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Fletcher to sell Pacific Steel for $120m to NZ Steel owner, Bluescope

BlueScope Steel, Australia's largest steelmaker and owner of the New Zealand Steel mill, has agreed to buy assets of Fletcher Building's [NZX: FBU] Pacific Steel in a $120 million deal that will lead to the closure of Fletcher's steel mill at Otahuhu at the end of 2015.

The transaction will leave BlueScope as the nation's only steelmaker and requires approval from the Commerce Commission. The companies are aiming to complete the transaction in mid-2014.

Melbourne-based BlueScope will pay $60 million for Pacific Steel's long-products rolling and marketing operations and pay about $60 million for the target's working capital, according to a statement from Auckland-based Fletcher, which expects a one-time net expense of about $19 million.

Bluescope will pay half the $60 million price of the assets upfront and the remainder once it has commissioned a new billet caster, expected to be by the end of calendar 2015.

The Australian company will build the billet caster at the Glenbrook mill south of Auckland operated by its NZ Steel unit, spending about $50 million on the new plant, it said. Until then, Fletcher will continue to operate the Otahuhu mill and supply BlueScope with billet on commercial terms, Fletcher said.

"These are tiny plants on a world scale and this is how you allow manufacturing to survive here," Philip King, Fletcher's investor relations manager, told BusinessDesk. "The competition comes from imports."

The shuttering of the Otahuhu mill is likely to see a jump in exports of scrap steel that used to be melted at the mill. BlueScope's Glenbrook plant is essentially set up for iron sand processing. Fletcher owns 50 percent of scrap metal business Sims Pacific Metals.

The sale includes Pacific Steel's rolling mill and wire drawing facilities at Otahuhu and its Fijian rolling mill. Once Bluescope's billet caster is running, NZ Steel will supply billet to the rolling mills at Otahuhu and in Fiji.

The deal "will help make the New Zealand steel industry more sustainable," said BlueScope chief executive Paul O'Malley. "The acquisition of the PSG downstream assets is an opportunity to better leverage our low cost iron sands and better serve customers with a full range of long products, together with our existing flat products."

Fletcher chief executive Mark Adamson said most of the Pacific Steel rolling mill and wire drawing workers will be offered work by BlueScope. The deal doesn't affect ownership of Fletcher's steel distribution business, Fletcher Easysteel, or its reinforcing business, Fletcher Reinforcing.

Fletcher shares rose 1.1 percent to $9.58 on the NZX and are up 6.4 percent in the past 12 months. Bluescope was last at A$5.93 on the ASX, having soared 56 percent in the past 12 months.


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Comments and questions

How does NZ Steel at Glenbrook compare with the CAP steelworks at Huachipato, still Chilean-owned?

The Compañía de Acero del Pacífico, also known by its acronym CAP, is the main iron and steel industry of Chile with its main facilities at Huachipato near the port of Talcahuano in Bío Bío Region.

CAP is a Chilean holding company of the mining and steel sectors. These sectors are represented by different affiliates. The first stage is done through Compañía Minera del Pacífico and involves the extraction and concentration of iron ore from the company's deposits in northern Chile. This production is sold as raw material between steel producers, mainly in the Asian market (China, Japan, Malaysia, Korea and Indonesia). The second stage is done through Compañía Siderúrgica Huachipato and involves the use in Chile on behalf of CAP for the production of iron ore to produce flat and long steel, for the most varied industries. The third and final phase of CAP's activity, using in turn part of steel production, is the development of solutions in steel, processed by subsidiaries in Chile, for use in construction, industry and infrastructure solutions that also marketed by subsidiaries in other countries of our region. This stage of CAP's activity is through Cintac S.A. and Intasa S.A. and their respective subsidiaries. CAP is listed on the Santiago Stock Exchange in the IPSA index.

Interesting. CAP's mining activities are supporting the steel mill in the face of import competition:

Predominantly an Iron Ore Business: CAP has become Chile's leading ferrous metals company, with 94% of EBITDA in 2012 and 2011 generated by CMP. CAP's steel processing division, SPG, accounted for the remaining 8% of EBITDA during 2012. CAP's steel production company, CSH, is back to operating at full capacity following the business interruption in 2010. However, CSH made a negative 2% contribution to EBITDA in 2012 as part of CAP's strategy to maintain market share following a period of cheaper steel imports in Chile amidst higher operating costs. CMP's cost of production averaged about USD50 per metric ton for the year. The average price for steel sold by CSH was USD819 per metric ton based on sales volumes of 1.1 million metric tons, with SPG achieving average prices of USD1,167 per metric ton based on sales volumes of 400,000 metric tons for 2012.

Imports Erode Steel Profitability: CSH's negative impact on CAP's consolidated EBITDA during 2012 follows a neutral contribution in 2011 and a negative 3% contribution in 2010. The loss in steel business profitability is due to increased raw material and energy costs and the strategy to compete with cheaper steel imports. Chile has an open market which, combined with low freight rates, has led to an increase in cheaper steel imports. CAP has managed to maintain a 50% market share under this scenario, albeit with zero profitability, and is operating at full capacity. The company is also more active in the long steel segment, which is more profitable than flat steel, as most of the imported steel products are flat steel. .