Long and short of local buys U
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.