Our second biggest steel group, OneSteel Ltd, is expecting reasonably strong levels of activity in key sectors of the economy from next year, as a result of government stimulus measures.
But before then the company will face a battle overcoming the tough trading conditions here and internationally, volatile pricing and the impact of the rising value of the Australian dollar.
It was for those reasons that the company did not issue earnings guidance for the fiscal year at yesterday’s AGM.
"The uncertainty of key external factors such as rate of recovery in economy, forex rate and domestic and international prices means it is not appropriate to provide earnings guidance for FY10," CEO, Geoff Plummer told the meeting.
It was news the market took in its stride and the shares closed up 5 cents at $3.14 yesterday.
The company said it was looking for a second-half production boost (for the half year to June 2010) of about 100,000 tonnes compared to first-half guidance, as demand rose due to the improving local economy.
Mr Plummer told the AGM in Sydney that in the short term he expected prices to remain high but the company would face volatile conditions in its iron ore export and metal recycling businesses.
"We are expecting reasonably strong levels of activity in the residential, construction and mining segments to continue," Mr Plummer said.
He said that although domestic activity levels were weak, the company was encouraged by improvements in the economy because of the government stimulus initiatives.
He said the company was facing improved market conditions but trading environment remains difficult with price and margin pressures still evident.
But he said OneSteel was benefiting from its continuing cost cutting program, the synergy benefits form the Smorgon Steel takeover, a small but steady increase in demand and increased production.
He said production and operating levels ramped up in accordance with previous guidance with the Whyalla steelmake at run rate of approximately 1.1 million tonnes per annum; Sydney and Laverton electric arc furnaces expected to operate at 65% utilisation rate for the first half of the 2010 financial year, while the Waratah electric arc furnace steelmake will be approximately 120,000 for the December half year.
Internationally, Mr Plummer said that the unused steel making capacity overhang continues to impact steel prices and margins.
But he said OST is on "track to achieve target iron ore sales of 6 mtpa in the 2010 financial year".
The recycling business will be impacted by volatile prices, demand uncertainty and tight supply.
Added to that is the impact of the higher value of the Australian dollar.
World prices expected to remain high but volatility in the Iron Ore and Recycling businesses will hurt. But this will be offset by strong demand from China and steady recovery in (recycling) activity in other regions.
Since the 2009 year results in August, he said the value of the A$ has increased from 82c to 93c against the US$.
He said this rise had a "direct impact for OneSteel of: 1 cent increase in A$ against US$ = negative $6.5m EBIT pa, plus indirect impact on domestic prices".
Domestically, the steel market was "still weak" but the company was encouraged by prospect of improved activity from government stimulus initiatives, such as
The Building Education Revolution stimulus from early 2010 and the larger infrastructure stimulus from second half 2010.
Mr Plummer said the rate and timing of a return to more normal levels of domestic activity would be determined by rate of recovery in the local economy.
However the company was "expecting reasonably strong levels of activity in residential construction and mining segments".
These segments of the market however were "still impacted by GFC issues including access to credit".
And Onesteel said its second half steelmake for the June 30 period is "expected to increase approximately 100,000 tonnes compared to first half guidance – subject to continued market improvement and the timing of benefits from Government stimulus initiatives".
