More Clouds Gather over Steel Manufacturing Future 1

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Monday, July 13th, 2015
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Further clouds are gathering over the future of steel manufacturing in Australia as calls for BlueScope to close the nation’s biggest steelworks plant continue to grow.

In a new development, Goldman Sachs has become the latest investment bank to call for significant cost cutting at a minimum after a list of banks including Morgan Stanley, UBS and Credit Suisse called for the plant to be closed.

While not specifically calling for facility closure, Goldman Sachs analyst Owen Birrell says a ‘major restructuring decision’ will need to be made in the coming months as the effective shutdown of the automotive sector in 2017 looms closer and is expected to impact significantly upon volumes.

“We believe a major restructuring decision on Port Kembla will need to be made in the coming 12 months,” Birrell said.

He added that Goldman “cannot be definitive regarding the extent of the potential restructuring” but that the bank was of the view that the resulting impact will be “ultimately positive for BSL as the business adapts to the structural changes seen across the industry.”

Throughout Australia, serious questions surround the medium term viability of domestic steel production despite the short-term effects of stronger building markets and the reduced value of the Australian dollar. Reasons for concern over the industry’s viability include the looming shut down of the automotive manufacturing industry and falling world prices as Chinese steel mills continue to dump excess product onto world markets. The latter phenomenon is expected to be further accentuated following the signing of the detailed China/Australia FTA and a slowdown in rates of consumption in China’s domestic market.

This has implications for the construction sector, which already faces challenges surrounding imported product which does not comply with Australian standards, yet could be forced into a situation of further reliance on offshore supplies of steel from China and elsewhere.

Already, 95 per cent of steel industry respondents to an Australian Industry Group survey in 2013 said non-compliant product (NCP) was present within the domestic market, with as many as almost half putting the prevalence of NCPs within the market at as high as between 11 and 50 per cent.

A growing body of analysts and investors are calling for BlueScope to close its Port Kembla plant, which has annual capacity of around 2.6 million tonnes of crude and which manufactures hot rolled coil and plate products. These analysts suggest Bluescope instead imports raw steel to focus on its profitable Colourbond range.

According to a News Ltd report, Morgan Stanley analyst James Rutledge expects an announcement ‘in the near term’ given the ‘upcoming catalyst’ surrounding enterprise bargaining negotiations in July.

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  1. Grant Spork

    Australia should contract Port Kembla and our other steel producers to create the 100,000 or so km of rail for high speed rail, freight rail, for reinforcing for drought proofing, highway building whilst our coal and iron ore are at record low prices. A ten year contract just above production costs would save the junior miners of coal and iron, and save our steel producers. Australias production of steel was used to industrialise our industry, start an automobile infrastructure, and build capacity. Such a strategic investment is required again. BHP and |RIO should not be included in this investment. Australia needs a vision for infrastructure development which includes using our steel and coal capacity to fast track our major infrastructure. Nationalise the coal and Iron production for a decade if required and return them to private ownership when commodities markets have recovered.