Results from listed companies in the steel sector show the market was awful in 2019. Photo / Getty Images
Results from listed companies in the steel sector show the market was awful in 2019. Photo / Getty Images
Opinion
COMMENT:
Results from listed companies in the steel sector show the market was awful in 2019 but they're now reporting green shoots of improvement – as long as they aren't snuffed out by the coronavirus crisis.
The question is, can we believe them?
First, the awful results: Fletcher Building's earningsbefore interest and tax from its steel operations plunged to just $1 million for the six months ended December from $22m a year earlier.
Steel & Tube's underlying ebit for the same period wasn't much better, falling almost 42 per cent to $5.7m from $9.8m.
It was grim on the supply side too. BlueScope's New Zealand operations, mainly the Glenbrook steel mill and the Pacific Steel plant formerly owned by Fletcher, reported an 82 per cent fall in ebit and the Australian parent is looking for improvements.
All players report stiff competition, particularly on pricing, while cost pressures, including wages, are mounting. Steel & Tube, for example, cut labour costs by $800,000 but its wages bill was up by about $600,000.
Fletcher reported material impacts on both volumes and margins, with sales down about 16 per cent, while Steel & Tube managed to hold margins at about 22 per cent, though its sales fell 9.8 per cent in the latest six months.
But both are sounding hopes of a recovery: "We have seen volumes and margins improving as we enter the second half," Fletcher said, and Steel & Tube expected a better second half.
Steel & Tube chief executive Mark Malpass told BusinessDesk his company had just raised prices between 2-and-5 per cent for a number of core products, following a 5 per cent hike a couple of weeks ago from one of its competitors, Vulcan.
But the nub of the problem, in his view, had been the lull in non-residential construction activity since early 2019.
Up until then, projects such as SkyCity's convention centre and hotel and the Commercial Bay development at the bottom of Auckland's Queen Street had meant boom times.
"Those large vertical construction projects largely came to an end for the supply companies in early 2019," Malpass said.
The marked slump in business confidence hadn't helped either, while tighter credit criteria by banks put the screws on commercial developers, he said.
"The whole industry is down. Players are fighting for the available pieces of bread or crumbs left on the table."
But now a revival of largely central and local government-funded projects is coming to the rescue. Malpass said activity picked up in mid-November, went very soft again in December and January, as always happens, and is now improving again.
Steel & Tube has won contracts to supply projects such as the Metro Sports facility in Christchurch, the new wharf at Napier Port, the Mangere Bridge rebuild and the City Rail Link in Auckland.
"We're moving from quotations into actual productivity," he said. But margins in the industry generally need to be higher.
The steel sector is now reporting green shoots of improvement. But can we believe them? Photo / Bloomberg
"I don't get to see the private companies' numbers but both Fletchers and ourselves are quality companies. There's just not enough margin."
Analysts are very cautious about whether the industry is past the worst, their confidence not helped by the fact that so many construction and related companies managed to make such a botch of the boom.
Along with the collapse of a string of construction companies, including Ebert, Orange-H and Arrow International, Fletcher chalked up almost $1 billion of losses in 18 months.
Steel & Tube incurred write-downs, restructuring and other one-off costs of well over $80m in the past two and a half years.
The company's market capitalisation - $132.8m last week with the shares trading at 80 cents – has nearly halved in the past five years, even after its $80.9m capital raising in 2018.
And the company spent about $75m on acquisitions between 2014 and 2017 with no noticeable impact on earnings growth.
"While we see a path for some underlying improvement potential for Steel & Tube, it operates in a tough and currently unattractive market," Grant Swanepoel, head of research at Craigs Investment Partners, said in his note on the company's results.
Nevertheless, it's too soon to call the last six months of 2019 the low point, he said.
Jarden's head of research Arie Dekker is another sceptic.
"We note that heightened competitive pressures have become a recurrent theme over the past four-to-five years, despite the upturn in market activity."
Steel & Tube wrote off $37m from goodwill on previous acquisitions in the latest result. Dekker said that suggests "underperformance across broad parts of the business."
Forsyth Barr's Matt Henry isn't buying the green shoots story either.
"There remains a very high margin for error in any Steel & Tube earnings forecast."
And he noted the company's management is "perennially optimistic" but has a history of over-promising and under-delivery.
