Forum Archive Index - January 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

We've heard quite a bit about the increase in gold price over the 
last year on this forum.  But few here will know about the 'less 
newswortherly sexy' parallel increase in the price of steel (as a 
proxy for this I'll use the hot rolled coil price from $US89.7 per 
tonne to $US127.2 in a year).  This is a 41% increase in $US terms in 
twelve months.  

Why this increase has occurred in a global industry that is 
apparently burdened by overcapacity I cannot fully explain.  Perhaps 
consolidation of producers in the European steel sector, which some 
industry players use as a price setting proxy, might explain it?  
Perhaps there are quality or transportation issues in fully utilising 
the capacity of world steel manufacturing plants (currently 80% 
according to industry experts) which means that the industry is 
running at closer to capacity than we all think?  Whatever the 
reason, there is no doubt that the last year has been hugely 
profitable for 'investors in steel' downunder.

It is interesting to look at a graph of the share price performance 
of the two largest steel makers in Australasia, OneSteel (OST) and 
BHP Steel (BSL) over this period (graph attached).   Also overlayed 
on the graph is the monthly average US dollar price of hot rolled 
coil steel.  If you imagine all those red/ochre figures joined up in 
a line you can see a definite correlation between all three lines.

Following an initial period of consolidation, it is the BHP Steel 
price that has moved up most sharply in response to the increase in 
hot rolled coil prices.   As the share with the biggest 
'manufacturing' component to its operations this is no surprise.  I 
mentioned in December that I considered BSL fully but fairly priced 
at $3.10, as it basked in an industry sweet spot.  At around $3.40 
this sweet spot now has a good dollop of cream on top to my way of 
thinking.  I can't explain any increase in BSL price from here 
forwards on fundamentals. Perhaps it is simply due to Aussie 
investors hungry for a good income share?   Perhaps it is time to 
hand over to the T/A guys?

Whatever the reason, the increase in share price is very good for 
those investors considering the switch from BSL to OST.  I'm picking 
March/April, dividend season might be the time to make this switch 
for NZ investors.  I still like OST for the inventory management cost 
savings that are possible, and have been done at subsidiary Steel and 
Tube.  I don't think these have been factored into the Australian 
share price as yet.  No OST is not my 'favourite' Australian share, 
but I do think it is too good to be ignored.

Meanwhile back at home, Steel and Tube maintains its trading 
price range between $3.05 and $3.25.  I guess the ongoing share buy 
back will give a stable outlook for the STU share price for much of 
the rest of the year.  I still really respect Steel and Tube, (a 
great income share) but it isn't quite cheap enough for the bargain 
hunter in me.  I'll report again in February with my thoughts on my 
upcoming 'operation BSL-OST steel share switch'.

SNOOPY

discl: hold BSL (and a very few OST) 



---------------------------------
Message sent by Snoopy 
e-mail  tennyson@caverock.net.nz
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"Stay on the upside of the downside, 
Anticipate the anticipation!"


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