The contrast between the business strategies of the noisy, very political BlueScope and its smaller, quieter and better-run rival, OneSteel (the other half of the old BHP Steel), are illuminating.
Both companies were spun off when BHP Steel was broken up in 2000: BlueScope Steel stuck to its modern, export-oriented steel plant at Port Kembla in NSW and smaller processing operations here and in Asia and other countries. OneSteel all but avoided export markets, preferring to stick to the domestic steel products markets based around its Whyalla blast furnace and two electric arc furnaces.
But from 2004 the companies parted ways, BlueScope stuck to basic steel making and processing, while OneSteel fixed on a strategy that will see it having spent well over $2 billion from 2004 till the end of next year re-jigging its basic processes and plunging into the export markets for iron ore as well as high-grade steel products.
While the dollar was cheap, both old approaches were acceptable strategies. But the 2004 move by OneSteel to change its steel-making process and enter the iron ore export sector was a significant move and risky, coming before the first iron ore boom from 2006-07 onwards, OneSteel could see the financial futility of using high-quality iron ore in Australia when it could get more value for it from export markets.
At a then cost of $250 million (that later grew and grew), OneSteel spent four years switching its iron ore product feed at Whyalla from high-grade hematite to upgraded magnetite pellets and exporting the hematite into world markets. The move wasn’t without criticism from the investment classes who questioned the strategy, the cost and said the company should be giving money back to shareholders.
But OneSteel kept on course and although plans to export up to 9 million tonnes of hematite a year fell short (they are running at just over 6 million tonnes of high- and medium-grade ores), the company caught the second iron ore boom from 2008-09 onwards.
As a result, in the past two years OneSteel has made more money out of iron ore exports than it has from any other part of its business, but that is what the expansion was designed to do in times of weak local demand, such as now. It is the big point of difference with BlueScope, which has had no control over its raw materials and was caught by the surge in iron ore and coking coal costs. Looking back it should have geared up and both a coal mine or two to replicate the OneSteel strategy.
So it is instructive that as BlueScope was revealing 1000 job losses and a total financial loss for the June 30 year of $1.05 billion this morning, OneSteel was announcing a $346 million deal to double the size of its iron ore export business to 12 million tonnes by the end of 2012.
That expansion will cost OneSteel an extra $200 million, on top of the purchase price of the new ore reserves and takes the amount to be spent on this strategy to well over $1 billion.
In 2007, OneSteel and BlueScope spent more than $1 billion buying and breaking up the rival steelmaker, Smorgon Steel. OneSteel got an electric arc furnace in Melbourne to add to its existing furnace in Sydney, BlueScope got its hands on the distribution assets of Smorgon.
But these moves are not all the company has done to lessen its dependence on a blast furnace and basic steel products that can be sourced from anywhere.
It spent more than $930 million last November buying the Moly-Cop and AltaSteel businesses from Anglo American to expand deeper into what’s called “grinding media and steel products businesses, focused on the high-growth mining consumables sector”.
“Grinding media are used in the process of extracting minerals from ore, particularly in the fast growing copper and gold mining industries,” OneSteel said last year and the purchases were added to its existing business based in Australia, the United States and Indonesia.
Sounds boring, but it isn’t: because of the still-growing demand from China, India, Japan, and other faster-growing economies in Asia, the mining industry is growing flat out. Gold prices are booming, copper prices have been high and China has become the biggest buyer and consumer of the latter (and the biggest producer of the former).
Boring, grinding media are steel products upgraded to more expensive levels and take OneSteel further up the value added chain, as manufacturing companies are supposed to do when confronted with structural change, as the steel industry is facing. This new business is now the second most profitable in OneSteel.
Last week OneSteel reported its 2010-11 results: It reported underlying earnings before interest and tax (EBIT) of $428 million, up 3% on EBIT for the prior year of $414 million. (BlueScope lost $258 million on the same business, according to today’s profit statement).
The iron ore export business provided the bulk of that solid profit for OneSteel, with the company reporting “EBIT for the iron ore segment for the year was up 57% to $524 million, due mainly to higher US dollar prices and lower freight rates, partly offset by higher operating costs and the impact of the stronger Australian dollar”.
That was on a 21% rise in revenue to iron ore revenues $948 million for the year, which came despite the stronger dollar and flat demand that saw a total of 6 million tonnes of ore exported. The company made losses in its steel manufacturing business ($185 million) and small EBITs in its distribution, recycling operations and a $65 million positive contribution from its mining consumables business.
OneSteel got a lot of publicity last week for revealing that it was planning job cuts and had already lost 1600 jobs since the GFC started three years ago. Some media reports claimed it was looking at closing its Whyalla blast furnace. Those reports missed an important comment from CEO Geoff Plummer.
He told a conference call last Monday that the company’s internal review was focused on stemming cash losses from the business, and closing the blast furnace at Whyalla was not likely.
“The costs to close Whyalla would be very significant. You would only close Whyalla if you were permanently exiting a lot of the business,” he said.
But most media reports missed the most important of all the company’s statements in its profit announcement last week.
In announcing a 4c unfranked final dividend to shareholders (10c for the year, down from 11c a share in 2009-10), directors made this comment about the dividend: “We currently anticipate franking will recommence in the 2012 financial year.”
Company boards thinking of closing a big, costly asset such as the Whyalla blast furnace, or worrying about further trading losses, do not tell shareholders the company could be earning enough profits to pay tax and generate franking credits in 2012, which is a rather roundabout way of showing confidence in the outlook.
BlueScope’s outlook didn’t contain anything as optimistic.
Again OneSteel, warts and all, is a very different beast to the squealing, complaining BlueScope, its management and board who continue to do serve their shareholders and employees badly by inept business strategies.
OneSteel has tried to move up the value-adding chain in response to changing markets and market conditions and the structural change now being wrought by the higher dollar. BlueScope has preferred to play the political rent-seeking approach.
It’s why OneSteel has a future and BlueScope’s is still very much up in the air.