OneSteel’s integrated model
More than a steel manufacturer, OneSteel is a uniquely integrated portfolio of complementary businesses, including the supply of raw materials to its own and customer steel mills operated in Australia and overseas, and the manufacture and distribution of a broad range of steel long products and the recycling of ferrous and non–ferrous scrap metal.
OneSteel manufactures and distributes a wide range of products, including structural rail, rod, bar, wire and pipe and tube products. OneSteel also distributes sheet and coil, piping systems, plate and aluminium products.
OneSteel’s vertically integrated business model provides a number of advantages, including representation across the full value chain from resources and recycling to steel production, value– add rolling mills and distribution.
OneSteel is a miner and seller of iron ore with well–established customer relationships. OneSteel is self sufficient in iron ore and able to fulfil all internal ore requirements for steel production in addition to delivering the current run rate of 6 million tonnes in iron ore sales for external customers. OneSteel also has proven magnetite iron ore reserves until at least 2027.
OneSteel is also a major national player in the metals recycling sector with operations in the United States and Asia. OneSteel’s recycling segment also provides a partial offset against price volatility in the scrap metal market.
OneSteel is the market leader in manufacturing Australian long steel products. The combination of OneSteel’s blast furnace steel operation and three electric arc furnace steelmaking operations enable flexible production, and that was tested in the 2009 financial year when management wound down operating levels to bring inventory in line with lower market demand.
OneSteel is a leading metals distributor with a strong distribution network and is particularly well positioned in regional areas close to market. OneSteel holds top rankings in the Australian general steel distribution, reinforcing and wire markets as well as leading niche market positions in rail wheels, grinding media, mining ropes, rail and fluid transmission.
Excluding OneSteel’s 2009 financial results which were impacted by depressed global market conditions. OneSteel has delivered solid improvements in key business metrics and cash generation since its public listing on the Australian Securities Exchange (ASX) in October 2000.
Response to the Global Financial Crisis
OneSteel responded quickly to the decline in market conditions with a number of “back to basics” initiatives focused on both the balance sheet and business operations to strengthen the company’s position.
Management took a number of steps from the second quarter to strengthen the balance sheet, including increasing the focus on cash management, refinancing maturing debt early, actively managing debtor and inventory positions, lowering capital expenditure, and reducing dividends.
Production and operating levels at all of OneSteel’s major facilities, including at Whyalla in South Australia and the major electric arc furnaces in Sydney and Laverton in Victoria, were significantly scaled back in an effort to lower inventory levels and bring production in line with reduced demand.
These activities led to a 25% reduction for the year in total raw steel production to 2 million tonnes, including 780 thousand tonnes at Sydney and Laverton and 1 million tonnes at Whyalla, with production at the Whyalla Steelworks down 13% compared to the previous year.
A capital raising announced in April, that included an institutional placement and an institutional and retail entitlement offer, resulted in $789 million of additional capital with the proceeds used to further strengthen the balance sheet including reducing gearing to a more conservative level.
Cost reduction efforts involved introducing tough expenditure policies and a company–wide labour cost reduction program. The total number of reductions to directly employed staff implemented or planned under the labour reduction program amount to approximately 1,240 by the end of December 2009.
These changes are expected to result in a decrease in the labour cost base of approximately $160 million per annum. A related redundancy charge of $57 million has been included in the 2009 financial statements with an additional charge of around $13 million expected in the 2010 financial year.
OneSteel’s “back to basics” program also included progressing the growth of our Iron Ore business and completing the final steps in the integration of the former Smorgon Steel businesses acquired in 2007.
Project Magnet Phase 2
As mentioned previously, OneSteel successfully increased our iron ore sales capacity to a run rate of 6 million tonnes per annum under Project Magnet Phase 2, a significant increase above the 4 million tonnes per annum capacity one year ago. The result was an important achievement as it was realised quickly and for very little cost and risk in a difficult market environment.
Smorgon Steel integration
The final rationalisation work associated with the integration of the former Smorgon Steel business, acquired by OneSteel in 2007, was successfully completed with the closure of the Martin Bright facility last December and the Newcastle Bar Mill in February this year. OneSteel achieved its upgraded target of a net synergy benefits run rate of $100 million during the financial year.
Key business drivers
The information included in the charts to the right and on the following page, illustrates trends in some of the major drivers of OneSteel’s business including key sectors of the Australian economy, domestic steel prices, prices of international steel and key inputs into steelmaking. The significant decline in price movements between the latter half of 2008 and mid 2009 is clearly evident in the charts on the following page and highlights the severity of the drop in global demand for steel and steel products during the financial year.
Iron ore prices
OneSteel has high–quality iron ore reserves in South Australia. In the 2009 financial year, OneSteel exported 5.1 million tonnes of hematite iron ore.
Figure 1 shows international movement in iron ore fines prices in both US and Australian dollars. The Japan contract Mt Newman fines prices dropped by 33% in April 2009 compared to the contract price for the period from April 2008 to March 2009. The contract iron ore prices dropped as the world demand for steel weakened.
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Coking coal prices
Figure 2 shows the international movement in contract coking coal prices in US and Australian dollars. OneSteel purchased approximately 0.8 million tonnes of coking coal in the 2009 financial year. Coking coal contract prices dropped by 57% in US dollar terms in April 2009.
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Scrap prices
Figure 3 shows an indicator of prices for scrap steel in US and Australian dollars. In FY09, OneSteel used approximately 1.3 million tonnes of scrap feed for its steel manufacturing operations in Whyalla, Sydney, Laverton and Waratah Steel Mills. OneSteel Recycling sold approximately 1.6 million tonnes of ferrous scrap both to internal as well as to external customers.
The Korean benchmark price for scrap in US dollar terms decreased by 56% in the period from July 2008 to June 2009.
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long products international prices
Figure 4 highlights the international benchmark prices for Structural Beams, Merchant Bar, Reinforcing Bar and Wire Rod reaching peak levels in the first quarter of FY09. The key segments for these products are residential, non–residential and engineering construction. The benchmark prices towards the end of FY09 dropped to 2007 levels.
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Prices for steel residential construction materials
Figure 5 represents the movement in prices of residential construction materials indexed to FY90 prices.
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Import volumes of steel into Australia
Import volumes of steel into Australia increased in the first half of FY09 but the levels dropped in the second half as illustrated in Figure 6. The drop in import levels resulted from overstocking and reduced demand in the construction segments.
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