BlueScope's blue sky

BlueScope is caught in an operating squeeze, but its forecast of better future earnings has caught many analysts by surprise. Australia's improved terms of trade have caused BlueScope shares to do better than the index in recent times and we saw another rise today. The BlueScope results are also an indicator of higher global inflation because steel is a vital cost ingredient in so many products.

BlueScope, with its unique global footprint, is also possibly vulnerable to global takeover as part of the consolidation of the world steel sector.

BlueScope's operating squeeze will come from higher iron ore and coal prices after July 1. To offset that squeeze, BlueScope must lift its steel and coated product prices and improve its efficiencies. The latest half yearly underlying earnings of $305 million came in roughly in line with analyst estimates. The group was heading towards earnings of around 82 to 84 cents a share for the full year but the higher profit forecast is causing the numbers to be recast.

For some years one of the greatest threats facing BlueScope has been that China would begin a massive steel export program which would hit BlueScopes's Australian and US steel making operations. BlueScope now expects a "significant" fall in Chinese steel exports in calendar 2008. A lot of the older Chinese steel plants have become uneconomic. At the same time, the big global steel companies are coming together so global steel prices are rising.

Just whether the higher steel price levels hold in the US as the economy slides remains to be seen.

The former CEO of BlueScope, Kirby Adams, was a visionary who spent $850 million in Asia setting up an amazing network of steel coating operations and other facilities. Adams invested $2.8 billion in all, including $700 million on the acquisition of Smorgon Steel, $277 million in the US and the remainder in better facilities in Australia. New CEO Paul O'Malley has written $225 million from the Asian investments, or just under a quarter of their value. The China write-off represents over 60 per cent of the $307 million spent in the country.

But BlueScope is going to stay around in China for the longer term, which is also good news.

The fact that BlueScope believes that it can lift steel prices to offset the raw material cost rises must be a huge worry to the Reserve Bank and other central banks concerned about inflation. Once China starts shutting plants and thinking about economic production it means that the cost of Chinese goods will start to rise.