BlueScope Steel Ltd (BLSFF, Financial) shares dropped 11% after the company, Australia’s largest steel manufacturer, said weaker global prices would be reducing their margins in the upcoming months.
Previously in August 2014 after reporting earnings, BlueScope’s stock plummeted by 13%. This led to investors expressing their dissent despite the company posting its best ever half-year net-profit figures in years.
According to BlueScope Steel, recent drops in the Asian and US steel prices would narrow its margins from January to June, the company’s fiscal second half, just as the company started moving back into profitability after a much needed broader infrastructure. Analysts feel this is a huge risk.
Recap of the last year
Shares in BlueScope Steel, which has factories in Australia, USA and Thailand, ended yesterday lower by 8.1% after touching levels of 11% downwards throughout the entire day’s trading. The day’s fall reduced around $196 million BlueScope’s apparent $2.34 billion market value.
BlueScope CEO, Paul ‘O’ Malley downplayed the share-price reaction saying he didn’t think there were any negative results in the company’s results. "I think that is pretty obvious to everyone that a fall in the steel price has an effect on our margins," he said.
Mr O’Malley went on to state that “BlueScope had forecast a 20% Y-o-Y increase in second half earnings, adding BlueScope was also benefiting from a lower Australian dollar that was making its steel products more competitive.”
BlueScope had been hampered by a strong domestic currency in China and Vietnam, two of its strongest markets, which made its steel less profitable. A restructuring at the company included layoffs and the merger of business units.
BlueScope’s net profit surged to $95 million in the six months through December, from $4 million the prior year. The steel company said it would pay a $0.02 interim dividend, thus earmarking the rising confidence in the firm’s outlook. It had earlier declared no midyear pay-out to investors last year.
Investors showed concern for the outlook of BlueScope Steel, at a time when a downturn in steel prices deepened and China’s exports of steel soared, flooding more of BlueScope’s key target markets such as Vietnam and India. According to data provider The Steel Index, the spot price of Chinese flat-steel exports dropped 18% since the start of 2015.
BlueScope Steel has said it expects underlying EBIT in the second half to be up 20 per cent on the $113.3 million underlying EBIT reported in the second half of 2013-14. But it also claims the recent drop in steel prices would hamper margins.
Hot rolled coil has shed more than $US 100 a tonne to approximately $US 400 a tonne since September 2014. With stubborn excess steel reserves rising in China, extra steel keeps finding its way into other markets, further influencing steel prices.
The journey forward
JP Morgan has said in a flash note to clients that reinstatement of the dividend is positive but second half earnings looks soft as according to market expectations. BlueScope’s guidance implies full-year EBIT of $305.6 million, a full 25% less than JP Morgan predicted.
BlueScope Steel has also been blessed by the fall in iron ore prices that have taken the brunt of the impact the currency drop has caused.
BlueScope Steel has been investing to expand its iron sand capacity. This operation is EBIT and breaks even at around $US 60 a tonne of iron ore.
While iron ore prices are currently fetching $US 63 a tonne, BlueScope expects the break-even price to fall to the mid $US 50s once it launches its third ship in the middle of 2015-16.
Conclusion
Investors would be wise to stay away from the volatile company in its current state seeing that its profit margins are about to drop thanks to its more cost effective competitors. BlueScope Steel is still attractive to its current investors who do not stand to lose much in the next 3 months with the CEO’s confidence in the currency and the market. A bearish outlook on the company, it would be wise to wait and watch with the Australian Steel giants.
