BlueScope beats an unknown path

There are modest signs of improvement after the restructuring that cost BlueScope the bulk of its massive first-half loss, but it's not clear where exactly the future will lead.

It is somewhat perverse to see a company that has just announced a $530 million loss saying that it is "on track", but that is what BlueScope Steel said today and it is a reasonably accurate statement. The group’s destination, however, remains unclear.

BlueScope was able to say that it is on track because it had previously foreshadowed massive losses related to the radical restructuring it is engaged in to try to ensure its survival as a result of the rekindling of the global financial crisis, over-capacity and low prices in the global steel industry, high raw material costs, the strength of the Australian dollar and weak trading conditions in its domestic market.

The survival of the group was squarely in question last year until its emergency $600 million capital raising halted what was an otherwise destructive blowout in its debt levels, from about $1 billion to $1.6 billion in a matter of months, as it embarked on its drastic and urgent re-making of its structure. It was the cost of that restructuring that was threatening an implosion within the group.

The core of the restructuring involves the shutting down of BlueScope’s export business, which had lost about $1 billion since the original crisis erupted, which includes the closure of the blast furnace at Port Kembla and the hot strip mill at Hastings in Victoria and a halving of its steel production. The program is expected to reduce BlueScope’s cost base by almost $700 million relative to where it stood in June 2008.

The December half results show the impact of that traumatic reshaping of the business and the continuing question marks over the group’s future, with $254 million of restructuring and redundancy costs and $184 million of impairment charges against deferred tax assets because of the uncertainty over its ability to return to generating taxable profits in future.

If the series of once-off items were stripped out, the result would still have shown an underlying loss of $129 million.

Perhaps of greater immediate consequence, having peaked at nearly $1.6 billion ahead of the capital raising, net debt is now down to $796 million – it has nearly halved – and BlueScope has pulled $357 million out of its working capital requirement.

It expects to reduce working capital further in the second half, despite further restructuring costs – of the total $430 million to $450 million cost of the program, $350 million to $370 million will be incurred this financial year.

There are some modest signs of improvement in the business and the environment in which it is operating, leading to an expectation within the company that it can slightly reduce the underlying losses in the second half of the year.

While, globally, demand for steel remains soft, the industry downturn is seeing other steelmakers taking out capacity, improving the market fundamentals, while the prices of raw materials like iron ore and coal have fallen back sharply from their peaks. The spreads between raw material costs and hot rolled coil prices, however, remains at historical lows and the Australian dollar shows no signs of material weakening.

The fact that the restructuring of the Australian business is more or less on track and improvements in the group’s New Zealand steel operations and its Asian and US coated and building products and steel-making operations also provide some modest encouragement that the group has the capacity to manage its way out of a quite delicate position.

The margins for errors in BlueScope’s dramatic response to the circumstances it found itself in once the crisis started biting are, however, quite small and it remains reliant on some improvement in external conditions if it is to create a more stable and viable business and balance sheet.

Critical to achieving stability will be continuing reductions in BlueScope’s debt levels. It expects to generate between $250 million and $400 million of cash from the expected further releases of working capital, asset sales and a $100 million payment under the federal government’s steel industry plan but faces restructuring costs of $120 million to $140 million in the second half.

It has some breathing space, with no major debt facility maturing before December next year, but the scale and complexity of the restructuring it is executing and the numbers of key factors outside its control mean that, while it might be on track, there is as yet no certainty about where that path will ultimately lead.

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