BlueScope Steel Approaches 52-Week High Despite Weaker Steel Prices and Spread in Global Markets

BlueScope Steel Limited (ASX: BSL) is approaching its 52-week high of $15.090 (high in April 2019) with a current high of $14.880 (as on 25 November 2019 01:39 PM AEST).

The Australia Securities Exchange-listed, steel manufacturing company, provides coated and painted steel building products along with delivering engineering building solutions to the commercial and industrial market. The business segments of BSL include Australian Steel Products, which produces and sell painted and coated flat steel products, New Zealand & Pacific Steel, Building Products ASEAN, and Hot-Rolled Products North America & India.

BlueScope recently confirmed that the August guidance for 1H FY2020 underlying earnings before interest and tax would be 45 per cent lower against the second half of the financial year 2019 amid anticipated softer steel prices and spread across the steelmaking businesses in the U.S., Australia and New Zealand.

However, the company mentioned that the demand in the major markets remains stable, and the North Star operations of the company are running at the full utilisation with a modest recovery in Australian volumes.

The stock soared on ASX post the announcement from $13.390 (Day’s low on 21 November 2019) to the current high of $14.880.

Recently, the company notified the investors about the legal proceedings in New Zealand against Toward Industries Limited- a previously-owned subsidiary of BSL. The proceedings were initially instigated by NZ Iron Sands Holdings Limited, which is a special purpose vehicle and represents a consortium of small private investors concerning to failed attempt by NZ Iron Sands Holdings Limited to buy Toward’s Taharoa Iron Sands mining business.

Post an extended sale process, the sale to NZ Iron Sands Holdings Limited failed amid non-fulfilment of required consents and conditions; however, NZ Iron Sands Holdings Limited claimed a loss of opportunity, which was reckoned by the consortium to be at $86 million for the period of 2017 to 2019.

Toward Industries Limited ultimately sold the Toward’s Taharoa Iron Sands mining business to a company majority owned by Taharoa C Block Incorporation- which is a Maori Incorporation with a wide shareholder base, and BSL provided cash of approx. NZD 51 million to achieve the sale.

In the status quo, the legal proceedings started by NZ Iron Sands Holdings Limited was discontinued, and Toward Industries Limited agreed to pay a small amount of the legal costs.

Steel Markets

The steel across the globe is quite balanced with China witnessing an increase in rebar prices and North America witnessing correction in the hot-rolled coil prices (business segments of BSL. China recently witnessed a surge in steel prices amid a shortfall in the domestic inventory, which in turn, supported the prices of steel and steelmaking raw materials such as iron ore, coking coal, etc.

The share prices of the company are deeply supported by the diversity of business in China and North America.

BSL, Steel Rebar and Hot-Rolled Coil Daily Chart (Source: Thomson Reuters)

While the HRC prices are going down, the prices of steel rebar are on a surge amid inventory shortfall across the mills and social warehouses in China, which has supported the share prices of the company along with a strong balance sheet.

To know more about the steel shortfall in China, and it is supporting the raw material prices, Do Read: China’s Push for Infrastructure and High Steel Margins Propels ASX Iron Ore Miners

Raw Materials

Iron ore prices climbed to a multi-year high in past few months, which reduced the profitability on the steel margins; however, now as prices are again reasonable in the market, which is again increasing the steel mills profit margins in China and prompting them to increase the production.

Iron Ore and Coking Coal Daily Chart (Source: Thomson Reuters)

The procurement process by the steel mills in China coupled with shortage across the significant ports in China is now supporting the iron ore prices as well; however, prices remain significantly below the recent 2019 high, which is sufficient for the steel mills to take advantage of the domestic steel shortfall.

To know how iron ore prices are looking on Charts and what to expect ahead, we would like to encourage you to read: Are Bulls Taking Charge in Iron Ore? Or Is Gold Ready for a Big Move? – Ask the Charts

BSL also operates its business in China, and the recent fall in raw material cost, increase in steel rebar prices in China, and strong financial position should have played some part in supporting the share prices of the company on ASX.

In the recent announcement, the Chairmen of BSL- Mr John Bevan mentioned that the strong balance sheet of the company coupled with quality assets provides the company with the capacity to withstand and potentially take advantage of tough cyclical conditions.

BSL witnessed the underlying earnings before interest and tax above $1.1 billion in FY2019 for the third time in a row despite weak steel prices and spreads during the second half of the financial year.

To further strengthen its root, the Board of the company approved a USD 700 million expansion of North Star BlueScope Steel Facility in Ohio, United States, which would further add about 850,000 metric tonnes per annum capacity in the United States domestic steelmaking capacity to take it to three million tonnes.

Return Against the Benchmark

Over the last six months, BSL delivered a total return of 30.70 per cent, while the HRC futures (U.S. Midwest) delivered a return of -22.66, and SHFE Rebar futures delivered a return of -1.14 per cent, and the last one-year, BSL delivered a total return of 25.64 per cent, while SHFE Rebar futures delivered a return of 5.18 per cent and HRC futures (U.S. Midwest) delivered a return -37.74 per cent.

On the equity benchmark, BSL outperformed the S&P/ ASX 200 Index by 2.3 per cent (on a yearly basis), and also outperformed the equity benchmark index by 24.55 per cent over the last six months.

The stock of the company last traded at $14.760 (as on 25 November 2019), up by 0.958 per cent against its previous close on ASX.

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