BlueScope Steel - Lab Report Example

? BlueScope Steel Executive Summary BlueScope Steel, being a steel manufacturing company, derives its vale from steel and iron production. The steel manufacturing industry has been identified as one of the most labour intensive among other industries. The management of the company has been keen on improving the value of the company in the recent years. Key areas that have been pinpointed for reenergizing include domestic business in Australia and New Zealand; expanding and improving Asian and North American markets. The most important growth element in BlueScope Steel is evident in its major restructuring plan covering Australian operations, which seeks to reposition the company for increased profitability and as well as growth. The Board approved the restructuring plan and as such, it will contribute to major changes in the operations of the firm that include shutting down the No. 6 Blast Furnace at the Port Kembla, closure of No.4 Cokemaking battery, No. 3 BOS steelmaking furnace and No.1 slab caster as well as closure of the Western Port Hot Strip Mill. Mergers and acquisitions are considered the best corporate strategy for BlueScope Steel owing to a wide range of positive attributes associated with it. With mergers or acquisitions, the company will certainly avoid the hustles associated with joint ventures or funding a subsidiary. The company has managed to expand a number of its operations owing to acquisitions. Key among the acquisitions made by BlueScope over the previous financial years include IMSA Steel Corp, a steel products manufacturing company, from Ternium SA subsidiary of San Faustin NV's Grupo Techint unit as well as Smorgon Steel Group Ltd (SS) steel and metal marketing division. Member 3 WANG, YING 2766757 To a steel-making company such as BlueScope, the value for its business comes from the steel and iron production, which is the most important valuation measurement. Besides the workforce, the steel industry is labor-intensive business. Then, the equipment and devices are also the value for this kind of industry. To increase the enterprise value, there are three major missions, namely reinvigorating their domestic business, including Australia and New Zealand; expanding and improving Asian and North American market; and continuing to grow sunrise business to make BlueScope Steel a unique steel production enterprise (2010/2011 Annual Report 2012). Coated and Industrial Products and Pacific Steel Products have significantly helped the company earn much more profit than before, in Australia and New Zealand, respectively (BlueScope Steel Limited Products2012). Because for the domestic market raw materials can be mined in Australia, the transportation expenses can be saved and steel marketing industry is the mainstay industry to countries in Oceania. Therefore, the growth project for steel making in these two years was very strong (IBIS World 2012). In addition, this program makes raw materials a very important role of producing iron for steel-making companies. As everybody knows, Australia is the origin of iron and its economy based on the export of the raw materials and iron. Australia gained a huge amount of capital during these four to five years (2010/2011 Annual Report 2012). Moreover, Australia was just affected slightly by economic crisis. According to this advantage, steel and iron production increased rapidly in Asian countries, and BlueScope Steel seized this opportunity. They take the advantage of Australia's natural resources, transfer them to the capital, and make the steel industry to be one of the top three pillar industries both in Australia and in New Zealand. The hot strip mill and the plate mill have been identified as the most two profitable products.However, this only depends on the market demand. For instance, if the market is in a positive situation, the steel price is high and market demand is optimistic, hence the production level will be maintained and the profit will be guaranteed at the same time. When it comes to the real condition, the metal coating and paint line business performed strongly during these two years (Opportunity, Direction, Delivery, A Blueprint for Growth 2007) because the production level has been achieved in the Australian market, especially in the Sydney area. Currently, on the basis of the recent investigation, BlueScope Steel started operating a new state-of-the-art paint line in western Sydney (Mitchell 2008) and it got a high ability to gain capital. In addition, 'this operation achieved an excellent delivery performance of 99.4 percent during the year' (Opportunity, Direction, Delivery, A Blueprint for Growth 2007). Furthermore, global building solutions and building products business have been established recently. This business paid more attention to North American market (ASX Release 2012). Sales revenue and earnings increased significantly (Opportunity, Direction, Delivery, A Blueprint for Growth 2007). Meanwhile, however, problems regarding carbon pollution have emerged. In this situation, due to former Rudd’s government, steel-making industries will receive compensation (Share Scene 2011). Thus, the net present value (NPV) for BlueScope Steel was decreased by $1.60 (Share Scene 2011). Therefore, BlueScope Steel has to seek means to reduce costs to increase the internal rate of returns (IRR) such as accounting, supply, human resource, and so on. By the year of 2004, BlueScope Steel realized a 20% reduction in headcount with an IRR of 15% and a payback period of 3.5 years (Success Stories 2004). Accordingly, the IRR will be in a positive condition because of the carbon compensation. The most important growth element in BlueScope Steel is evident in its major restructuring plan covering Australian operations, which seeks to reposition the company for increased profitability and growth. The Board approved the restructuring plan and as such, it will contribute to major changes in the operations of the firm that include shutting down the No. 6 Blast Furnace at the Port Kembla, closure of No.4 Cokemaking battery, No. 3 BOS steelmaking furnace and No.1 slab caster as well as closure of the Western Port Hot Strip Mill (2010/2011 Annual Report 2012). These two important projects are aimed at ensuring that the company streamlines its performance with the Australian domestic demand and above all, that BlueScope successfully gets out of the Australian export business. This means that the Australian steelmaking giant is going to embark on aggressive local operations with a view to ensuring that the company seizes all the business opportunities in Australia rather than engages in foreign operations that guarantee minimal returns (BlueScope Steel Limited, Products 2012). It is evident that concentrating on the local market will certainly add value to the operations of BlueScope in diverse ways and the most important one being assisting the company in saving on unnecessary spending. Various factors have forced BlueScope Steel to embark on the restructuring process mostly concerning economic issues. The key factors include, without limitation, depreciating Australian dollar, unprecedented reduction on the steel prices, and ever escalating cost of raw materials (2010/2011 Annual Report 2012). The global financial crisis, on the other hand, played a considerable role in forcing the steel company from abandoning Australian export in the sense that it has limited the spending power of various consumers in the international market. BlueScope is optimistic about their growth strategy characterized by restructuring process owing to the fact that the process is focused on the long-term viability of the business. The management believes that the restructuring process will bring significant growth prospect by boosting the company’s earnings as well as cash flow. This claim can be justified by the management estimate on pro forma FY2011 basis, which indicates that Earnings before Interest and Tax (EBIT) for the Coated and Industrial Products Australia (CIPA) reporting segment would be approximately $225 million (2010/2011 Annual Report 2012). Member 4 WU, LIFEI 2720978 The M&A definition, which short for mergers and acquisitions, refers to the company’s strategy, company’s finance and management factors regarding buying, selling, dividing and mixing of a variety firms to help an enterprise develop significantly, or a new field or new location, without creating a subsidiary (Mergers and Acquisitions terminology). It is undoubted that mergers and acquisitions are the best corporate strategy for BlueScope Steel owing to a wide range of positive attributes associated with it. With mergers or acquisitions, the company will certainly avoid the hustles associated with joint ventures or funding a subsidiary. A merger takes place when two organizations come together to operate as a single unit. Acquisition, on the other hand, refers to a situation where an individual organization acquires a majority stake, if not all, in the shareholding of another company. BlueScope has always preferred acquisitions to mergers (The Economic Times 2012). This claim can be justified by the fact that BlueScope has been engaging in several acquisition projects for a long period. Acquisitions have been advantageous to BlueScope in a number of ways. The first advantage that the company has been enjoying is revenue enhancement owing to sharing of market gains. It is no doubt that BlueScope has been enjoying cost efficiency owing to economies of scale. The company has managed to expand a number of its operations owing to acquisitions (The Economic Times 2012). The key acquisitions made by BlueScope over the previous financial years include IMSA Steel Corp, a steel products manufacturing company, from the Ternium SA subsidiary of San Faustin NV's Grupo Techint unit as well as Smorgon Steel Group Ltd (SS) steel and metal marketing division. Other acquisitions involve that of Ranbuild Pty Ltd, a steel products manufacturer and wholesaler, Butler Manufacturing Co, a manufacturer of prefabricated metal buildings, and Highline Ltd, a steel manufacturer (The Economic Times 2012). For M&A target analysis, it has to be divided into three steps. First, marketing is a major element for any industry and company. At the mention of marketing, for BlueScope Steel, the market demand and the quantity of demand, there is no doubt that it will succeed. In addition, the prospect is bright to some extent. In this situation, Australia Steel Industry has grown dramatically over the recent decades because of Asian market, especially the large demand from China. Besides, BlueScope Steel is the leading steel firm in Australia and New Zealand, supplying a large percentage of steel products, both in domestic and overseas market (2009/2010 Annual Report 2012). Therefore, as everyone knows, this company is, no doubt, playing a vital role in people's daily life, from society infrastructure to the necessities, even from buildings and mansions to the blockhouses and cars. Moreover, as long as the Asian and North American markets have been established, BlueScope Steel products will be available in an increasing number of countries such as USA, UK, Canada, China, and India (The Economic Times 2012). If the global market is settled up, this enterprise will develop very quickly. At that time, no matter how the iron and steel industry develops, BlueScope Steel can continue its cooperation relationship with domestic firms and global business partners. Secondly, however, the steel market is not developing very well these years. On the one hand, the economic crisis affects many industries – not just steel companies. Bubble economy happened in America firstly and then impacted China and Japan after a couple of years. So the steel companies face a serious challenge. Because BlueScope Steel concentrates to improve the Asian and North American markets in recent years (2009/2010 Annual Report 2012). While there are crises appearing in these two major markets, the enterprise may have to collect a large number of funds to tackle the economic problems. Specifically speaking, in accordance with recent statistics, industry revenue is expected to fall sharply in 2011 and 2012 by about 15.9%, to $8.35 billion (IBIS World 2012). What is worse for BlueScope Steel, it closed one of its two blast furnaces at Port Kembla (IBIS World 2012). Thus, 6.1 million tones will be decreased. As a result, the revenue and profit will be falling at the same time. Meanwhile, the export is getting worse. If the domestic market is negative, then how can the international market continue to develop? On the other hand, iron and steel industry is labor intensive. Production relies on large-scale investment in capital equipment as well as on labor (Bartel & Lichtenberg). If the revenue cannot be kept, the labors’ salary will be influenced because if the firm is reducing the cost, the wages are a part of consideration. In conclusion, for the M&A analysis, the advantages and disadvantages should be considered in the meantime. If the mergers and acquisitions matters are mentioned in the company's schedule, the labors’ interests can be damaged as well. Then the enterprise's business troubles may lead to the society problems. Also, Australia's GDP or GNP cannot be kept for further economic discussion (2009/2010 Annual Report 2012). Furthermore, the status of company affects the finance and capital structure directly. Due to the negative market of steel and iron, BlueScope Steel has to refinance billions of dollars to boost sales and export. If BlueScope Steel wants to continue to develop and keep its status in the steel and iron industry, it has to raise money and get the sufficient capital in standby. In addition, the existed loan also has to be supported. Thus, the final dividend will be cut, even cancelled, to support debt and loans. Three years ago (2009), 'the company, in February cut its first half dividend to five cents, from twenty two cents in the previous corresponding period' (Adelaide Now 2009). Moreover, based on the current steel prices, the large quantity of orders is required, then the raw material is demanded. The price of raw material is another problem about which one will think. All the matters can be addressed by capital. Therefore, the final dividend has to be cut. To sum up, all the policy regarding the dividend is setting to sustain the company development. All the shareholders should consider the enterprise firstly. BlueScope Steel is renowned for operating two forms of dividend policy. The first policy operated by the company is the cash dividends whereby the company gives equity owners dividends in cash. This is one of the most widely applied dividend policy across the globe because most investors are always interested in liquid returns. The second dividend policy applied by BlueScope Steel is the stock dividend. However, this form of dividend policy is only applied at will considering that an individual investor will be given an option of engaging in Dividend Reinvestment Plan (DRP). The Dividend Reinvestment Plan (DRP) allows BlueScope equity owners to convert their cash dividends into stocks (BlueScope 2012). Converting cash dividends into stocks is important for boosting equity holding by increasing the number of shares. Stock dividend is important for shareholders who are interested in capital gains. BlueScope has always maintained a policy of cash dividend and they have always ensured that their equity owners are given a share of the company’s annual earnings (BlueScope 2012). BlueScope Steel has been paying cash dividend for the last 9 years (2003-2011), which are both interim and final ones, with the exception of FY2009 and FY2010 whereby the company did not pay a final and interim dividend respectively (‘BlueScope Steel to cut final dividend’ 2012). This means that the company is serious about ensuring that the equity investors get a share of the company’s annual earnings. For the last 9 years, from 2003 to 2011, BlueScope Steel has been in a position to pay a minimum of 5 cents and a maximum of 27 cents dividend amount per share. For the year ended 30 June 2010, the directors recommended the payment of a final dividend of 5 cents per fully paid ordinary share, fully franked based on tax paid at 30%. This is the least amount of cash dividend that the directors have ever approved for fully paid up ordinary shares. Conclusion BlueScope is certainly a success story in the steel production industry despite the fact that it has faced major challenges owing to the volatile economic conditions. This claim can be justified by the fact that BlueScope Steel has been in a position to improve its capitalization besides the fact that they have maintained a profit streak for more than a decade with the exception of FY2009. BlueScope Steel has been paying cash dividend for the last 9 years (2003-2011), both interim and final ones, with the exception of FY2009 and FY2010 whereby the company did not pay a final and interim dividend respectively. To make matters worse for BlueScope steel, it closed one of its two blast furnaces at Port Kembla. 6.1 million tons will be decreased. As a result, the revenue and profit will be falling at the same time. BlueScope Steel has been forced to embark on the restructuring process. The key factors include, without limitation, depreciating Australian dollar, unprecedented reduction on the steel prices, and ever escalating cost of raw materials. The management is positive that after the restructuring process, the company will be in a position to improve its growth and profitability. References 2009/2010 Annual Report, Viewed May 15, 2012, http://www.bluescopesteel.com/files/dmfile/AnnualReport2010.pdf 2010/2011 Annual Report, Viewed May 15, 2012, ASX Release 2012, BlueScope establishes global building solutions and building products business, ASX Release, viewed 27 April 2012, . Bartel, AP & Lichtenberg, FR. The skill distribution and competitive trade advantage of high-technology industry. BlueScope Steel 2004, Success Stories, viewed 27 April 2012, . BlueScope Steel Limited, Products, viewed May 15, 2012, http://www.bluescopesteel.com/products-and-customers BlueScope Steel Limited, Dividend, viewed May 15, 2012, BlueScope Steel to cut final dividend, raise capital 2009, Adelaide Now, 30 April 2009, viewed 30 April 2012, . Carbon tax: stocks to win and lose, from Virgin to Bluescope 2011, Share Scene, 20 June 2011, viewed 27 April 2012, . ‘Iron and steel manufacturing in Australia: market research report 2012, IBIS World, Feb 2012. ‘Mergers and acquisitions terminology’, Business Teacher, viewed 29 April 2012, . Mitchell, JG 2008, Improving the bottom line, NSW TAFE, Sydney. Opportunity, Direction, Delivery, A Blueprint for Growth 2007, BlueScope Steel Limited The Economic Times 2012, Australia's BlueScope Steel doubles profit, eyes mergers, The Economic Times, Viewed May 15, 2012, http://economictimes.indiatimes.com/australias-bluescope-steel-doubles-profit-eyes-mergers/articleshow/2294064.cms Read More