BlueScope hammers out a sharper edge

BlueScope's result signals an approaching new phase where the steelmaker will, before long, be able to switch focus from cutting to investing in its surviving businesses.

A net loss of $12 million, or even an "underlying" profit of $10 million might not appear anything to get excited about but for BlueScope Steel today’s first-half result is another milestone in what has been a three and a half-year fight for survival.

In terms of its reported earnings, the modest loss compares with the $530 million lost in the same half of the 2012 financial year, which was part of a continuum of losses totalling about $2.5 billion that dates back to the outbreak of the global financial crisis.

Those losses reflected not just the dramatic implosions in demand in the steelmaking markets that BlueScope was operating in when the crisis’ aftershocks destabilised the group but the radical and traumatic restructuring that the group was forced into to try stay afloat.

BlueScope was forced to withdraw from the export steel business, which had cost it about $1 billion in the post-crisis period. It also embarked on a massive overhaul of its continuing operations and last year announced that it would sell its ASEAN and North American coated products businesses into a $1.4 billion joint venture with Nippon Steel.

That joint venture will release $US540 million of cash for BlueScope and, assuming its completion next month, will reduce the group’s net debt from $499 million to $109 million. BlueScope’s net debt peaked at about $1.6 billion and, had it not been for a distressed equity raising, could easily have overwhelmed the group.

That it didn’t wasn’t due to any material improvement in the conditions – high iron ore prices, the strength of the Australian dollar, excess global steel-making capacity and a weak domestic economy – that plunged it into the red but the radical restructuring and cost-cutting BlueScope’s management executed.

The latest half-year results not only reflect the extent of the progress the group has made but had a far more optimistic tone to them. Most of its key businesses are on an improving trajectory.

The Australian coated and industrial products division improved its underlying earnings before interest, tax, depreciation and amortisation from a negative $57 million to a positive $79 million and BlueScope’s chief executive, Paul O’Malley, expects EBITDA to remain positive in the second half.

The global building solutions division had relatively stable underlying EBITDA of $25 million ($24 million previously), with some encouraging increase in volumes and orders in North America. There was a slowdown in China during the half but the recent pick-up in China’s economy ought to see better second-half results.

BlueScope believes the division, which generated $728 million of revenue in the half, has the potential to be a $3 billion a year business, with EBIT margins of about five per cent, within three years.

The building products division in ASEAN, North America and India grew underlying EBIT 52 per cent to $31 million and the earnings of hot rolled products business in North America were up 65 per cent to $33 million, while the Australian distribution business improved from a $27 million loss at the EBIT level to a $7 million loss.

Once the joint venture with Nippon Steel has been completed, BlueScope will have minimal debt and, despite the shrinkage in its operational and revenue bases (the group had revenue of $10.5 billion pre-crisis) will have a more resilient and far more efficient base and the capacity to start investing in the growth of its surviving operations rather than funding continual restructuring and downsizing.

It has been a painful period for BlueScope and its shareholders, who have seen its share price smashed and who haven’t received a dividend for 18 months.

The share price has recovered from a low of $1.50 last year and surged above $4.20 in the immediate wake of today’s report in a clear signal that the market believes that it is shifting into a different, and more outward-looking, phase in its recovery from its near-death experiences.


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