UPDATE:BlueScope Steel 1st Half Loss Deepens As Materials Costs Rise

Net losses for Australia's largest steelmaker by revenue, BlueScope Steel Ltd. (BSL.AU), deepened over its fiscal first half to Dec. 31 as the price of key raw materials boomed in an oversupplied global steel market.

Net losses in the half nearly doubled to A$55 million, from A$28 million the previous year, the company said, although revenues rose 13% to A$4.62 billion from A$4.11 billion.

The outcome illustrates the stark divide between miners and producers in the steel industry, as materials costs rise against a more restrained backdrop for steel prices. Steel is a crucial commodity for the world's manufacturing and construction sectors and a vital indicator of global economic health.

Diversified miners including BHP Billiton Ltd. (BHP), Rio Tinto Ltd. (RIO), Anglo American PLC (AAL.LN), Xstrata PLC (XTA.LN), and Fortescue Metals Group Ltd. (FMG.AU) have announced surging profits over the past two weeks on the back of record prices for steelmaking materials, particularly iron ore and coking coal. Each ton of steel requires around 1.5 tons of iron ore and 0.6 ton of coking coal.

East Asian hot-rolled coil, a benchmark sheet metal product, has risen 18% to US$730 a metric ton from US$620 since the new year amid rising expectations of global growth, according to Commonwealth Bank of Australia. But record wet weather in mining regions of Australia has driven up prices of iron ore and coking coal still further.

Based on price data from CBA and data service CoalPortal, that has pushed raw materials costs up to US$488/ton from US$387/ton over the same period, a rise to 67% from 62% in key input costs as a percentage of sale prices.

BlueScope Chief Executive Officer Paul O'Malley said the still-fragile global economy is keeping supply ahead of demand in an oversupplied world steelmaking sector.

"We need to see gross domestic product in the developed world improve, and drive increased steel demand, to narrow the supply/demand gap. Steel margins continue to be impacted by the high cost of raw materials," he said.

The company said the A$285 million deterioration in its underlying earnings from the second half of the 2010 financial year was largely caused by a A$356 million increase in materials costs, which was offset by only a A$106 million improvement in steel sale prices.

But BlueScope's results were also hit by a stronger Australian dollar cutting into export margins and offshore profits, by lower steel demand in Australia, and A$16 million of negative accounting and tax changes, the company said.

Australia's construction and manufacturing sectors have been hit hard by a stronger currency and rising interest rates caused by the resurgent mining sector, with the sectors suffering contractions since August and May, respectively, according to the Australian Industry Group, a trade body.

BlueScope's largest division in Australia particularly underperformed, accounting for A$35 million of the A$41 million on-year decline in first-half underlying earnings before interest and tax.

However, on an underlying basis excluding one-off items, the company's net loss narrowed 11% to A$47 million from A$53 million, and management proposed an interim dividend of 2 cents per share, including franking tax credits, compared to a halted payout the year before.

BlueScope, a former division of BHP Billiton that traditionally uses product from BHP's mines in Australia's iron-rich Pilbara region, has taken to buying Fortescue's cheaper iron ore over the past six months as prices for the material have risen.

O'Malley said it would be hard to forecast performance in the second half of the financial year due to the difficulty in estimating the spread between costs of the key raw materials of iron ore, scrap and coking coal, and steel prices.

"This spread is difficult to forecast. At the moment we expect to deliver a break-even net profit after tax" in the second half, he said.

The company also said it had agreed a A$1.35 billion loan from a syndicate of 13 banks to replace a A$1.28 billion facility due to expire in July.

-By David Fickling, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com

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