Steel Glowing Hotter

An increased profit forecast at a newly spun-off Australian steelmaker is causing some investment advisors to take notice of the steel industry.

Industry analysts and executives, though, seem divided over whether the profits are signs of long-term steel industry health or short-term gains caused by a temporary price hike.

Executives from Australia’s BHP Steel—which was spun off from parent BHP Billiton earlier this year—raised their profit forecasts by 50 percent for fiscal year 2003.

“We have been very pleased to see the strength in steel prices around the world,” BHP CEO Kirby Adams told the Australian Broadcasting Corp. “That’s been generally driven by supply restraint that the global steel industry has operated under for the past six to nine months.”

Adams has predicted a 2003 net profit of $400 million (Australian) this year, boosted up from an initial forecast of $254 million.

One Australian industry observer, Robert Gottliebsen of The Australian newspaper, believes such announcements may cause investors to take notice of steel companies. Shares of many steelmaking companies, he notes, are trading at price to earnings ratios of from eight to 10.

A key may be continued Chinese demand for steel. That nation’s demand for steel is commonly cited as a factor propping up higher prices. “China’s really holding the key in terms of global economic growth, and the consumption of steel in China continues to grow at a very fast pace,” BHP’s Adams told the Australian Broadcasting Corp.

Gottliebsen notes that the U.S. protective measures have helped keep prices higher in North America, leading to better profits for U.S.-bases steelmakers, as well as at BHP’s American mill in Delta, Ohio.

Analysts seem to agree that the long-term key will be whether the industry has reduced capacity and phased out aging facilities. “Around the world, steelmakers are stripping out high-cost capacity and rationalizing operations,” writes Gottliebsen. “Nowhere is this more evident than in Japan and Europe, where the major steelmakers are coordinating their operations to achieve enormous operational gains. The U.S. is lagging, but there are moves being contemplated.