to spread, foreign exchange and market conditions.

BlueScope shares, which briefly touched a high point for the past year of A$18.83 on July 20, closed at A$17.87 last Friday. They were trading mid-morning in Australia at A$18.44 per share.

(BusinessDesk)

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