BSL Bluescope Steel Limited

Australia's largest steelmaker by output, BlueScope Steel Ltd. (BSL.AU), said it will write off $900 million Australian dollars (US$922 million) in assets and may cut its export capacity after being squeezed by currency swings, high materials costs and low product prices.

The news, which analysts say will likely bring about a A$1 billion full-year loss, is a further sign of the stresses being placed on the country's economy by its once-in-a-generation mining boom. A A$173.5 billion wave of resources investment due over the next two years, plus the country's image as a safe-haven economy in contrast to other struggling developed countries, has pushed the Australian dollar to 28-year highs and driven up interest rates to 4.75%.

Manufacturers have been hit hard as a 24% strengthening in the local currency against the U.S. dollar over the past two years has made their exports uncompetitive and reduced the price of imports. The country's largest beverage maker, Coca-Cola Amatil Ltd. (CCL.AU), Tuesday blamed the high Australian dollar for its decision to close a local food processing plant with the loss of 150 jobs.

In a statement to the Australian Securities Exchange, BlueScope said the future of its export operations is in doubt. Exports accounted for 59% of sales in the six months to the end of December.

"The board is reviewing options to align BlueScope's domestic steelmaking production capacity to Australian domestic market demand. No decisions have been made," the Melbourne-based company said.

Analysts have suggested the company abandon its export operations and close one of the two blast furnaces at its Port Kembla steel mill, located 60 miles south of Sydney. Such a move would likely lead to significant job losses in the adjacent city of Wollongong, where BlueScope is one of the largest employers.

"BlueScope has been a global anomaly in that it exports half of its steel. There's a reason the Chinese only export about 5%, and it's because you can't make money from it. Their exports are bleeding money so they need to shut down one of the furnaces," said Michael Slifirski, a Melbourne-based analyst at Credit Suisse.

BlueScope is the country's second-largest manufacturer by revenues after packaging firm Amcor Ltd. (AMC.AU), but its current unprofitability means its market value is just A$1.8 billion--barely half that of Lynas Corp. Ltd. (LYC.AU), a rare-earths miner that has yet to make a trading profit.

The tribulations of BlueScope are emblematic of the changes that have transformed the Australian economy over the past decade. Spun out of BHP Billiton Ltd. (BHP)--now the world's largest mining company--in 2002, it has been hit hard by the same rise in raw materials prices that have buoyed both BHP's profits and the Australian economy.

Each ton of steel requires around 1.5 tons of iron ore and 600 kilograms of coking coal. The prices of both have risen strongly in recent years on the back of strong demand from Asian steelmakers, especially in China.

Presenting BlueScope's half-year results in February, Chief Executive Paul O'Malley said the cost of raw materials, which the company largely buys from BHP, had risen to A$2.5 billion from A$400 million in 2002. Profits would also improve by A$200 million if the local currency fell back to the US$0.80 level it hovered below for most of the past two decades, he said at the time. The Australian dollar is currently trading at US$1.03 versus the greenback.

Shares in the company slumped over the course of the day, falling 7.7% to 91 Australian cents at the close of the market. However, the company's peer OneSteel Ltd. (OST.AU), also spun out of BHP in 2000, fell only 0.7% to A$1.38 and the broader S&P/ASX 200 index closed up 0.8%. OneSteel owns iron ore and coal mines, which partially insulate it from the economic stresses faced by BlueScope.

Analysts expect BlueScope to make an underlying loss of A$102.2 million in the year to June 30, according to a Dow Jones Newswires poll of six brokers. This would result in a A$1 billion reported loss when the A$900 million writedown is included.

BlueScope said the writedown would come from reducing the carrying values of its Australian coated and industrial products division and its distribution business. Both units are being rolled into the main steelmaking division and accounted for A$404 million in goodwill between them, although the company did not offer further details of how the writedown was calculated.

The revision was "accommodated within the company's financial covenants with its lenders", BlueScope said. However, MF Global analyst Andrew Gardner estimated the company only had enough earnings to meet its interest payments twice over--an unusually tight ratio.

BlueScope had net debt of A$912 million at 31 December 2010, and drew down A$128 million of debt to pay interest, dividends, and operating costs in the last six months of the year, according to its half-year report. The company is due to report full-year earnings August 22.

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

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