Steel prices are rising but so are input costs. To complete the mixed bag of benefits brought by the global growth phenomenon for steel manufacturers, the Aussie dollar is soaring as well, writes Andrew Trounson
AUSTRALIA’S newly consolidated steel industry is facing a fine balancing act amid a global boom in steel demand and prices. On the face of it, giants BlueScope Steel and OneSteel are set to benefit from booming steel prices led by strong demand out of emerging economic power houses China and India. That is on top of strong growth generally out of the developing world and a Middle East cashed up by soaring oil prices.
But the rise in prices isn’t only a demand story. Raw material costs are soaring. The massive tripling in contract annual coking coal prices this year to around $ US300 a tonne is only the most obvious example of spiralling raw material costs. Annual contract iron ore prices are set to rise by more than 70 per cent in 2008- 09, and then there is the cost of alloys, freight, and electricity, all of which are heading north.
BlueScope has said the combined impact of rising raw material, alloy and scrap prices was likely to add $ 1 billion to its cost base.
The rising costs have sparked a scramble for coal and iron ore mines among the global steel giants that is increasingly being played out in Australia. OneSteel, one of only a few steel companies globally to have its own iron ore mines, has moved to significantly boost its iron ore production out of South Australia with an eye on hot iron ore markets.
Chinese steel companies are thick on the ground investing in Australian miners, while last month the world’s largest steelmaker Arcelor Mittal emerged with a 14.9 per cent stake in Queensland coal miner Macarthur Coal.
The global response to climate change is also set to increase costs. Australia is set to introduce carbon trading in 2010, though the extent to which import- vulnerable industries like steel will be insulated has yet to be determined.
Finally a rising Australian dollar, already close to parity with the US dollar, is keeping competitive import pressure on the Australian steel producers.
‘‘ In terms of steel prices, supplies and costs we are no longer an island,’’ OneSteel chief executive Geoff Plummer said.
But at the same time, the Australian steel customer base is also vulnerable, and can be expected to be a brake on the ability of the industry to pass on costs.
For example, the high dollar is only intensifying the pressure on Australia’s manufacturing sector. Mitsubishi’s decision in February to finally pull the pin on its Adelaide manufacturing operations with the loss of 930 jobs was the culmination of a longtime hollowing out of the manufacturing sector, which is now focused on relying on efficient technology and niche sectors to stay in business.
But even if such moves lead to a minirenaissance in the manufacturing sector, the intensity of steel use in Australian manufacturing doesn’t appear likely to bounce back.
Residential construction is also soft in the wake of the Reserve Bank’s interest rate hikes, and the even greater hikes from the commercial banks as they seek to rebuild margins following the global credit crunch. Since August the Reserve has added a full percentage point to the cash rate, while commercial banks have added 1.4 percentage points to mortgage rates.
On the flip side the mining boom and increasing infrastructure investment is supporting strong demand from the nonresidential and engineering construction sectors.
Nevertheless, Australian demand faces some headwinds, creating a tightrope for the steel majors. As Plummer points out, the sector not only has to compete with imports directly, it has to compete indirectly with the import pressures faced by is customers.
Last month, BlueScope chief executive Paul O’Malley warned the company was facing a margin squeeze on its branded coated building products as it sought to stay competitive in the local ‘‘ inter- material’’ building market.
BlueScope is aiming to limits price increases in that sector of the market to around 3 per cent, or close to inflation, ‘‘ so in that part of the business there will be a margin squeeze,’’ O’Malley says.
‘‘ We have to be mindful of the intermaterial product market and hold our price relative to that market,’’ he says.
It is in this context that OneSteel and BlueScope see their carve- up last year of rival Smorgon steel as providing the efficiencies to prevent margin pressure and to some degree limiting local price increases that have nevertheless been steep.
Over the past six to nine months, OneSteel’s product prices has jumped by 40- 60 per cent, but as Plummer is quick to point out those increases compare with international prices doubling over the same period.
The $ 2.4 billion carve- up of Smorgon Steel last year was a tortuous affair in which Onesteel and BlueScope squabbled publicly over who would get what. The tension was a reflection of the high stakes involved given that deal has virtually settled the structure of the sector following a decade of upheaval during which BHP spun off its steel business as OneSteel and BlueScope at a time when global overcapacity was a chronic weight on steel prices.
And it was during this time that Smorgon Steel emerged as a new competitive force in the local sector.
BlueScope was already the dominant player in steel flat products, but its operations were boosted domestically by the acquisition of Smorgon’s distribution chain.
The deal left OneSteel the dominant long products player following the integration of Smorgon’s manufacturing and steel making operations.
In the wake of the carve- up has come rationalisation as OneSteel seeks to wring efficiencies out of the Smorgon takeover.
In February it announced moves to shut two steel plants with the loss of 270 jobs. It is shutting down the Newcastle bar mill to consolidate the operation in the more efficient nearby Waratah mill, while also shutting the Martin Bright finishing plant in Melbourne.
The shutdowns are about cutting surplus capacity in the wake of declining demand from manufacturing, including demand from the automobile sector.