BlueScope caught in eye of perfect storm

It was a sad day for Australian steel manufacturing on Monday when BlueScope Steel (BSL) reported a full-year net loss of $1.05 billion and flagged the closing of one of its two Port Kembla blast furnaces and the abandonment of its export business and the loss of up to 1000 jobs.

Operations will continue at Port Kembla, near Wollongong in New South Wales, however, production will be reduced to about half of the existing capacity.

BlueScope has been caught in the eye of a perfect storm recently with the high Australian dollar, and record iron ore and coking coal prices all crippling the steel-making business.

Historically, 50 per cent of steel produced has been destined for the export market and chief executive Paul O’Malley said that the closure of the export business was needed to return the business to viability.

And the decline in the export business is not just a recent phenomenon, with export sales only making a meaningful contribution to the business twice in the past decade. Exports have lost about $1 billion in the past three years.

Since BlueScope Steel (formerly BHP Steel) demerged from BHP Billiton in 2002 the two ASX -listed entities have been on vastly different paths, with BHP a price setter, and BSL a price taker.

After listing at $2.80 a share in July 2002, BlueScope peaked at $10 at the height of the boom in May 2007, but has been on a slippery slope ever since to be trading at 74c/share on Monday, a return of -74 per cent (excluding dividends).

On the other hand, BHP was trading at $10 in July 2002, and with a $38 share price on Monday this results in a 380 per cent return, making the decision by Don Argus to demerge the businesses back in 2002 a masterstroke for BHP.

Interestingly, BlueScope actually outperformed BHP between 2002 and 2006, and was on level pegging with BHP up until mid-2008 when the GFC really began to bite. Since then it’s been all downhill for the one time blue-chip company which now has some tough years ahead to recover from a disastrous period.

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