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Bluescope seeking another A$15M of annual savings from NZ Steel operations

Monday 22nd August 2016

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Australian steel manufacturer Bluescope is seeking another A$15 million a year in savings from its New Zealand operations, which broke even on an operating earnings basis, after depreciation and amortisation, in the latest financial year.

Earnings before interest, tax, depreciation and amortisation from Bluescope's two Auckland units, NZ Steel and Pacific Steel, came in at zero in the year ended June 30, compared with a A$26.8 million positive contribution in the previous financial year, the Melbourne-based company said in a statement.

New Zealand operations recorded a A$20.3 million increase in losses on an ebit basis to A$53.5 million, reflecting lower regional steel prices and iron ore prices, offset by a weaker NZ/US dollar exchange rate and cost savings totalling A$45 million. The company is now targeting annual savings from the Kiwi operations of A$60 million at the same time as it determines "whether operations can be internationally competitive and profitable".

The latest financial year saw Bluescope write down the pre-tax value of its New Zealand net operating assets to A$234.7 million from A$634.8 million and it has put its Taharoa ironsands export operation up for sale in a process it says is "progressing".

Cost savings achieved to date are being offset by higher carbon prices under New Zealand's emissions trading schemes, the potential for higher electricity transmission prices under proposals from the Electricity Authority, and the firm is pushing for an anti-dumping inquiry into Chinese steel exports to New Zealand.

The company's announcements today give no sense of the implications for the New Zealand operations if they failed to be internationally competitive, although noted that cost savings in Australian and New Zealand steelmaking "provided the basis to continue to make steel for now".

The acquisition from Fletcher Building of Pacific Steel is in part a strategy to focus on the New Zealand domestic market, where Bluescope sees a prolonged uplift in residential and non-residential construction.

Underlying ebit losses were also much lower in the second half of the financial year, at A$6.4 million, compared with A$47.1 million in the first half. Pacific Steel is expected to produce a NZ$40 million "annualised economic benefit" in the current financial year, being the full run rate forecast from the acquisition, having produced NZ$10 million in the second half of the year just ended.

In the year ahead, Bluescope expects a "slight improvement" over the second half of the last financial year, mainly from Pacific Steel and billet caster economics being fully realised, and higher steel pricing.

While the New Zealand unit's earnings were the group's weakest, Bluescope reported a strong surge in profitability as a variety of strategic acquisitions, cost-cutting initiatives and asset revaluations started flowing to the bottom line.

That was despite "continuing global overcapacity and production which drove regional commodity steel spreads in the six months to June 30 2016 to their lowest levels since Bluescope listed in 2002", managing director Paul O'Malley said.

Underlying ebit for the year rose by 89 percent to A$570.5 million while underlying net profit after tax at A$293.1 million was a 119 percent improvement on the previous financial year.

Total steel despatches from NZ and Pacific Steel fell to 697.1 million tonnes, from 782.6 million tonnes in the previous year, contributing to a fall in revenue to A$887.3 million from A$972.1 million the previous year. Domestic steel sales were relatively steady, but export sales fell apart from iron sands, where volumes rose sharply.

Key influences on the difference between the New Zealand units' performance in the latest year were a A$70.9 million fall in export prices and a A$27 million fall in domestic prices, offset by a A$106.8 million gain on exchange rate conversions and other costs. Export price losses reversed to a A$4.6 million gain in the second half of the year.

At Taharoa, there was an underlying ebit loss for the year of A$14.2 million. Some A$15.2 million of new capital expenditure was approved in the second half, but "further growth capex is under review and subject to the outcome of (the) sale process."

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