BlueScope Steel Outlook Positive

Australia | Feb 28 2018

Improved global conditions for steelmakers, and particularly in the US, support the outlook for BlueScope Steel.

-Guidance likely conservative, based on pick up in Australian demand and current US spot spreads
-North Star spreads should benefit from trade action seeking to limit steel flow to the US
-Strategic review to assess options for the loss-making Asian buildings business


By Eva Brocklehurst

BlueScope Steel ((BSL)) is expected to finish FY18 with a flourish, amid improved global conditions for steel spreads along with US tax reform and Chinese capacity management.

Ord Minnett suspects BlueScope management, whose guidance appeared a little soft, is trying to be careful in what is otherwise regarded as a healthy macro environment for steelmakers, particularly those with US exposure. First half results were ahead of most forecasts and guidance points to full year operating earnings (EBIT) of $1.12bn.

Deutsche Bank believes guidance is conservative, based on the pick up in demand for Australian high-margin coated steel and current US spot spreads. Nevertheless, the broker retains a Hold rating with a view that earnings are close to peaking.

Reported earnings were boosted by a few one-off benefits, not assumed in the guidance provided in December, Credit Suisse points out. Yet the broker believes current guidance is conservative as spread assumptions for North Star are well below prevailing spot spreads.

In Asia, the building products joint venture is expected to be flat in the second half, reflecting soft project demand and selling prices that are lagging input cost increases. A stronger second half in New Zealand is expected, amid good demand and fixed steelmaking input costs.

US Outlook

Credit Suisse notes comments around the US Section 232 proposals were necessarily circumspect. Management's general view is that North Star spreads should benefit from any trade action that seeks to limit steel flows into the US, while the US west coast coating business, SteelScape, should be no worse off.

No significant need for project capital was identified in the medium term, suggesting cash could build on the balance sheet and capital returns continue. In this context a further $150m in buybacks was announced. Consumption of franking credits has meant the end of fully franked dividends until the tax losses at Port Kembla are consumed.

The company also wishes to maintain capacity to contemplate acquisition opportunities and is aware of a need to re-line the blast furnace in 15 years, or potentially exit commodity steelmaking in Australia.

Australian Steel

Australian steel products were supported by a favourable product mix and price increases for Colorbond but with an adverse impact from continued dumping and strategic pricing to pipe & tube customers.

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