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RPT-COLUMN-Fortescue, Bluescope success shows why iron, steel prices will stay low: Russell
August 22, 2016 / 12:01 PM / a year ago

RPT-COLUMN-Fortescue, Bluescope success shows why iron, steel prices will stay low: Russell

(Repeats with no changes to text)

By Clyde Russell

LAUNCESTON, Australia, Aug 22 (Reuters) - A year ago it’s likely you would have got better odds that Fortescue Metals Group and Bluescope Steel would go under rather than double profits, given the dire outlook for both iron ore and steel products at that time.

But both Fortescue and Bluescope reported earnings on Monday that would have seemed fanciful 12 months ago, underscoring that companies can adapt to survive extended periods of low prices for the commodities they produce.

Their success is also testament to why it is actually quite difficult to reduce supply in over-supplied markets, and ultimately their results support the view that iron ore and steel prices are likely to remain lower for longer.

Of course, both Fortescue, Australia’s third-biggest iron ore miner, and Bluescope, the nation’s most valuable steel producer, have been helped by the rebound this year in commodity prices as China boosted its economic stimulus.

But to say both were rescued by China’s spending would be to ignore the steps the companies took to try and ensure their survival in a market where they were both viewed as fairly weak competitors.

Fortescue boosted its net profit after tax for the year to June 30 to $985 million, up 212 percent from the same period a year earlier.

Bluescope raised its underlying net profit after tax to A$293.1 million ($222.8 million) in the year to June 30, up 119 percent from the same period a year ago.

The surge in profits at both companies came off the back of less spectacular revenue figures, with Fortescue reporting earnings of $7.08 billion, down 17 percent, and Bluescope managing a 7-percent increase to A$9.2 billion.

What these numbers largely show is the huge impact on the bottom line of cost-cutting, so much so that both companies are quietly expressing confidence about future earnings, with Bluescope saying it expected to lift its first-half profit by 50 percent and Fortescue saying it was on track to meet its 2017 financial year goals.

The generally optimistic pictures being painted come even as the outlook for iron ore and steel remain challenging.

Most analysts and iron ore miners expect this year’s 42-percent rally in Asian spot iron ore .IO62-CNI=SI to fade, and the global steel market remains over-supplied as China struggles to close loss-making surplus capacity.

SUCCESS BRINGS INVESTOR REWARDS

Perhaps the main point is that companies are no longer banking on a sustained recovery in prices, rather they have adapted to the reality that their iron ore and steel markets will likely be in global surplus for several years to come.

“I think we should plan for global oversupply occurring for some time, which is why ... we’ve got to make sure we’ve got the balance sheet that can survive any shocks whether they come or not,” said Bluescope Chief Executive Paul O‘Malley.

Bluescope, which was spun out of mining giant BHP Billiton in 2002 and employs about 16,000 people, has engineered a turnaround after coming close to shutting its largest facility at Port Kembla in Australia’s New South Wales state.

The company did stop production of some steel products and managed to lower its labour costs through agreements with its workers, a pattern that other steel producers have tried to emulate to varying degrees of success.

Success in cost-cutting has its rewards, with Bluescope’s share price up about 94 percent this year compared to a 53-percent rise in benchmark steel rebar in Shanghai, while Fortescue has leapt 160 percent so far this year, about four times the gain of spot iron ore.

The outperformance of the companies over the commodities they produce is probably the best indicator of the value of cost-cutting, but it does also beg the question as to how much more savings can be squeezed out.

More likely is that the resource company fortunes will revert to more closely tracking the movements in commodity prices, as they have done in prior years.

Editing by Joseph Radford

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