onesteel profits under pressure

Rising Australian dollar hits OneSteel's profits

Sarah-Jane Tasker
From: The Australian
October 19, 2010 12:00AM

THE rising Australian dollar is expected to crunch OneSteel's profits, as analysts lower the target price of the stock.

Stock already buffeted by the global financial crisis and proposed mining tax.

Credit Suisse analyst Michael Slifirski said the foreign exchange market was undermining the earnings base of Australia's second-largest steel manufacturer and eroding its otherwise strong iron ore export business.

Mr Slifirski has cut his price target on OneSteel from $3.50 to $3.25, and reduced his profit forecast for next year by 15 per cent to $338 million.

"We see little prospect of substantive demand recovery, FX depreciation or material iron ore appreciation, necessary to alter the current challenging outlook," Mr Slifirski said in a client note on the stock.

He said the drop in profit forecast reflected the adverse impact of the Australian currency's appreciation on US dollar revenues, against an Australian dollar cost base, and the risk of a rise in steel imports, displacing domestic production.

"Domestic steel demand remains at depressed levels, falling short of our modest recovery trajectory," he said. "Ultimate demand recovery is inevitable, but now appears unlikely to occur in time to support consensus earnings expectations."

The Australian dollar hit parity with the US greenback late on Friday, the first time since the exchange was floated in 1983. The dollar weakened slightly yesterday and closed at US98.48c.

In OneSteel's annual report, released last month, managing director Geoff Plummer said steel margins in the company's manufacturing and distribution businesses were expected to remain under pressure from the impact of a stronger Australian dollar and competitive pressure due to low activity levels.

OneSteel has had a challenging year, recovering more slowly than expected from the GFC.

The steel manufacturer and iron ore producer said at its annual results in August there was a pause in recovery in the middle of the year, heightened by the federal government's resources tax announcement.

In the annual report, Mr Plummer said the factors that led to the stall in the recovery in May and June had continued into the new financial year. "This is expected to impact our profit performance for the first half of the 2011 financial year," he said.

http://www.theaustralian.com.au/business/rising-australian-dollar-hits-onesteels-profits/story-e6frg8zx-1225940403849