NZ Steel in A$100M profit turnaround, future more secure

Monday 21st August 2017

Australian-owned New Zealand Steel achieved a A$100 million turnaround in underlying operating earnings in the year to June 30, following two years of deep cost-cutting, the sale of its Taharoa ironsands business, and a focus on domestic over export sales.

Underlying earnings before interest and tax came in at A$61.1 million for the year, compared with a A$40.3 million loss in the 2016 financial year, despite a fall in total steel despatched from 697,100 tonnes the previous year to 604,900 tonnes in the latest year and sales revenue of A$747.5 million well below the A$887.3 million recorded in the previous year. The underlying ebit result excludes A$26.2 million of revenue from the Taharoa ironsands export business, which was sold during the year to Maori interests for an undisclosed sum.

The improvement in earnings for the New Zealand operations of ASX-listed Bluescope Steel, which owns the NZ Steel and Pacific Steel businesses in Auckland, was part of a wider bounce back in earnings. Bluescope reported net profit for the year of A$715.9 million, up 102 percent on the previous year, its best result since 2005 and more than doubling earnings per share on an underlying ebit basis to 113.9 Australian cents per share. Annual dividends rose to 9 cents in the latest year, from 6 cents per share the previous year.

The company is also signalling a more secure future for its New Zealand and Australian "cost competitive commodity steelmaking" businesses following efforts on both sides of the Tasman to make its operations more commercially sustainable.

"Commodity steelmaking in Australia and New Zealand is a valuable option provided it can deliver target returns and is cash flow breakeven at the bottom of the cycle (ebitda less stay in business capital expenditure)," say slides prepared for presentation by Bluescope chief executive Paul O'Malley. However, the company also intends to maintain balance sheet capacity "to fund a shutdown of steelmaking if not cash positive. Conversely it will maintain flexibility to reinvest in capacity where target returns are met".

Unlike last year, when Bluescope highlighted carbon and transmission costs as threats to its New Zealand operation, this year's harshest criticisms are reserved for the state of the Australian energy market, where Bluescope says "baseload energy supply is in crisis" because Australia's electricity system has the least flexibility in baseload generation of "comparable key economies".

The New Zealand business produced more steel for domestic use and less for export than the year before, reflecting a strategy to concentrate on being competitive in the domestic market, where the construction sector continues to grow strongly.

Some 453,800 tonnes of flat and long steel products were sold in New Zealand, compared with 427,200 tonnes the previous year, while export volumes fell to 151,100 tonnes from 269,900 tonnes.

For the year ahead, Bluescope said it expected its New Zealand business to benefit from "further productivity and cost initiatives", although these are now expected to be incremental after two years in which measures to create ongoing savings of NZ$125 million a year have been implemented.

However, "currency and assumed steel prices (are) likely to lead to a slightly softer half" than the strong second half performance in the latest financial year, the company said.

Of the $80 million of ongoing savings identified in the last year, a quarter came from reduced labour costs, a fifth each from production efficiencies and reductions in raw material and overheads costs, and a 35 percent cut in repairs, maintenance and manufacturing costs.

(BusinessDesk)

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