Cuts path to profit
Townsville BLUESCOPE and Fortescue Metals are two quite extraordinary survival stories that developed into sequels of spectacular success. Their stories are rendered even more extraordinary by the fact they occurred at the same time.
Both are companies that “someone else” didn’t want: indeed, to a large extent, the same “someone else” – Australia’s own “Think Big” BHP, which will report its own impressive comeback profit today.
BHP – then named BHP Billiton – didn’t “want” BlueScope back in 2002. It floated it off as a separate company.
BlueScope was actually BHP – the “real” BHP, the original BHP, Australia’s premier and, for most of the 20th century, only steel company.
In the case of Fortescue, BHP ( and Rio Tinto) literally didn’t want the Pilbara ore on which that company is based.
The duo had all the Pilbara’s premium ore, and enough of it for decades if not centuries; they had no use for the second- tier stuff that became Fortescue.
More recently, the duo didn’t “want” the Fortescue company – when it was flooding the market. Although, I would suggest that Fortescue’s Andrew ‘ Twiggy’ Forrest took a step too far in believing that the duo was actively trying to destroy his company by boosting their output.
As it’s turned out, everyone’s benefited by all that extra ore being dug out of the Pilbara and shipped north: certainly BHP and Rio and even, spectacularly, Fortescue; but even more so the broader Australian economy and the national interest.
Back in 2012, Fortescue was staring at corporate oblivion. The evaporating gap between its very high cost base and the falling price it got for its second- tier ore was threatening to join with its $ US10 billion- plus debt, to consign it to the corporate knackery.
Forrest pleaded with Rio and BHP to cut their output. Indeed, he went further; he demanded they did so and if they didn’t that there “orta be a law against” them.
Not only didn’t they listen, both Rio and BHP dramatically increased their production and their shipments, to China and its steel industry embarked on global hegemony.
Fortescue, under CEO Nev Power, did the only thing it could to survive: it slashed costs and then slashed them again; paused, very briefly, and kept slashing. In just half a decade, Fortescue has taken out something like 75 per cent of the actual direct cost of producing its iron ore.
When the iron price didn’t plunge quite as much as most feared ( averaged over the half- decade), Fortescue was able to turn its second- tier ore into gold. This enabled it to also slash its debt by around 75 per cent. Now the cash can be redirected to shareholders.
You might reasonably say BHP and Rio did Fortescue a big favour by declining to cut their output. And that Fortescue did them one back in turn by leading the way in getting production costs in the Pilbara down. BHP and Rio either followed or cut in tandem with Fortescue.
All things considered, the Fortescue effort is a tad more impressive. I might note, that while, yes, it did involve big cuts to people numbers, it wasn’t based on ation.
Whatever, as a consequence, BHP and Rio have been even bigger winners, because their premium Pilbara ore gets a significantly higher price, and so a significantly higher dollar margin; and that margin is spread in each case over roughly 50 per cent more tonnes than Fortescue.
Now, the thing about BlueScope is the conditions – those, mostly, high iron ore prices ( and also, at least for BHP, also mostly high coking coal prices) – that have been so good for Fortescue, might normally have been expected to finish off BlueScope.
When BlueScope was floated off from BHPB back in 2002, you might reasonably have seen it as being on a one- way trolley- ride to the corporate cemetery. Indeed, especially if you could have known back then quite how big and ruthlessly price- competitive and even quality- efficient, the Chinese steel hegemon was about to become. How could little old BHP Steel, renamed BlueScope, survive? slashing remuner-
It didn’t have its own iron ore. It didn’t have its own coal. Yes, it was getting both from its former parent; but it was paying the same prices as the Chinese mills.
Indeed, back then its former corporate twin OneSteel – to be renamed Arrium – looked the better bet as it did have its own ore; and some operations further up the value chain and with some natural protection from China.
But, as they say, look at the two now: BlueScope reporting a profit that doubled to $ 716 million and with net debt down to just $ 232 million ( albeit with serious problems ahead, mostly due to government, and community, stupidity on energy); Arrium waiting to see what life might be like under its new British owner, after being bought out of voluntary administration.
Now, a big part of Bluescope’s success under its CEO Paul O’Malley has been achieved by taking BlueScope out of Australia – into the US and Asia, in both production and marketing terms.
But that would have been a very different company if the survival dynamic had not also been built on making the local basic steel- make dramatically more competitive ( by slashing costs) in what became a ruthless global environment.
Thanks to the China story which so enriched Fortescue ( and BHP and Rio). Enriched, to repeat, only because all three made their businesses so much more efficient and operationally successful.
Just think about it; it is no small thing to keep all the trains running on time and the ships moving in and out of port when you are digging up and shipping more than 600 million tonnes of the Pilbara each year – nearly two million tonnes every day.
Now, I wrote last week that Brian McNamee was the best CEO we’ve seen in the post- 1980s period. That stands. Both O’Malley and Power, though, easily join him in the Top 10.