iron ore mining From todays AFR .... they should take a leaf out...

iron ore mining
From todays AFR .... they should take a leaf out of ADY's book ...

"BlueScope may paddle with its own ore
Robert Guy and Yvonne Ball
2005/08/24


BlueScope Steel has joined an exclusive club of companies reporting profits in excess of $1 billion, but Australia's largest steel maker warned its major iron ore and coal suppliers that it may consider investing in mines to offset rising commodity prices which threaten its profits in the 2006 financial year.

Soaring raw steel prices underpinned a 72 per cent rise in full-year profit to a record of just over $1 billion, propelling BlueScope Steel into the ranks of the 10 most profitable companies in Australia alongside the four major banks, mining giants BHP Billiton and Rio Tinto, News Corp, Telstra and shopping centre manager Westfield Group.

Chief executive Kirby Adams cautioned that earnings would decline in 2005-06, saying it would be the "second best in BlueScope's 87-year history", and attributed the forecast drop to higher prices for iron ore and coal for its hot rolled products division which contributed 96 per cent of the company's operating earnings of $1.38 billion.

"I guess there aren't too many opportunities that an Australian chief executive gets to announce a $1 billion profit. It has only been three-and-a-bit years since we separated from BHP and we feel like we've done pretty well over that period of time," Mr Adams said.

The company declared a final fully franked dividend of 24¢ a share, up 33per cent, and a special payout of 20¢ a share, double that of last year.

Mr Adams said he was "comfortable" with forecasts for a net profit of about $730million for the 2006 financial year, but said the "audacity" shown by some of its suppliers through unprecedented price rises had forced it to consider investments in its own sources of iron ore and coal.

"Over the first couple of years of our history as an independent public steel company, we said absolutely no [to acquiring mining assets] because we had just exited from a resources company and we thought putting forward a strategy to backward integrate into resources would appear that we're just trying to recreate BHP all over again."

"Now mind you, three years ago no one anticipated that raw material prices would go where they have, no one would have anticipated the incredible profit margins now available in raw materials. So we have to now re-examine this strategy.

"I'm not saying that we are going to get into this business, but it is so attractive that we feel compelled to at least have a look."

Mr Adams said that 100 per cent of the negative impact on the profits of its flagship Port Kembla steelworks in the 2006 financial year could be directly attributed to higher costs for coal and iron ore.

To insulate itself against surging coking coal prices, BlueScope Steel entered an 18-month contract with BHP Billiton for coal from its mines in the Illawarra - which Mr Adams said had been "expropriated" from BlueScope ahead of its spin-off from the mining giant in 2002 - as opposed to the industry standard 12-month contract. This move inflated BlueScope Steel's costs by $52 million.

Mr Adams welcomed the development of new sources of iron ore, noting that Andrew Forrest's Fortescue Metals Group plans to become a third supplier of iron ore from Western Australia's Pilbara region was "highly prospective" and that it was a project "that ultimately will get up".

He said the global steel industry would welcome new supply: "We [the industry] have been confronted with the most imposing increase in raw material costs ever seen in the history of the steel industry.

"In oil terms it would be the equivalent of OPEC imposing an $US80 to $US100 per barrel price of oil on all of us.

"We don't appreciate and don't need these kinds of shocks to the system. They are not healthy, they are not in the long-term interest of global steel industry, they are damaging to applications in steel."

"We need to get back to a more reasonable situation and take a longer-term and not such a short-term view."

BlueScope Steel continued to push ahead with the development of "downstream" coated and buildings products, especially in Asia, to help insulate its earnings from volatility in raw steel prices.

BlueScope Steel is Australia's largest corporate investor in China and Mr Adams said that he remained upbeat for the outlook for growth in the country.

"If you are going to be at all bullish on the resources sector, the metals sector, the steel sector, you have to believe in China. If you don't believe in China, you should short the Australian market because it is now the single biggest phenomenon going that is driving this economy, that is driving the resources industry, that is driving the steel industry," Mr Adams said.

BlueScope has felt the impact of the domestic housing downturn, most notably in NSW, and to a lesser extent in Queensland and Victoria. However, that weakness was being offset by strength in the non-residential market. "Demand for those products, however, in the non-residential segments (so schools, hospitals, shopping centres) and also importantly in heavy construction - that being mining, rural and government infrastructure kind of applications, stadiums and that sort of thing - is very very strong.

"So we have seen a mixed shift from residential housing into non-commercial and heavy industry. So overall, a good picture for BlueScope Steel in the domestic market."