Posted on 08/19/2019 6:26:07 PM PDT by Aussiebabe
US energy prices just one-third of those in Australia, along with a robust manufacturing sector stoked by President Donald Trump's policies, have prompted a $1 billion expansion of an Ohio steel mill by BlueScope.
BlueScope chief executive Mr Vassella said the $1 billion expansion of the North Star mill, to be fully up and running by 2023, was the largest capital investment the steelmaker would likely ever make, and would deliver annual returns of 15 per cent-plus.
He said the company had intimate knowledge of the mill because it helped build it in the first place in the mid-1990s in a joint venture with North American group Cargill, and had moved to full ownership in 2015.
Mr Vassella lamented the state of Australian manufacturing as the sector battled high energy prices and said one of the main drivers of the North Star expansion, which will increase capacity by 40 per cent, was that energy costs in the United States were substantially lower.
"That's a tragedy quite frankly for Australian manufacturing,'' Mr Vassella said.
BlueScope also operates the Port Kembla steelworks in New South Wales, which underwent major cost-cutting and restructuring in 2015. Mr Vassella said he worried a lot about manufacturers in Australia who were BlueScope's customers and were facing ''demand destruction'' because their energy costs were too high.
RELATED QUOTES BSLBluescope Steel $11.76 5.19%
1 year 1 day 15.47 at 1/10/18 Aug 18 Dec 18 Apr 19 Aug 19 11.00 13.00 15.00 17.00 Updated: Aug 20, 2019 — 11.00am. Data is 20 mins delayed. View BSL related articles Mr Vassella is also making a bet on the economic policies of Mr Trump, which had been a positive for domestic US industry. North Star's main customers are in the automotive and construction industries and 95 per cent of them are within a 350km radius of the North Star mill.
"The mood in the US is pretty good,'' Mr Vassella said.
He emphasised there had been a year of detailed planning and number-crunching prior to the board giving the go-ahead for the expansion.
"We're not frivolous with this sort of money,'' Mr Vassella said.
"This is a 30-year investment. What I'd say about North Star is that we built this asset. We know the business really well. I think it allows us to feel very confident about the return profile.''
Mr Vassella also promised shareholders that BlueScope wouldn't end up as one of the big Australian companies which make a mess of major investments overseas.
Wesfarmers squandered billions on a flawed expansion into the United Kingdom hardware market in a big bet, rather than the steady incremental growth which BlueScope had been pursuing.
BlueScope shares slipped 8.4 per cent on Monday to $11.18 as the company warned that in the first half of 2019-20 underlying profits would be about 45 per cent lower than in the June half just completed, because of weaker commodity steel spreads, including at North Star.
Mr Vassella said he wasn't perturbed by the one-day share price fall, which he suspected was because of the softer outlook and the hefty capital spend.
"We can only keep doing what we're doing,'' he said, emphasising that North Star was a long-term investment that would ultimately deliver a step-up in earnings of between $100 million to $150 million in extra profits annually.
Moody's vice-president Matthew Moore said lower global steel prices and higher raw material costs would cut BlueScope's earnings for 2019-20 but the company had a strong balance sheet providing a ''significant buffer'' in weaker conditions.
BlueScope became 100 per cent owner of the North Star steel mill in Delta Ohio in 2015. RELATED BlueScope eyes $1b US steel plant expansion He said while it was a large capital spend at North Star, the business would ultimately benefit from the higher throughput when it was fully up and running by 2023.
Australian Workers Union national secretary Daniel Walton said the federal government should be enforcing rules around local use of Australian steel in an infrastructure boom. "The federal government needs to grow a backbone and put in enforceable local procurement rules with real teeth,'' Mr Walton said.
Mr Walton said the US government had given the US manufacturing sector confidence through a robust industry policy and low energy prices.
Mr Vassella said North Star's production was quarantined from the US-China trade wars because it supplied US customers in automotive and construction. "It's very well insulated from that point of view,'' Mr Vassella said.
Just bought a tank of gas at 2.36 in Georgia. Roads are much better too.
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