Forum Archive Index - May 2003
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[sharechat] Investing in Steel - May 2003 Update
I've been updating my research on what is happening in the world of
and things are looking interesting! It looks like the great steel gurus of
the world have revised their opinion on the 'hot rolled coil steel price',
and now say that it is likely to remain relatively strong until the end of
the year. The 'hot rolled coil steel price' is a proxy for what is
happening to the BSL (BHP Steel) share price. So this might explain
why the BSL share price has not plunged as I, swallowing the gurus
earlier views in good faith, previously suggested it might.
The world's steelworks are currently working at 83.5% of capacity.
This is the highest capacity utilisation since 1989! There is a
suggestion that one explanation for this is that China are building up
their steel stocks. This means that a consequent bottoming of the
'hot rolled coil steel price' has been pushed out to 2005.
If you are a believer in buying in gloom (which I am) and you believe
that the stock market tends to move based on events that are 18
months to two years away (which I do) then we are currently entering
a window of opportunity for investing into the global steel industry.
Regular readers will know that I am not interested in investing in a
commodity business like steel per se. I am interested in investing in
the very well run distribution channels for steel, however. Steel &
Tube (STU) in New Zealand and/or OneSteel (OST) in Australia (
50% owner of Steel and Tube) are the two most notable 'local'
If you turn to the attached graph you will see that the tracing effect of
the BSL share price in comparison with the OST share price over the
last six months is almost uncanny. It looks to me like Mr Market is
treating them as twins! This fact I believe will potentially enable us to
take advantage of 'Mr Market' over the next few weeks/months and
might just allow us a rare chance to move into OST at a very good
Taking into account the potential total return over three years, what
would constitute a 'very good price'? For New Zealand 33% rate
taxpayers (ignoring exchange rate fluctuations) and assuming NZrs
will be able to claim Australian imputation credits courtesy of Onesteel
subsidiary Steel and Tube, the returns are:
Total After tax income + Capital Appreciation; Compounding Rate of
Return over 3 years (after tax)
STU: 19+23 +23+ (330-336)= 59c; 5.5%
OST: (6.5+8.0+9.5) + (196-168)= 52c; 9.4%
This is based on 26th May closing price of STU ($3.36) and of OST
($1.68) and various other earnings assumptions outlined in my
'Investing in Steel' series in late 2002. I am hopeful of being able to
buy into OST at a little less than $1.68 which will enhance my expected
return further. This analysis shows that investing in OST will likely
give a significantly better return than investing in STU directly.
Returning to the attached graph, we can see the Hot Rolled Steel price
has remained quite flat yet the share price of BSL/OST has declined
markedly since the beginning of the year. If the Hot Rolled Steel Price
is truly a proxy for BSL, how can this be? I believe the explanation
for this is the rising Australian dollar. Even though the world price for
hot rolled coil has remained stable, in $A terms it has declined. This
has lead to a falling off in the share price of BSL and by association
OST. While I would expect some decline in the price of OST due to
the 'hot rolled coil' effect, OST is half manufacturer/half distributor
which means it should not be as sensitive to the hot rolled steel price
as full steel manufacturer BSL. The fact that the market is treating
both BSL and OST the same will, I hope, give us our good buying
opportunity to get into OST.
Another factor in the steel scene is that the steel producers worldwide
have put the screws on their coal fuel suppliers (like AUO). The world
price of furnace coal has been pushed down with a consequent boost
to the profitability of steelmakers. Perhaps Gerry if he reads this
might be good enough to give us his view on the outlook for coal in this
Returning to the attached graph for one last time, and given that the
share price of BSL is approximately twice that of OST, have a look at
the volume of shares traded. You will see that during April and May
the dollar value of BSL shares traded is consistantly higher (relative to
OST) than in the four months before that. This is possibly due to the
BSL share buyback and this may be supporting the BSL share price at
near current levels. This view is further supported by the observation
that as soon as BSL shed its dividend the share price recovered
almost immediately! By contrast the OST share price, not supported
by a buyback, took the expected dip.
BSL is only able to buy back 10 million shares before July 12th. If
BSL completes the buyback of 10 million shares before that date, and
there s an associated lull in the buy back, then the share price may slip
bringing down the price of OST with it. Somewhere around late June
and early July is where I believe, fellow investors, we may just get our
best opportunity to become an OST shareholder.
discl: No meaningful position in OST yet! Waiting Patiently.
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