Chastened BlueScope Steel Reports $1 Billion Profit
Events during August shone a light upon a wise business rule of thumb. First do your cost-benefit analysis, then make your decisions. Sometimes those decisions have a sound economic base, but awkward to live with, and sometimes they have harsh consequences. The record $57.5 million fine imposed upon BlueScope Steel by the Federal Court last week is a case in point. The Australian Competition and Consumer Commission (ACCC) had initiated civil proceedings against BlueScope, alleging the steelmaker engaged in “cartel conduct” over the supply of flat steel products during 2013–14. In December 2022, the court ruled in favour of the ACCC, finding BlueScope and one of its former executives, Jason Ellis, had attempted to induce eight steel distributors in Australia and an overseas manufacturer, Yieh Phui, to enter agreements to fix and/or raise the level of pricing for flat steel products.
Along with the penalty order against BlueScope, Justice Michael O’Bryan also imposed a penalty on Mr Ellis amounting to $575,000. “The conduct in the present case warrants a significant penalty to deter repetition by Mr Ellis and by others who may otherwise calculate that
the rewards from such conduct outweigh the risks of detection,” said Justice O’Bryan. For its part, the ACCC stated: “Cartel conduct is illegal because it cheats Australians by increasing the prices consumers and business customers have to pay and by restricting healthy economic growth.” BlueScope and Mr Ellis were also ordered to pay the ACCC’s costs. BlueScope has 28 days to appeal. The wisdom and legality of the business decisions taken at the time by the parties involved is once again the chatter within the steel industry.
Only days before the penalty order BlueScope reported a net profit after tax of $1.01 billion for FY2023 in which underlying EBIT was $1.61 billion. Although the after-tax profit was down $1.8 billion on the record achieved in FY2022, Managing Director and CEO, Mark Vassella said: “The balance sheet remains strong with $703 million net cash, positioning the Group well in a period of increased capital spending on projects that underpin sustainable earnings and growth.” And here is where an obviously awkward cost-benefit decision comes into play. In August, BlueScope’s board approved the $1.15 billion reline of its dormant, coal-fired number six blast furnace at Port Kembla – at a time when the company is actively pursuing green steel initiatives. Unfortunately, steel´s green future hasn´t arrived in time.
“We see no alternative between now and late 2026 when we need number six ready to blow in and start producing iron for us,” Mr Vassella said. “There are no technologies which are commercially viable to replace the blast furnace so, we are building a bridge to the future,” he added. The reline project was initially estimated to cost between $700 million and $1 billion. But now the “bridge” has a price tag of $1.15 billion – making it the most expensive and perhaps least-wanted infrastructure project in BlueScope´s history. Mr Vassella said the new blast furnace would have a “campaign life” of 20 years; however, this did not mean BlueScope was committed to using coal to make steel for that entire period.
The Australian steel market continues at speed with large infrastructure projects under-pinning demand and keeping the main steel producers content enough – even if prices are down many notches on the Covid-19 years. That said, the troika of higher interest rates and costs, plus lower disposable income are subduing the market to a degree: evidence of which is in the growing number of builders and developers going bust. In an initiative that some analysts regard as fanciful, the Albanese government has committed to building 1.2 million new homes in the five years from mid-2024. (Fanciful, because we´ve never built at anything like that rate: and the government will actually only build 30,000 of those homes, leaving the private sector to build the rest – if it wants to). Nevertheless, plenty of building work would mean solid demand for steel, which is positive. More immediately, if steel demand internationally continues to fall away, then prices could come down. However, typically, a fall in demand for our commodities impacts the strength of our dollar meaning import prices may not fall.
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