Shares hit on BlueScope's weak outlook

Shares in BlueScope Steel were dumped on Monday as it flagged no pick-up in earnings in the December half, and waits for the weaker dollar to revive domestic demand.

Bluescope also warned that China, the mainstay of economic growth over the past decade, had been hit by a "cyclical slowdown", especially along the important coastal areas.

"Australia has been in recession for three years," BlueScope chief executive Paul O'Malley said. "The [economic] performance has been masked by the big four banks and top two mining companies.

"Over the last three years there have been significant cost increases," he said, referring to the carbon tax and other cost increases that have weighed on the profitability of small and medium-sized companies. These pressures had resulted in continued company failures, with Bluescope hit by bad debts on its domestic business of $5 million to $6 million in the year to June.

Domestic shipments have declined in almost every half since the global financial crisis, BlueScope said, forcing it to take an axe to costs.

Given the weak year-to-June earnings, coupled with the company's downbeat outlook, BlueScope shares took a hammering - falling 16 per cent to $4.70, finishing near the day's low of $4.55. The selling spilled over to Arrium, the other domestic steel maker, which is to release year-to-June earnings on Tuesday. It lost 6¢ to close at 98.5¢.

"Other than Australian demand, [China's cyclical slowdown] is the thing that concerns me most," Mr O'Malley told analysts. As a result, BlueScope flagged no improvement in earnings in the first half of the fiscal 2014 financial year, hoping for a pick-up after the federal election and as the lower Australian dollar filtered through the market.

"We don't expect an improvement until the second half, given present market conditions," he said.

In China, demand in the construction sector was lagging the headline 7 per cent growth figure along the east coast, Mr O'Malley said, although growth inland was better. The group expected to benefit from the commissioning of a processing plant in Xian, central China, which was now under way.

The group is seeing some demand for prefabricated steel buildings in Africa, which it said had some similarities to south-east Asia of 20-30 years ago, and could experience strong growth in the future.

BlueScope posted a year-to-June net loss of $84.1 million, down from a $1.04 billion loss in 2011-12 as redundancy and restructuring charges declined. Revenue fell to $7.3 billion from $8.4 billion a year earlier.

BlueScope will spend $87.5 million - equal to retained cashflow - to buy the Orrcon and Fielders units of Hills Industries, which will make a positive contribution from fiscal 2016, after integration costs of $15 million.

Elizabeth Knight— Page 28