Shares in BlueScope Steel fell sharply yesterday after Australia’s biggest steel maker, hacked its interim dividend and warned of a possible second-half loss.
The shares ended down more than 10% at $2.78.
While underlying profit for the six months to December 31 rose strongly to $479 million, it was underpinned by a strong first quarter which contributed $430 million to the result.
With the first half of 2008 seeing interim earnings of $407 million, the performance in the December quarter of last year was dramatically different: a huge slump as the global steel and trade slumped and prices plunged.
BlueScope CEO Paul O’Malley said export sales in the second quarter had been "materially curtailed” by lower demand for steel worldwide, high raw material prices and the economic downturn.
“Coming into the second quarter, export sales from Australia slowed materially due to the worsening economic and financial conditions in the developed world>"
"Net profit after tax attributable to the shareholders of the Company increased $291.0 million to $406.9 million driven by higher global slab and hot rolled coil prices and the flow-on to domestic prices in the first quarter, higher Coated and Building Products prices in North America and Asia, favourable foreign exchange impact due to the weakening AUD and impairment of the China coating line and Vietnam coating line in the prior comparative period.
"These were partly offset by lower export and domestic sales volumes in the second quarter, higher raw material costs, lower conversion cost recoveries driven by reduced production volumes at Coated and Industrial Products Australia, New Zealand Steel and Coated and Building Products Asia, higher net realisable value provisions for inventory and profit on sale of the 19.9% shareholding in Smorgon Steel in the prior comparative period."
BlueScope wasn’t alone as steel makers in China,. India, Japan, Ukraine, Europe, the US, in every major country saw exports hammered in the three months to December, with prices falling sharply as well.
Steel groups reacted by slashing production, and in turn raw material purchases as they ran down surplus stocks.
Some analysts claim to see elements of a steadying in the industry, especially in China, but Arcelor Mittal, the world’s leading producer (with a 10% share of global output) says it is maintaining its 35%-plus cutback for as long as it takes this year to bring supply/demand back into balance.
OneSteel, BlueScope’s local rival, reported similar conditions last week and is facing a sharp slump this half, with more job cuts appearing to be inevitable.
BlueScope’s CEO said yesterday that "Should lower demand and prices, coupled with high raw material prices continue we expect to see a negative underlying NPAT (net profit after tax) for (the second half of fiscal) 2009."
The company cut interim dividend by 77% per cent to five cents, down from 22 cents, citing unforeseen changes in demand and uncertainty as to the duration of the global economic downturn.
"Government stimulus packages may translate into some improvement in economic activity later this calendar year, but it remains to be seen how it will affect steel demand,” Mr O’Malley said.
BlueScope operates in Australia, New Zealand, the United States and Asia.
Revenue for the half increased 30% on the previous corresponding period to $6.15 billion, from $4.73 billion, thanks mainly to the first quarter’s boom.
Mr O’Malley said the company was focused on maintaining a robust balance sheet, strong liquidity position and disciplined capital expenditure to deliver $150 million in savings on existing and new cost management programs.
BlueScope has suspended a second coating line project in Indonesia as part of its decision to reduce capital spending across the group and weaker demand.
"BlueScope Steel aims to emerge from the downturn with our position as a low cost, high quality steel manufacturer intact,” Mr O’Malley said.
The company also has the reline of the Number 5 blast furnace at Port Kembla to contend with.
Mr O’Malley said: “The outlook for the second half of FY09 is now weaker than anticipated. We had factored in lost production due to the scheduled Blast Furnace No 5 reline"
With the weak global market and lower prices, the cost of the reline and the lack of production will almost see the company operate at a small profit in the half at best, and at worst a loss. But in the medium term it will help take the lost tonnage out of local and global markets, which will have a small positive benefit.
