Another whiff of confidence from investors about a sector that has been on the nose in the past year or so – steel – specifically the shares of our Number 2 steelmaker, Arrium (ARI) (the old OneSteel).
The company’s shares have more than doubled from mid year to a close of $1.64 yesterday, when they added a solid 7.9%, or 12c in a market that was lower all day.
(Incidentally, the shares of the Number 1 steel group, BlueScope (BSL), haven’t had the same performance – up from just under $4.40 mid year to as high as $5.50 and around $5.05 yesterday).
Driving Arrium’s share rise has been the continuing strength of the iron ore market, especially in China – it’s also been behind the growth and strength in Fortescue (FMG) shares, as well as those in BHP Billiton (BHP) and Rio Tinto (RIO). Arrium would be our 4th biggest iron ore exporter at the moment.
Iron ore prices are currently above $US130 a tonne, which provides great support for the shares, more so than the sort of support the company could expect from its weak steel and mining supplies businesses.
And, yesterday Arrium warned the market that trading conditions remain tough for its steel business, the major part of its operations, not so good for the mining supplies business, while the talk about iron ore was of finding new markets and expansion, which must have cheered investors.
ARI YTD – Arrium Up On Iron Ore Prospects, Not Steel
The company’s AGM was told that trading conditions will continue to be impacted by weak demand and the impact of the high value of the Australian dollar, even though that has come down in recent months.
And the company’s mining supplies business (which supplies grinding and other materials to various parts of the industry) continues to be hit by weak demand, destocking and strict cost controls from nervous end users.
Arrium said demand for grinding products remains strong, but the destocking had hit demand for mining (steel) rope and rail wheels.
Looking at the current December half year, Arrium said domestic and international steel markets remain ‘‘generally weak’’ with earnings of the division, as measured by earnings before interest, tax, depreciation and amortisation, steady with the second half of the 2012-13 financial year.
Iron ore though remains the one bit of good news. December half sales are planned at 6 million tonnes, with the full year sales forecast at 12 million tonnes.
With prices around $US130 a tonne (give or take a few dollars for quality differences and extra freight costs from South Australia) compared to the Pilbara mines, Arrium could be looking at gross profits of $70 – $90 a tonne.
Asset sales will generate $200-250 million for the full year over the year to next June 30. In the year to June, Arrium posted a net loss of $695 million following asset write-downs and restructuring cost of $961 million.
The AGM was told it was too hard to give earnings guidance for the year at the moment because of the question of the value of the dollar, iron ore prices, demand for steel and the health of the domestic and international economies.
"In line with our normal practice, we are not providing quantitative guidance for the group at this time due to the uncertainty around key drivers such as iron ore prices, the exchange rate and the rate of growth in the international and domestic economy," chairman Peter Smedley told the AGM.
"However, we do expect underlying net profit after tax for the second half to benefit from delivering the expanded rate of iron ore sales, from continued growth in Mining Consumables, increased sales volumes in Steel, as well as the full impact of the Steel cost reductions."
It was probably those comments, and the continuing solid outlook for iron ore prices, that helped Arrium shares outperform the wider market on the day.
Mr Smedley announced he would be stepping down next year and that fellow director Colin Galbraith would replace him.
