Long and short of lo­cal buys U

The Weekend Australian - Review - - Steel - James Dunn

NTIL 2000 steel in Aus­tralia was syn­ony­mous with the Big Aus­tralian’’, BHP. But in that year, BHP be­gan the break- up of its steel­mak­ing op­er­a­tions, sell­ing off its long’ prod­ucts ( such as rail­way lines, beams, re­in­forc­ing wire) as OneS­teel.

Two years later, BHP hived off its flat’’ steel prod­ucts op­er­a­tion as BlueScope Steel (‘‘ flat’’ prod­ucts refers to hot rolled coil, or HRC, which is then pro­cessed into beams and pan­els for con­struc­tion, cars, white­goods and other things)

Sub­se­quently, OneS­teel ac­quired the man­u­fac­tur­ing as­sets of Smor­gon Steel, its ma­jor do­mes­tic com­peti­tor, in Au­gust 2007, unit­ing Aus­tralia’s only man­u­fac­tur­ers of long’’ steel prod­ucts, as well as the two ma­jor steel and metal dis­trib­u­tors.

BlueScope Steel re­mains the na­tion’s big­gest steel maker, with an­nual out­put of about 6.8 mil­lion tonnes. OneS­teel pro­duces about 2.7 mil­lion tonnes a year.

BlueScope op­er­ates in Aus­tralia, New Zealand, Asia and the Pa­cific, and owns 50 per cent of North Star BlueScope Steel, a hotrolled steel joint ven­ture in the US. BlueScope ex­ports to the US, Asia, Europe, the Mid­dle Eats and the Pa­cific.

Apart from types of steel, the ma­jor dif­fer­ence be­tween the two is that OneS­teel has its own iron ore re­serves. Not only does this mean that the com­pany is shielded from soar­ing iron ore prices, it ac­tu­ally ben­e­fits, be­cause it has ore to sell. OneS­teel has con­verted the Whyalla steel­works to pro­duce steel from low- grade mag­netite, rather than hematite iron ore, free­ing about 40 mil­lion tonnes of higher- grade haematite lump and fine ore for sale over ten years.

Gold­man Sachs JBWere says that in­creas­ing the amount of iron ore it sells from 4 mil­lion tonnes a year to 5 mil­lion would more than off­set in­creases in OneS­teel’s cok­ing coal costs in 2008- 09.

This ca­pac­ity to par­tic­i­pate in iron ore as a sup­plier, along with the bal­ance sheet to ca­pac­ity to use in fur­ther growth op­por­tu­ni­ties by 2009- 10, makes OneS­teel GSJBW’s pre­ferred Aus­tralian ex­po­sure to the steel sec­tor.

BlueScope Steel is a dif­fer­ent story: its fo­cus is on ex­pand­ing its man­u­fac­tur­ing op­er­a­tions in Asia. Side- by- side with its own ex­pan­sion into China, In­dia, Thai­land and Viet­nam, BlueScope bought US group But­ler Man­u­fac­tur­ing Com­pany in April 2004. But­ler is world leader in the metal build­ing com­po­nents and pre- en­gi­neered build­ings ( PEBs) in­dus­try, and it taps di­rectly into the con­struc­tion growth in China.

Bro­ker Mer­rill Lynch has BlueScope as its pre­ferred stock in the sec­tor: it ex­pects the Asian hot- rolled coil price to rise by $ US100 a tonne within the next six months As BlueScope sells more than 5 mil­lion tonnes of slab and hot- rolled coil into Asia a year, Mer­rill Lynch says this price rise more than off­sets fore­cast rises in BlueScope’s iron ore and coal in­puts.

Bro­ker Citi rates BlueScope a sell, ar­gu­ing that the steel mar­ket is mov­ing close to a peak, at which time mar­gins for steel mak­ers such as BlueScope will start to be com­pressed.

Round­ing out the lo­cal steel stocks is Sims Group, the world’s largest scrap metal re­cy­cler. Sims is ben­e­fit­ing hugely from the tripling of scrap prices since the start of 2006, and from $ 11 in mid- 2004, it has risen to $ 35.

While Sims’ profit is ex­pected to rise by about 26 per cent this fi­nan­cial year, bro­ker In­ter­su­isse says some cau­tion is re­quired’’ af­ter a 49 per cent rally in the stock price this year. Bro­ker Citi says that, at $ 38, Sims is trad­ing at about 18 times ex­pected earn­ings, com­pared to its long- term his­tor­i­cal av­er­age of 11 times, and that the stock is over- val­ued.

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