Steel & Tube flags increase in prices in early 2017 as coking coal, iron ore prices surge

Thursday 17th November 2016

Steel & Tube Holdings boss Dave Taylor says a "dramatic upswing" in coking coal prices and higher iron ore prices meant there needs to be a hike in domestic steel prices in New Zealand next year.

Taylor made the comments in a presentation at the company's annual meeting in Wellington. The price of premium hard coking coal reached US$307.20 a ton last week from US$85 a ton at the start of June, according to Reuters. Iron ore futures have also climbed to reach about US$70 a metric ton.

Higher coal costs add about US$140 (NZ$200) to a tonne of steel and the rise in iron ore amounted to another $40 increase per tonne of steel, he said. "Already steel prices have shown an upward trend, with steel mills no longer able to absorb this cost increase. These key cost contributors all point to a substantial price increase across all steel products that we expect will impact domestic steel prices in New Zealand very early in calendar year 2017".

Reuters reported this week that Nippon Steel & Sumitomo Metal, Japan's biggest steelmaker, expects coking coal prices to range between US$250-US$300 a ton for the next three months, having almost quadrupled this year and that it planned to pass most of the increase on to its customers. The Japanese company could be forced to cut its profit targets if price hikes didn't stick, it reported.

Last month Steel & Tube announced the acquisition for as much as $16.3 million of Composite Floor Decks (CFDL), which is forecast to lift its sales by 22 percent to $22 million in 2017, generating pretax earnings of $5.5 million. The shares touched a 15-year low in June but rallied back to a nine-month high in August after reporting record annual sales

Taylor said results in the first half of the current financial year will be about in line with the same period a year ago when underlying profit was $9.9 million. "However we do expect the second half will be much stronger reflecting the pricing opportunity, a full half benefit from cost reductions, a full half of CFDL and better results from its S&T Plastics unit," he said.

The company does have some "reputational issues" to address related to its seismic mesh and steel pile cases supplied for the Waikato expressway, he said.

The Chinese-sourced road reinforcing for the Huntly bypass was found to be weaker than specified, while Steel & Tube is among steel suppliers being investigated by the Commerce Commission over alleged non-compliance with the standard for mesh. Steel & Tube is also being investigated for wrongly using the logo of a testing firm on its test certificates.

But separately the company has engaged with the government over the standard the mesh must meet, arguing that the current measure is ambiguous and test results open to interpretation. Building and housing minister Nick Smith this month released the resulting updated Verification Method and Acceptable Solution for the grade 500E steel mesh sold, requiring increased independent testing and more focus on the steel's ductility, which is its ability to stretch as it should in an earthquake.

Taylor said today such a measure was still open to interpretation and ductility was a difficult thing to measure across the volume of steel products a company such as Steel & Tube turns over. Such ambiguity meant the outcome of the commission's investigations wasn't a given, he added.

"Given the significant interpretational issues, it may be that the Commerce Commission forms a view that may be inconsistent with S&T’s interpretation of the testing standards," he said.

Explaining what went wrong with the Waikato expressway order, he said that "unlike much of what we supply, the steel requirements were specified by the project."

"Coupled with tight delivery time-frames, we utilised a supplier that had provided similar material into NZ but not for S&T," he told shareholders. "To ensure compliance, we engaged third party testing to be performed by accredited laboratories. Given that this is the subject of further action in the country of the steel’s origin, I’m unable to go into more detail."

Steel & Tube had worked with the expressway project team "to find an engineering solution that maintains the integrity of the design with no impact to the NZTA," he said.

As part of the reputation rebuild, the company is underway with a "perceptions survey" of its stakeholders. "We are aware that these issues have negatively impacted S&T’s reputation, and not least the share price, and although this appears to me to be more within the general community than our customers, there is some work to rebuild our reputation," he said.

Across the $400 million of steel products Steel & Tube buys a year its "long-term conformance" runs at 99.75 percent, in line with the industry average. The company's imports from China amount to 8 percent of its total purchases compared to an industry average of 18 percent, he said.

BusinessDesk.co.nz

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