BlueScope bends towards a brighter future

For the first time since the financial crisis undermined it, BlueScope Steel appears on the verge of stability.

While the $1 billion loss (the second $1 billion-plus loss in two years) was probably slightly higher than anticipated, as was the underlying loss of $238 million, the key and most threatening issue for BlueScope in recent years has been its balance sheet, which has been asked to absorb and finance a massive restructuring of the group's businesses.

Even before the announcement last week of the formation of a $1.36 billion joint venture with Nippon Steel into which BlueScope will sell its ASEAN and North American coated products businesses and extract net proceeds of $US540 million, BlueScope had made some progress.

Net debt had been reduced to $384 million, or $580 million if the timing of cash flows at year-end were taken into account. A year ago net debt was about $1.24 billion after peaking at about $1.6 billion and was still threatening to overwhelm the group. The joint venture with Nippon Steel will effectively wipe out the remaining debt.

The final plank in the heroic efforts to recreate BlueScope and give it a viable, if somewhat downsized future, lies in returning its remaining operations to profitability.

It appears that BlueScope believes that goal is now in sight, with its chief executive, Paul O'Malley, saying he expected a continued improvement in financial performance and an underlying result after tax for the first half of the new financial year that was approaching break-even.

Such is BlueScope's confidence that it has finally got on top of the issues that threatened it that it plans to invest $300 million in its businesses this year, a third of it in growth projects.

While there is significant upside in the coated products joint venture – the companies believe they can add incremental earnings before interest, tax, depreciation and amortisation of up to $US75 million to businesses that today generate EBITDA of about $US115 million – BlueScope really needs some improvement in its operating environment if it is to return to generating something materially better than break-even results.

It was plunged into losses and jeopardy by weak demand and excess steel-making capacity in the global industry even as raw material costs were soaring and the Australian dollar was spiking.

There has been some withdrawal of steel-making capacity and iron ore and coal prices have fallen back significantly.

Conditions, however, remain volatile and weak and despite the radical restructuring, which includes a withdrawal from export markets that had generated losses of about $1 billion as the crisis developed and a reduction in BlueScope's cost base of about $700 million, the group remains dependent on the external context improving if it is re-establish itself as a sustainably profitable entity.

Nevertheless, the achievement in ridding itself of debt and, if it can meet its guidance, getting the remaining businesses back to break-even shouldn't be underestimated, given that there has been a very serious question mark over BlueScope's ability to survive the traumas the financial crisis and its aftermath inflicted on it.