Raising Interest Rates, Slowing Economic Growth, and Weaker Prices Soften BlueScope Steel’s Outlook

Business Strategy & Outlook:

BlueScope’s strategy appropriately plays to its strengths and attempts to neutralize its weaknesses within its portfolio of legacy assets. Steel manufacturers produce largely undifferentiated products and have limited pricing power. Maintainable competitive advantage is typically generated by being the lowest cost provider. BlueScope’s Australian business operates at a relatively high cost and struggles to compete in highly competitive export markets. North Star is significantly more entrenched and operates toward the low end of the cost curve.

Over the past decade, BlueScope sensibly restructured Australian operations away from commodity export markets where the relatively high cost of production places it at a competitive disadvantage. The Australian operations are now tailored to the domestic market with a focus on shifting its sales mix to its value-add metal coated and painted product brands. The group’s Ohio-based North Star operations are the business’ crown-jewel. North Star specializes in the production of hot rolled coil for the U.S. domestic market and utilizes highly efficient electric arc furnaces which can produce at a lower per unit cost than blast furnace competitors. BlueScope has gradually expanded production capacity at North Star over time to maximize the value of its operations. BlueScope is taking appropriate actions to manage its environmental, social, and governance risks. BlueScope is proactively investing in technologies to limit the carbon intensity of its steelmaking operations and has committed to a net zero emissions target by 2050.

Financial Strengths:

BlueScope has a strong balance sheet. As at the end of the first half of fiscal 2022, BlueScope’s net cash position was approximately AUD 700 million (including operating leases) and had approximately AUD 2.7 billion in undrawn debt facilities. BlueScope’s balance sheet will be put to work over the next few years to fund a range of initiatives across Port Kembla, North Star, the U.S. buildings segment, and acquiring the coil coatings business from Cornerstone Building Brands. BlueScope is also strategically investing in sustainability programs associated with its commitment to net zero emissions by 2050. Longer term, BlueScope is targeting a relatively conservative net debt position of around AUD 400 million with at least 50% of free cash flows distributed to shareholders in the form of dividends and share buybacks.

Bulls Say:

Supply side reform in China will reduce industry overcapacity and act to boost steelmaking spreads and operating margins relative to depressed levels in the early 2010s.
The strength of Australia’s residential construction market will aid in shifting the Australian segment’s sales mix to value-added products in the near term.
Fiscal stimulus programs enacted during the coronavirus pandemic will support demand for steel products over the near term.

Company Description:

BlueScope is an Australian-based steelmaking firm with five steel related business units. The Australian Steel Products segment mainly specializes in a range of high-value coated and painted flat steel products for the domestic market. North Star is the group’s U.S. mini-mill specializing in the production of hot rolled coil for the U.S. construction and automotive sectors. Building Products Asia and North America comprise operations across Southeast Asia, China, India, and the U.S. West Coast involved in metal-coating, painting, and roll-forming. New Zealand Steel and the Pacific Islands business has steel operations across New Zealand and the Pacific. The Buildings North America segment specializes in nonresidential buildings, including materials manufacturing and support services.

(Source: Morningstar)

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