Who started the steel pricing war?
Some in the steel distribution industry point the finger at Steel & Tube which in turn points the finger at Fletcher Building's steel division, but the cold, hard fact is nobody is winning in the current price war.
In what was a year of recovery, Steel & Tube downgraded guidance twice and earnings before interest and tax came in at $16 million for the 12 months ended June 30, well below its original target of $25 million.
The 2018 financial year ebit was restated to $13.1 million from the $16.5 million it reported a year ago, but the latest result is still little more than half 2017's ebit of $31.1 million.
The Fletcher Building steel division's ebit plummeted 33 per cent to $33 million for the year from $49 million the previous year – the problem clearly worsened in the second half because first-half ebit was down only 9 per cent.
Fletcher won't comment any further than what it said in its annual results presentation last month.
"The market is competitive and, for us, this has been compounded by rising steel prices and input costs, which is compressing margins," Fletcher says.
Forsyth Barr analyst Matt Henry says the steel industry is "renowned for finger-pointing. Nobody accepts responsibility and they always blame other people. It's difficult to know what the reality is."
The supply side of the industry appears to be faring no better. The BlueScope Steel-owned New Zealand Steel and Pacific Steel businesses' ebit fell 28 per cent in the year ended June.
As Australia-based BlueScope, which owns 15.8 per cent of Steel & Tube, pointed out in its results presentation, the first-half ebit had been strong, up more than 75 per cent at A$71.9 million, but the second half fell to just A$8.7 million.
That was the first weak half-year period following four very strong ones, Bluescope managing director Mark Vassella said, but added that "we have an expectation that all businesses deliver adequate returns through the cycle and we're monitoring the performance of this business going forward."
BlueScope didn't respond to BusinessDesk's requests for comment.
Steel & Tube chief executive Mark Malpass has some convincing-sounding arguments as to why it isn't his company front-footing the price war and why pricing at the moment "is just nuts.
"We're not chasing volume at the expense of margins," he says, but acknowledged his company didn't get the boost to margins in the second half that it had hoped for.
"We're backing away from so much stuff. We're just not comfortable. We can't make a return our shareholders would find acceptable."
There's a nice bar and line graph in Steel & Tube's full-year results presentation that shows second-half sales fell compared to the first half but that ebit margin only fell slightly between the first and second half.
When one applies numbers to what the graph is supposed to represent, the picture looks somewhat different.
Yes, second-half revenue was 7.5 per cent lower than first-half revenue, but the ebit margin fell from 3.7 per cent in the first half to 2.6 per cent in the second half, not so gentle a decline.
Steel & Tube's margins appear considerably skinnier than Fletcher's – its steel ebit margin fell from 9.2 per cent in the first half to 5.9 per cent in the second half.
Henry says the reason Fletcher's margins are so much fatter is because of its Pacific Coilcoaters unit, a steel coating business that competes with NZ Steel's Coloursteel product, making it a duopoly part of the market.
Pacific Coilcoaters "is the jewel in Fletcher's steel division," Henry says and would account for about 80 per cent of the steel division's earnings.
Malpass says his company is doing what it can with the things it can control to improve margins, such as taking out $5 million in operating costs during the year just gone and reducing net debt from $104 million down to $15 million. While $78 million of the reduction came from last year's capital raising, the remainder came out of positive cash flow.
Steel & Tube has gained new customers but Malpass says that wasn't due to price-cutting.
The new customers were gained through "our value proposition and through service" and the company has moved to 24-hour service in the Auckland market.
Word-of-mouth recommendations from existing customers has helped.
Malpass says service, including delivering on time, is the most critical factor for customers, followed by technical support and then by the relationships Steel & Tube staff have with customers. Price is usually only in fourth place down the list of what's important to customers, he says.
"Most of our customers would say as long as you're within 2 or 3 per cent on price, that's OK," he says.
As it often is in New Zealand, the current situation is threaded through with personal relationships and connections.
Malpass used to work for Fletcher, heading what was then Fletcher's largest division which included its steel operations.
Malpass oversaw the sale of Pacific Steel to Bluescope before leaving Fletcher in 2014 but says he still has friends at Fletcher's: "These are good-quality people."
He joined Steel & Tube initially as an independent director in March 2017 but then stepped into his current executive role in September that year when it became clear the company needed new leadership.
Fletcher, despite striving to recover from its construction unit Building + Interiors losing the best part of $1 billion in 18 months, launched an opportunistic takeover bid for Steel & Tube last year.
The bid was always a long shot, given the likely Commerce Commission issues, but Fletcher's prize was effectively snatched away when first Steel & Tube resisted and then major shareholder Milford Asset Management sold its 15.8 per cent stake to Fletcher competitor BlueScope.
Malpass' view is that BlueScope, a Steel & Tube supplier through its NZ Steel subsidiary, had been concerned that Fletcher would cut its Coloursteel out of a key distribution network. In any case, BlueScope hasn't sought a seat on Steel & Tube's board.
Steel & Tube has a direct relationship to the BlueScope parent company as its major shareholder and deals with NZ Steel directly as a supplier, he says.