The weaker Australian dollar is starting to drive manufacturers back to Australia in a sign the economy is adjusting to a post-mining boom world, BlueScope Steel boss Paul O'Malley said.
Three and a half years ago, BlueScope became a symbol of the decline of Australian manufacturing when Mr O'Malley announced the closure of the No. 6 blast furnace at Port Kembla.
The move came with the loss of around 1,000 jobs, $500 million of one-off costs, and BlueScope's pullback from the export market. There were questions about the future of Australian steelmaking.
"We were facing serious macroeconomic headwinds, a two-speed economy, a declining manufacturing base and a global steel industry adding capacity," Mr O'Malley said on Monday.
"The mining boom has been great if you are a mining company, but it has been tough for east coast businesses with the high exchange rate. That is now changing. After a very strong trend toward offshoring [in manufacturing], we are starting to see some domestic onshoring for the first time in almost six years."
The commodity price boom was a key driver keeping the Australian dollar near or above parity with the US dollar.
With the collapse in coal and iron ore prices, the dollar is now around US78.3¢ .
Mr O'Malley said it is unlikely Australia would become an exporter of manufactured goods that have already moved to lower-cost countries, but he said the sector would grow again if the currency stays down.
"As the Aussie dollar gets into the 70s [US cents] we get competitive, and with a year or two of that under your belt, you start to get the confidence to invest.
"It is in its embryonic stages, but we are already seeing window manufacturers and door manufacturers saying: this is easier for us to do here [in Australia] again," he said.
Half-year profit jump
His comments come as BlueScope reported a 62 per cent jump in underlying half-year profit to $79.6 million and a 9 per cent rise in sales to $4.35 billion.
The stronger result was primarily driven by the Australian Steel Products business which reported underlying earnings before interest and tax of $64.7 million, up from $13.9 million.
Booming new home building in Australia is boosting demand for BlueScope's products, including its Colorbond range.
"Residential housing has been very, very strong. [Australian Steel Products] knocked it out of the park. Ths is our best result since the global financial crisis," Mr O'Malley said.
The fall in the Australian dollar against the US dollar, stronger steel margins, and increased sales volumes in the US business also bolstered the company.
Alongside the improved earnings, BlueScope declared a franked interim dividend of 3¢ per share, the company's first since it declared an interim dividend of 2¢ in February 2011.
Despite the positives, investors were not pleased by BlueScope's guidance for the second half of the year given the strong expectations built into the share price.
BlueScope shares fell 8.1 per cent to $5.10 on Monday.
Steel prices to crimp margins
The company said it expects underlying EBIT in the second half to be up 20 per cent on the $113.3 million underlying EBIT reported in the second half of 2013-14. But it also said that the recent dive in steel prices would crimp margins.
Since September, hot rolled coil has shed more than $US100 a tonne to around $US400 a tonne.
Stubborn excess steel capacity in China means extra steel keeps finding its way into other markets, further weighing on steel prices.
JP Morgan said in a flash note to clients that reinstatement of the dividend is positive but the second half earnings guidance "looks soft, given market expectations".
BlueScope's guidance implies full-year EBIT of $305.6 million, against JP Morgan analyst Keith Chau's pre-result forecast of $329 million.
While the fall in iron ore prices has taken some of the heat of the currency, it has been a mixed blessing for BlueScope.
The steel giant mines iron sand at Waikato North Head and Taharoa in New Zealand. Taharoa exports its product and the price is directly linked to the iron ore benchmark.
BlueScope's New Zealand division reported a 93 per cent drop in underlying EBIT to $2.6 million due to the drop in iron sand pricing in concert with iron ore.
Iron sand investment
The company has been investing to expand its iron sand capacity. The iron sand operation is EBIT and cash break-even at around $US60 a tonne iron ore prices.
Iron ore is currently fetching about $US63 a tonne. BlueScope expects its break-even price will fall to the "mid-to-high $US50s" once its third ship comes into service in the middle of the 2015-16 year.
Mr O'Malley said that the trend of large-scale commercial and industrial building business moving from China to the United States is continuing.
"North American business is booming. China is struggling a bit. We just see ongoing growth in the US."
He said that five years ago, energy-intensive businesses like tyre makers were building in China but those businesses are now moving to the US.