BlueScope Steels Strategies in Response to the Appreciating Australian Dollar - Case Study Example

BlueScope Steel’s Strategies in response to the Appreciating Australian Dollar [Name] [Professor Name] [Course] [Date] Abstract: BlueScope Steel is a major Australian valuable industry that competes for international markets and a major valuable export dollar earner for the country. The company has operations in Asia, North America, New Zealand and Pacific Islands, as well as in Australia. The high Australian dollar has meant extreme losses for the company over the recent years. Bluescope steel has however turned its business around from experiencing a 1billion dollar loss to an expected small net profit in 2h 2013. This paper critically evaluates the actions taken by Bluescope steel in response to the appreciating Australian dollar in the past 5-6 years. Keywords: High Australian dollar effects, BlueScope financial strategies, Australian steel market trends Overview The high Australian dollar has resulted to sharp declines in demand for steel exports, fall in sales and radical fall in steel prices. In 2009, Australian steel industry revenue was reported to have approximated $17.6 billion while export earning was $1,722 million. Steel prices dropped from around $1,000 to $400 per tonne while the company’s share prices fell to a record low of $1.83. In the second half of 2009, BlueScope steel reported a loss of $66 million for that financial year after a loss of $569 million in the preceding financial year (Chambers 2011). The trends resulting from the high Australian dollar have ended in varied significant social and economic impacts on BlueScope Steel. Following these, the company has implemented certain strategies in response to the situations, as examined in this paper. Closure of blast furnaces at Port Kembla Located near Wollongong south of Sydney steelworks, Port Kembla is a major world high-tech producer of quality strip products, plate and slab that employs an estimated 6,000 full-time employees and a large number of contract workers. Port Kembla has BlueScope’s largest operating plant with a capacity of making over 5 million tonnes of steel annually (BlueScope 2012). The closure of No. 6 blast furnace in October 11 at Port Kembla affected some 10 percent of the company’s 9,000 workers. Further, it reduced the plant’s steel production capacity by 50 percent (Chambers 2011). The closure heralded the company’s strategy to exit the export market. This showed that pressure from the high Australian dollar, resulting to low steel prices, high coal cost, high iron ore cost, meant that BlueScope had ultimately acknowledged that exports had become highly unprofitable (See Table 1). The gap for profit loss has narrowed significantly after the company reported two successive annual resources of $1 billion caused by external factors such as high Australian dollar, which averaged around 104 US cents. Critically, the closure of the furnace meant that all steel produced by the country would be sold exclusively within the domestic market (BlueScope 2013). Table 1: Adapted from BlueScope Steel’s 2013 financial year report Further, the company focused on using technologies in the steel production processes. Like in all manufacturing, steel manufacturing implies the use of machines and automation to replace workers resulting in increased productivity and reduced human labour. Indeed the data for the Port Kembla steelworks indicates reduced employment rates and increased steel productivity. For instance, production rose from around 4.4 tonnes in 1980 to 4.9 tonnes in 2,000 to 5 million in 2009. Conversely, there has been a significant reduction in employment rates. In 1990, the Port Kembla plant employed around 30,000 workers, which dropped to 21,000 in 1996 and to 6,000 in 2009 (Chambers 2011). BlueScope intended to build its steel manufacturing capabilities while emphasizing on increasing productivity and creating a highly flexible and skilled labour force. Initially, the company exported half of the 5 million tonnes of steel produced annually at the plant, from two of its major blast furnaces No. 6 and No. 5, even as the remaining blast furnaces were dramatically withdrawn as modern versions were installed. Financial Hedging Strategies In response, BlueScope undertook a program in 2009 to cut off costs of around $295,000. Among the initiatives within the program included reduction of overtime, reduction of the number of contractors, encouraging staff annual leaves and offering of redundancy packages. The program was a deliberate policy of reducing costs with expectations that the measures could be reversed when the Australian dollar weakened. Concerning redundancy package in particular, the company hoped that voluntary redundancy would avoid the need for forced redundancy as a result preventing protests by workers caused by possible sackings. As part of the redundancy packages, the company made one-cash payments to entice large number of workers into acceptance of voluntary redundancies. The company has implemented such other strategies as cutting jobs. For instance, about 800 jobs were lost in New South Wales and another 200 in Victoria in the midst of high Australian dollar and the rise in the price of raw materials. This has been aimed at increasing productions while at the same time reducing cost of production, such as labour or other costs, and to enable the company to destabilize its global competitors. The company was to cut around 1,500 jobs at Port Kemble and Hastings. This has compelled collaborations between the BlueScope and the trade union, which has praised the company’s strategy as a model of transition required in the Australian economy. The term transition in this case means reducing the number of jobs at the company and the working conditions intended to make the company competitive in the course of the rise in Australian dollar, while enabling the company to leverage sackings to employ more selected skilled workers at low wage rates (BlueScope 2013). Offshore Strategies The effects of high Australian dollar have meant that Australia’s steel prices are high in the international market making it less attractive compared to the Chinese steel. On critical analysis, Chinese steel producers have been BlueScope’s major competitors. A number of offshore strategies have been implemented by BlueScope Steel to overturn the trends. For instance, the company has exerted pressure on the Australian government to engage with China in talks over the issue at the global market negotiations. This is because being a player in the open market implies having open currencies rather than devaluing currencies deliberately to leverage export markets, a strategy that has been implemented in China since 2011. BlueScope has placed urged the government to place pressure on China to float the Yuan claiming that economic analysts believe it has been undervalued by nearly 40 percent. Concerning the high raw material pricing particularly in the global markets, the government has meanwhile showed involvement by reducing the costs of business through overhaul of certain business regulations through its seamless national economy initiatives. It has further strengthened tax incentives for research and development. This has meant that BlueScope focuses on researching on cost-effective and innovative raw material to continue to be competitive in the global market (Tyrell 2012). In addition, the government has strove to invest heavily in infrastructure and skill development to help boost the capacity of the manufacturing industry. A significant dynamism of the global steel industry is the dramatic shift that occurs in the pricing of iron ore. Iron ore is a major raw material for manufacturing raw materials, and accounts for 60 percent of the cost of steel. In 2009, BlueScope was ranked 45 globally as a result of its planned cut-back on iron ore production after it closed the blast furnaces at Kembla. BlueScope has yet again increased iron ore production to cut the cost of buying the raw material in the international market. On comparative steel consumption, Australia consumes between 200 and 300 kilograms of steel per person per year, while China consumer around 400 kilograms per person per year. High Australian dollar has thus meant that China becomes the dominant steel producing country, producing around 568MMt per annum of steel. Within a span of 20 t0 15 years, China developed the capacity of about 100 Port Kembla plants. BlueScope on the other hand produces about 8MMt per annum of steel, making the company a major player in its own yard but comparatively small globally (Landy 2010). On the issue of carbon pollution reduction scheme (CPRS), BlueScope has been pressured to urge the government to change its stance on implementing CPRS. Even though BlueScope supports the move to reduce emission of carbon dioxide, the current CPRS scheme threatens further capital investments and jobs. Some researchers have estimated that if the CPRS scheme goes ahead, further 4,000 jobs would be lost. BlueScope believes that the CPRS plan in its current form discriminates unfairly against Australia’s steel industry compared to the international competitors. The company claims that the government’s scheme could cost the company at least $1.4billion between 2012 and 2020, and that given the high Australian dollar, it would be difficult to meet these costs (Goodley and Wood 2013). The company has also invested in three key areas, where it has been achieving high returns on invested capital. BlueScope estimates that the total expenditure for 2013 will be around $300 million, maintenance around $200 million and further 100 million on other projects such as expansion of its iron stands in New Zealand and creating building solution for offshore companies such as China-based Lysaght facility (BlueScope 2012). References BlueScope. 2012. BlueScope Steel AGM. (Online) Retrieved from: [http://www.bluescopesteel.com/media/280243/3-mdceoaddresstoshareholders2.pdf] Accessed 4 June 2013 BlueScope. 2013. FY2013 Financial Reporting. (Online) retrieved from: [http://www.bluescopesteel.com/media/290729/1hfy2013-half-yearlyreport-and-accounts_final.pdf] Accessed 4 June 2013 Chambers, M. 22 August 2011. The Australian. Steel exports dead, 1000 jobs lost as BlueScope shuts Port Kembla blast furnace. (ONline) Retrieved from: [http://www.theaustralian.com.au/national-affairs/steel-exports-dead-1000-jobs-lost-as-bluescope-shuts-port-kembla-blast-furnace/story-fn59niix-1226119257737] Accessed 4 June 2013 Goodley, S. & Wood, L. 2013. BlueScope Port Kembla. (Online) Retrieved from: [http://hsc.csu.edu.au/geography/activity/local/4008/port_kembla.htm] Accessed 4 June 2013 Landy, B. 2010. The global steel industry: an Australian perspective. The Australian Pipeliner.(Online) Retrieved from [ http://pipeliner.com.au/news/the_global_steel_industry_an_australian_perspective/043591/] Accessed 4 June 2013 Tyrell, A. 22 August 2012. It’s Not BlueScope Steel’s Fault. It’s the High Aussie Dollar!.Money Making. (Online) Retrieved [http://www.moneymorning.com.au/20110822/its-not-bluescope-steels-fault-its-the-high-aussie-dollar.html] Accessed 3 June 2013 Read More