BlueScope ventures out into the light

13 Aug 2012 – Stephen Bartholomeusz – Business Spectator

That near-50 per cent spike in the BlueScope Steel share price probably has as much to do with relief as it was to the specifics of the announcement that the group will joint venture its ASEAN and North American coated products businesses with Nippon Steel.

BlueScope imploded as the global financial crisis developed, with over-capacity in its industry, low prices, higher raw material costs, the soaring Australian dollar, a weak domestic economy and dangerously high debt levels undermining it and leaving it drowning in a sea of red ink.

Even after last year’s desperate $600 million equity raising there were continuing doubts about its survival as it tried to effect an urgent and radical restructuring of its business that included the shutting down of its export businesses.

Those doubts would, had the joint venture not been announced, been amplified by the announcement of more write-downs today which will lead to the group reporting a $1 billion loss for the 2011-12 financial year, even though there are some clear signs of improvement at an operating level.

The $310 million of new write-downs within the Australian business relate, BlueScope’s directors said, to a slower than expected recovery in domestic demand and the use of higher discount rates against future expected cash flows because of the increased volatility in markets.

The joint venture announcement caused BlueScope’s shares to soar by nearly 50 per cent, adding $450 million or so the group’s market capitalisation ahead of the announcement of $871 million.

BlueScope and Nippon Steel, which is merging with Sumitomo Metals to create the world’s second-largest steelmaker, will create a new entity, equally owned, with an enterprise value of $1.36 billion. Critically, in return for Nippon Steel’s acquisition of its share of the joint venture, BlueScope will receive net proceeds of $US540 million.

BlueScope has done a remarkable job of reducing its debt, which looked likely to hit $1.6 billion last year had it not been for the capital raising. Net debt is now down to $384 million thanks to an intense focus on reducing working capital, although the company said that adjusted for the favourable timing of year-end cash flows, a net debt balance of about $580 million would be a more appropriate figure.

In any event, the cash from the creation of the joint venture will effectively wipe out BlueScope’s remaining net debt and with the group saying it expected it expects its domestic coated and industrial products business to deliver positive earnings before interest, tax, depreciation and amortisation in 2012-13 it may finally be close to real financial stability.

While the broader implications of the proceeds from the joint venture for BlueScope’s future are perhaps the most significant aspect of the announcement, it also says several positive things about the business BlueScope has built in the region and in the US and its future.

The price tag obviously validates the worth of the business but introducing Nippon Steel as a partner should transform it. Nippon Steel has customer relationships within the region that BlueScope couldn’t replicate on its own. It also has its own technologies and products.

It is instructive that the joint venture believes it can add incremental EBITDA of as much as $US75 million by 2017 to the growth profile of the existing business, which generates about $A115 million of EBITDA.

BlueScope’s Paul O’Malley and his team have been through four years of continuous and difficult and delicate reorganisation as they undertook one of the bigger industrial restructurings ever contemplated in this market, one complicated by the group’s fragile financial foundations.

Once the deal with Nippon Steel has been completed, after four years of teetering on a tightrope, BlueScope ought finally to have been stabilised.

Japan posts record trade deficit in H1

26 Jul 2012 – AAP –

Japan has posted a record first-half trade deficit of $US37.3 billion ($A36.59 billion) as energy costs soared and exports to key markets slumped, while analysts warned of further pain for the next six months.

As the country struggles to recover from last year’s quake-tsunami and nuclear crisis, costs have shot up while income has plummeted owing to the rolling debt crisis in Europe and a stuttering recovery in the United States and a strong yen.

The 2.9 trillion yen deficit stemmed largely from energy costs, with the resource-poor nation seeing a nearly 50 per cent jump in purchases of liquefied natural gas and a 16 per cent increase in crude oil shipments, the data showed.

Japan has struggled to meet its energy needs and has turned to pricey fossil fuel alternatives after its nuclear reactors were switched off following the crisis at the Fukushima Daiichi plant caused by the March 11 quake-tsunami.

“Japan’s trade balance continues to show a trend of weak exports and extreme sensitivity to import prices, such as those of crude oil,” RBS Securities chief Japan economist Junko Nishioka said on Wednesday.

“The crisis in Europe is posing a growing risk to Japan’s economic recovery scenario.”

In the first half, Japan’s imports rose 7.4 per cent on-year, while exports grew just 1.5 per cent.

The country’s trade surplus with the European Union during the first half was at a record low, according to the ministry, as vehicles and semiconductor shipments dived.

Europe is a major market for a wide range of Japanese products and Tokyo has repeatedly warned that the continent’s economic woes would directly impact its recovery prospects.

May saw a bigger-than-expected trade deficit of about 907 billion yen, Japan’s first monthly trade deficit with the European Union since records began in 1979.

Adding to the downward pressure on exports is the strengthening yen – which is at a 12-year high against the euro – as investors flock to the safe haven unit owing to uncertainty over the global outlook. Last year it touched a record high against the dollar.

The rise has prompted Tokyo to repeat warnings that the currency was overvalued, with officials in recent days hinting that they may intervene again in foreign exchange markets.

“While exports to Europe and China were already weak, we now see that export (growth) to the US may also be declining,” Hideki Matsumura, economist at Japan Research Institute, told Dow Jones Newswires.

“I believe Japan will post another annual trade deficit. We’re already in the red looking at the last six months, and it’s too late to regain our losses.”

Data for June alone, however, saw Japan post a better-than-expected trade surplus of 61.7 billion yen, instead of the market forecast for a 135 billion yen deficit, the official data showed.

But while it was the first surplus in four months, with the exports of vehicles and auto parts rising, some analysts said even those figures were less than encouraging for the world’s third-largest economy.

Goldman urges investors to embrace growth markets

Staff reporter – Buz Spectator

Eight “growth economies” will account for well over half of global economic growth in the next decade and Australian investors should increase their direct exposure to these markets, according to Goldman Sachs Asset Management (GSAM).

In an interview with Business Spectator’s KGB, GSAM’s senior portfolio strategist Katie Koch said the BRICs countries (Brazil, Russia, India and China) along with Mexico, Indonesia, South Korea and Turkey would contribute 60 per cent of global growth in the next ten years.

Ms Koch said that she thought it would be prudent for investors to have around 25 per cent of global equity exposure to growth and emerging markets in their investment portfolios.

“We certainly aren’t suggesting that investors should sell all their developed exposure,” she said. “That’s not the case. We think they need to have a balance of both.”

Ms Koch said she thought that demand for mineral commodities, such as the iron ore exports Australia’s economy so heavily depends upon, would wane somewhat as those countries shift their focusses from building infrastructure to the domestic consumer.

“When you think about the incremental growth drivers going forward, it is going to be more about the consumer than it’s going to be about building stuff on the ground of those countries,” she said.

However, Ms Koch said that she did not believe there would be a substantial fall in the commodity prices that are so crucial to the margins of many resources companies because they would adjust supply accordingly.

For investors, Ms Koch said that while there she is not negative about the Australian stock market, portfolio diversity will be key to enhancing both the growth prospects and safety of their portfolios.

“I would say that in this environment when you look at a portfolio overall, diversification is your friend because you want to be diversified into countries with different and potentially higher growth patterns,” she said.

“When I think about safety I think the primary thing to do there is to diversify one’s portfolio… when we take a step back and look at the portfolio overall, I think that can be a very return enhancing but also risk adjusted decision.

“Getting things like exposure to post secondary education in Brazil, which you can do on a listed exchange, or the story of beer being drunk in Africa in greater quantity, or pizza delivery in India.

“All of these big kinds of themes that have very little correlation to what’s happening on the ground in Australia would be great things for clients to have exposure to in their portfolios.”

Japan predicts 2.2 per cent growth

13 July 2012 – AAP –

The Bank of Japan (BoJ) says it expects the country’s economy to expand by 2.2 per cent in the fiscal year to the end of March 2013 and has held off ushering in fresh stimulus.

Today’s forecast from the BoJ, which kept interest rates and a Y70 trillion ($A858 billion) asset-purchase program unchanged after a two-day policy meeting, was slightly lower than its April outlook of 2.3 per cent growth.

The central bank kept its 1.7 per cent growth forecast for the next fiscal year unchanged, but warned that uncertainty in overseas markets, including Europe and the United States, could be a drag on Japan’s economic recovery.

“Japan’s economic activity has started picking up moderately as domestic demand remains firm, mainly supported by reconstruction-related demand” after last year’s quake-tsunami disaster, it said in a statement.

“(But) there remains a high degree of uncertainty about the global economy, including the prospects for the European debt problem …(and) the momentum toward a recovery for the US economy”.

The bank’s decision not to usher in further stimulus may surprise some dealers who had expected new policy measures after interest rate cuts last week by the European Central Bank and China’s central bank.

Brazil yesterday cut its rate to a record low, while today South Korea’s central bank unexpectedly cut its key interest rate for the first time in more than three years.