8 February 2006
BlueScope's 2006 profit may decline 53% on China steel glut
Source: Bloomberg
BlueScope Steel Ltd., Australia's largest steelmaker, said annual profit will fall as much as 53 percent because of a glut in China. The company's shares slid 12 percent, their biggest slump in three months.
Earnings per share will be 65 Australian cents to 75 Australian cents in the year ending June 30, the Melbourne-based company said in a statement today. That's down from a record A$1.374 ($1.01) last year and is below analysts' estimates.
China, which produces a third of the world's steel, became a net exporter for the first time last year, forcing companies such as Mittal Steel Co. and Posco to cut prices and output. BlueScope said prices this quarter fell as much as 20 percent from the first half and the "weaker pricing environment could continue."
"This is not a global steel demand issue; it is a regional over-production and steel supply issue," BlueScope managing director Kirby Adams said
Shares of BlueScope Steel fell 90 cents to close on the Australian Stock Exchange at A$6.56, the lowest since June 25, 2004. Other steelmakers in Asia also fell. Shares of Posco fell 2.7 percent to 217,500 won, and shares of Nippon Steel Corp. fell 3 percent to 425 yen.
China output
Chinese steel production may increase 10 percent this year, the China Iron and Steel Association said last month, after jumping 25 percent in 2005.
"Given how high the market is, if there's anyone missing their targets, they're really going to be hammered in a big way," said James Holt, who helps manage the equivalent of $4.6 billion at Zurich Financial Services Ltd. in Sydney.
Posco, the world's fifth-largest steelmaker, last month said its fourth-quarter profit fell 68 percent as benchmark Asian prices declined because of overproduction in China. Posco forecast sales would drop as much as 12 percent this year, reflecting increased competition from China. Posco cut its sales estimate twice last year.
'Depression'
"We are entering a valley of depression such as we have never experienced before," Chairman Lee Ku Tae said in his New Year speech to employees on Jan. 2. "China has become a net exporter due to its active expansion over the recent years and has become an unavoidable threat sooner than expected."
BlueScope and its rivals are being squeezed by falling prices for their products and high raw materials costs. The prices of iron ore and coking coal, used in steel making, jumped to records last year as Chinese steelmakers compete for the supply. Iron ore prices may rise another 12 percent from April this year, according to a Bloomberg survey in November.
"The question now is what happens in the longer term," Tony Farnham, an analyst at Aegis Equities Research Pty., said in Sydney.
'The oversupply from regional steel production has pushed down commodity steel prices and put unwarranted demand tension into raw materials which is hurting global steelmakers," said Kirby Adams in the BlueScope's statement posted on the Australian Stock Exchange. "These pressures have flowed through Asia and into our domestic markets."
Pipes
BlueScope produces hot-rolled steel coil, a benchmark product which is processed to make pipes and tubes and is used in cars and buildings. It also paints, coat and process steel, turning it into roofs, fences and walls. It has plants in Asian countries including China, Vietnam and Indonesia.
Hot-rolled coil prices fell by more than $100 a ton recently, Adams said on a conference call. BlueScope had to cut prices in Asia for products including hot-rolled, cold-rolled and galvanized steel products.
Prices of hot-rolled coil for Japan, a benchmark product in Asia, may fall 28 percent this year to $429 a ton, from a year ago, according to a January forecast made by Sydney-based AME Mineral Economics.
Plant
BlueScope's Asian business posted a loss in the first half, BlueScope Steel said. The second half will be better for the unit, said BlueScope's Chief Financial Officer Paul O'Malley on a conference call with reporters.
The company is ramping up plant capacity in Asia, and has cut down on higher-cost materials in its inventories. Orders from customers are also starting to rise, O'Malley said.
In Australia, demand has been reduced from manufacturing and automotive customers, Adams said on the teleconference call. Higher oil prices reduced demand for cars, leading carmakers to slow orders for steel products, he said.
Kirby also said the company hasn't been approached with offers for mergers nor from a potential acquirer.
Asian Pacific steel stocks surged on Jan. 30, after Mittal Steel Co. made 18.6 billion euro ($22.3 billion) takeover bid for rival Arcelor SA, sparking speculation of more acquisitions.
The company said it expects to pay out at least 42 cents per share of dividend as previously announced. The company will report half-year earnings Feb. 20.