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BlueScope: Weak Building Approvals a Near-Term Headwind; Decarbonization Is a Longer-Dated Story

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BlueScope Steel Ltd

We maintain our fair value estimate of AUD 16.50 for no-moat-rated BlueScope BSL, with shares screening as overvalued. We think the steel spreads of the past three years are untenably high, driven by pandemic-induced stimulus and the subsequent demand bump, and supply chain disruptions. We expect steel spreads to return to historical averages longer-term as higher interest rates weigh on activity, prices, and margins.

BlueScope is facing a challenging path over the coming decades as it reaches for its greenhouse gas emission targets. In particular, the plan to decarbonize Port Kembla, which is the main operating asset in Australia and accounts for 35% of the company’s revenue, could disadvantage BlueScope versus its global peers. Since setting emission goals in fiscal 2018, BlueScope is on track to meet its targets thanks to the expansion of North Star which is contributing a larger proportion of production volumes. North Star uses electric arc furnaces which are more energy-efficient than the blast furnaces, or BFs, used at Port Kembla.

BlueScope’s options to meaningfully lower carbon emissions are pricey. For instance, management estimates greener technologies will require electricity prices in New South Wales to go below AUD 30 per megawatt hour to be economically viable, a price point that has not been seen in five years. Decarbonizing will also demand significantly more natural gas, where prices have been trending up in the past decade.

However, decarbonizing is not our near-term concern as the relining of a BF at Port Kembla will buy BlueScope some time up to 15-20 years. Shorter term, building approvals across Australia have fallen since 2021 and will likely stay relatively muted due to higher interest rates, and property developers rebuilding their financial strength postpandemic.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Mathew Hodge

Director of Equity Research, Australia
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Mathew Hodge is director of equity research, Australia and New Zealand, for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc.

Hodge joined Morningstar equity research via the acquisition of Aspect Huntley and was previously a director on the team from 2019. He has approximately 20 years of experience, primarily covering the metals and mining sector. In addition, Hodge has sat on Morningstar's economic moat committee since 2014. More recently, he led the refresh of our capital allocation methodology in 2020 and chairs the subsequently formed capital allocation committee. In 2001, Hodge joined Aspect Huntley, which was acquired by Morningstar in 2006.

Hodge studied mining engineering at the University of New South Wales and previously worked in mining, principally as a mining engineer in underground coal. He holds the Chartered Financial Analyst® designation.

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