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BlueScope Steel: Profit Downgrade on Lower Steel Prices

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BlueScope Steel Ltd
(BSL)

No-moat BlueScope Steel BSL has downgraded first-half fiscal 2024 EBIT guidance by about 12% to AUD 620 million-AUD 670 million. Earnings from North Star, about 25% of last year’s group EBIT, are set to halve. BlueScope expects steel-making spreads to fall by around USD 100 per metric ton. The average fiscal year-to-date steel price in the U.S. is down about 15% on fiscal 2023, and a spot of about USD 700 per metric ton is down a further 5% on this fiscal year’s average.

Despite softer steel prices and steel-making spreads, BlueScope maintains its outlook for the rest of the business. This includes Australia—about 30% of fiscal 2023 group EBIT—where lower benchmark steel prices are offset by lower raw materials costs and stronger prices for BlueScope branded product. We think this reflects the ongoing housing construction strength where activity is elevated, despite lower approvals and starts. Dwellings under construction in the June quarter 2023 of about 238,000 were down just 2.3% from the peak a year earlier but still 27% higher than the December 2019 quarter.

We lower our fiscal 2024 EBIT forecast by 15% to AUD 1.2 billion, and earnings by 15% to AUD 1.82 per share. Despite this, we maintain our AUD 16.50 per share fair value estimate. The reduction in near-term earnings is small and offset by the time value of money. We make no changes to our fiscal 2025 or midcycle earnings forecasts or assumptions. There may be a bit more downside to earnings in fiscal 2025 and 2026 if the economy falters, but these forecasts are close to our midcycle expectations. BlueScope shares are modestly overvalued, which we think reflects the abnormally strong steel-making spreads and earnings of the past three years, thanks to fiscal stimulus and supply constraints. Those tailwinds, and consequently market expectations for BlueScope’s earnings outlook, are abating. Should inflation persist, higher interest rates could become a meaningful headwind to economic activity and steel prices.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Mathew Hodge

Director of Equity Research, Australia
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Mathew Hodge is director of equity research, Australia and New Zealand, for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc.

Hodge joined Morningstar equity research via the acquisition of Aspect Huntley and was previously a director on the team from 2019. He has approximately 20 years of experience, primarily covering the metals and mining sector. In addition, Hodge has sat on Morningstar's economic moat committee since 2014. More recently, he led the refresh of our capital allocation methodology in 2020 and chairs the subsequently formed capital allocation committee. In 2001, Hodge joined Aspect Huntley, which was acquired by Morningstar in 2006.

Hodge studied mining engineering at the University of New South Wales and previously worked in mining, principally as a mining engineer in underground coal. He holds the Chartered Financial Analyst® designation.

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