HEAD­ING NORTH

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

The Weekend Australian - Review - - Steel -

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.

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