Growth pause leaves a bitter taste for BlueScope investors

Even in the current era of obsessive continuous disclosure, companies can get caught in the expectations tangle. Paul O'Malley from BlueScope Steel delivered a set of earnings numbers on Monday that were captured in analyst forecasts, but his outlook statement was woefully short of what the experts had punched into their models.

The stock was smacked down by 16 per cent, ignoring the company's guidance that improvements would flow through to earnings in the second half of the 2014 financial year.

The market was expecting the combination of a weaker Australian dollar, some traction of anti-dumping regulations and cost cutting to start to kick in during the first half of financial year 2014. But O'Malley chose to err on the side of safety. In doing so he left shareholders with an unpleasant taste.

The full year 2013 was a major breakthrough in a multi-year turnaround, but this had been expected and was already factored into the share price.

The healthier balance sheet had been given a tick and the successful negotiation of the coated products joint venture with Nippon Steel & Sumitomo Metal and the proceeds from the deal was also old news.

The trouble is investors wanted earnings momentum to continue in 2014, rather than take a six-month growth pause.

BlueScope will receive a nice kick from the falling Australian dollar but there is a three- to four-month lead time between the movements and the flow-through effect.

Having said that, the earnings briefing provided a blunt reminder that the troubles facing the industry are not just currency-related.

BlueScope should be recognised and commended for undertaking its life-saving restructuring a few years ago. But mounting a war on its antiquated cost base doesn't solve all the problems of a lacklustre economy and sluggish demand.

O'Malley reckons that if one strips away the performance of six major Australian companies (Rio Tinto, BHP and the four big banks), the local economy is in recession.

BlueScope charts a softening in Australian domestic volume from all its customer sectors, including house and non-dwelling construction, agriculture, mining, infrastructure and transport.

The overall improvement in the results was mostly about turning the Coated & Industrial Products Australia (CIPA) unit from an underlying loss in 2012 (of about $150 million) to a profit of $150 million.

This was a story about decreasing loss-making exports, getting some better prices (thanks to lower raw material costs) and successful fortification of the regulatory guard (the Anti-Dumping Commission) which reduced the competition from cheap steel product landing in Australia.

Given CIPA was the company's earnings basket case, it's the turnaround that's provided the most leverage to improve the overall performance. But to achieve the next leg up, BlueScope will need the dollar to remain low and an improvement in construction activity.