OneSteel Ltd has reported a share rise in first half profit and warns that the worsening global economic crisis will dampen demand for steel over the rest of the year.
It was a result like BHP Billiton’s a solid first six months and a much more subdued outlook.
A measure of what the company is expecting is a 2% trim in the interim dividend to 6 cents a share (that’s a drop of 25%).
In its outlook for the second half, OneSteel hinted at a sharp profit drop, possibly by as much as a third, based on current forecasts. Hence the caution of the dividend cut.
"The Board believes reducing the dividend 2 cents appropriately reflects the interests of shareholders by balancing the need to consider balance sheet and earnings outcomes whilst maintaining its options when considering dividend at the end of the full financial year," the company told the ASX yesterday.
OneSteel has slashed its steel production forecast by a further 150,000 tonnes in an attempt to lower its excess inventory but has maintained its guidance for 5 million tonnes of iron ore sales this year.
The South Australian steelmaker, which cut 800 jobs and 300,000 tonnes of production at its two electric arc furnaces from November onwards, says the latest output cuts will lead to more job losses.
Its blast furnace at Whyalla is already running at the minimum allowable rate as it works to reduce a build-up of inventory that occurred as demand collapsed in the fourth quarter.
The overstocked problem has been exacerbated by the decision to order imports to help meet the strong demand in the middle of last year, since the imports were not delivered until the global financial crisis gained steam.
The scrap business recorded a $30 million inventory loss due to the weakening Australian dollar, reduced volumes and the renegotiation of some sales.
OneSteel’s net profit for the December half year rose to $228.3 million, from $63.6 million in the previous corresponding period.
Operating net profit for the half year was $215 million, up 131%, excluding restructuring costs, impairment charges and the integrating of the Smorgon Steel business it bought in August 2007 and Australian Tube Mills.
"We saw a strong start to the first half of the year but it became increasingly apparent towards the end of the half that the impact of the global deterioration in financial and economic conditions on Australian demand was worse than anticipated," chief executive Geoff Plummer said in a statement.
"Both our manufacturing and distribution segments recorded strong results for the half, but the impact of the global financial crisis was felt hard in Australia particularly in November and December and our sales for these months were much weaker than anticipated."
The said that weakening global conditions had the greatest impact on its Materials segment in the half with its iron ore and recycling businesses most exposed to international markets.
“Our iron ore business successfully achieved its volume target for the half despite a significant slowdown in Chinese steel production and demand for iron ore in the second quarter.
“Revenue was affected by much lower prices for spot iron ore sales compared to the record highs at the end of the 2008 financial year,” Mr Plummer said in the statement.
Mr Plummer said the company’s iron ore business had achieved its target for the half year, despite a slowdown in steel production in China and a general decline in demand for the commodity.
It expects the global crisis will continue to contribute to weak world steel markets in the months ahead.
"We expect global and regional steel markets to continue to be weak with prices and demand suppressed until signs of an international recovery are clearer," Mr Plummer said.
"However, in our more internationally exposed materials segment, there are encouraging signs that the market bottom has been passed, with prices for spot iron ore and scrap having moved off their recent lows.
"In our domestic markets, tight availability of credit and reduced confidence are key contributors to the lower activity levels."
“Towards the end of the half-year we saw inventory levels rise due to weaker than expected sales. This was exacerbated by the arrival of imported products we had ordered earlier at a time of very strong demand to help meet our customer service objectives”, Mr Plummer said.
“We have taken substantial steps early to wind back production and bring inventory in line with demand.
“These steps and other ‘back to basics’ initiatives are expected to have flow on benefits for the company’s cash, working capital and debt positions in the second half,” Mr Plummer said.
"In relation to production, the company advised in late January that it was extending adjustments to operating levels, particularly steel-making production to bring operating and inventory levels in line with demand as early as possible in the half.
"Adjustments were made at all major facilities, but most notably at Whyalla and the major electric arc furnaces at Laverton and Sydney.
“Current plans would see EAF steel make for March to June reduced by approximately 150 thousand tonnes, in addition to the 300 thousand tonnes announced in late January."
OneSteel currently expects its full year net operating profit to be higher, and between $325 million and $375 million.
That would compare to a range in analysts earnings estimates of between $259 million and $448 million.
Its 2007-08 net operating profit was $315 million.
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