Business Drivers

The following graphs illustrate trends in some of the major drivers of OneSteel’s business such as key sectors of the domestic economy, domestic steel prices, prices of international steel and key inputs into steelmaking, OneSteel’s project list and the volume of steel imports into Australia. There is also a map highlighting the location of OneSteel’s major manufacturing, distribution and shredding sites, a diagram that illustrates the product processes of OneSteel’s operations and a map that outlines OneSteel’s mining tenements. Figure five compares the revenue drivers of OneSteel’s business with those of the broader Australian economy and Figure six charts the growth in activity in OneSteel’s domestic revenue drivers. Figures seven through to thirteen on these two pages represent the major business sector drivers of OneSteel’s domestic revenues. ONESTEEL REVENUE DRIVERS Figure five illustrates that the drivers of OneSteel’s business in 2006/07 were quite different from those of the broader Australian economy. consumer demand makes up 58% of Australian gross domestic product while the construction segment accounts for just 14%. In terms of OneSteel’s revenue drivers, construction accounted for 52%. As such, OneSteel’s revenue was less affected by swings in the level of consumer demand, and more by the construction markets.
DOMESTIC REVENUE DRIVERS Figure six is an index of activity in the segments that drove OneSteel’s domestic revenue. Overall, all the domestic market segments improved by 2.0%, decelerating from the previous year’s pace of 5.5%. the construction sector, which accounted for 52% of OneSteel’s revenue, improved by 4.9%, amid continued strength in the non–residential and engineering segments. ENGINEERING CONSTRUCTION Engineering construction encompasses the value of building or upgrading major infrastructure such as roads, bridges, railways, highways, pipelines, telecommunications, harbour and marine facilities, water and sewerage, and electricity. this sector makes up a significant proportion of OneSteel sales in any given year and in 2006/07 provided approximately 20% of OneSteel’s revenues. As Figure seven indicates, activity in this sector increased by 5.0% when comparing the 2006/07 and 2005/06 financial years NON-RESIDENTIAL CONSTRUCTION the non–residential construction sector represents the value of work done in building and altering hotels, offices, shopping centres, factories, and education, health and other social facilities. this sector accounted for 20% of revenue in 2006/07. As Figure eight indicates, the value of activity in this sector increased by 6.5% when comparing the 2006/07 financial year with the prior year.
RESIDENTIAL CONSTRUCTION Residential construction covers investment for the building and altering of private and public units and houses. OneSteel derived 12% of its revenues from this segment in 2006/07. As can be seen from Figure nine, residential construction activity increased 2.1% from the previous year. OTHER MANUFACTURING Residential construction covers investment for the building and altering of private and public units and houses. OneSteel derived 12% of its revenues from this segment in 2006/07. As can be seen from Figure nine, residential construction activity increased 2.1% from the previous year. MINING PRODUCTION Mining production represented approximately 10% of OneSteel revenues. Activity in this sector rose 3.3% (refer to Figure eleven) over the 2006/07 financial year from the prior year.
AGRICULTURE PRODUCTION Agricultural production represented 5% of OneSteel revenues and declined by 17.6% from the prior year as a result of continued drought conditions in many areas (refer to Figure twelve). AUTOMOTIVE OUTPUT Automotive output includes production for domestic automotive manufacturers including component part manufacturers. this sector represented 5% of OneSteel’s revenues. Activity was flat compared with the prior year (refer to Figure thirteen). IRON ORE PRICE OneSteel has iron ore reserves in the South Middleback Ranges that it uses to both feed the Whyalla Steelworks and to sell to external parties as an additional source of revenue. through Project Magnet the volume of external sales of hematite iron ore is being ramped up from one million tonnes per annum to reach four million tonnes in the 2007/08 financial year. thus iron ore sales are becoming a greater proportion of OneSteel’s revenue base. Sales of iron ore and related by–products contributed approximately 16% of total revenue in the 2006/07 financial year. Figure fourteen shows the international movement in iron ore prices in both US and Australian dollars. Benchmark iron ore prices increased 9.5% in April 2007 following a 19% price increase in April 2006.
COKING COAL PRICE Figure fifteen shows the movement in international contract coking coal prices in US and Australian dollars. Whyalla Steelworks uses coking coal in the manufacturing process at the Whyalla Steelworks to make iron. OneSteel purchases approximately 1,000,000 tonnes of coking coal per annum. OneSteel generally buys coking coal at “contract” prices. the graph illustrates that contract coking coal prices decreased by US$18 to US$97 per tonne in April 2007. this follows a price decrease in April 2006 to US$115 per tonne from US$125 per tonne. contract coal prices are generally set in line with the Japanese fiscal year that runs from 1 April to 31 March. SCRAP PRICE Figure sixteen shows prices for scrap steel in US and Australian dollars. Prior to the merger with Smorgon Steel, OneSteel used approximately 500,000 tonnes per annum of externally sourced scrap feed for its Sydney Steel Mill operation. the other 1.2 million tonnes of steel that OneSteel produced each year prior to the merger with Smorgon Steel was predominantly converted from iron ore at Whyalla Steelworks. HOT ROLLED COIL (HRC) PRICE The graph represents prices in US and Australian dollars for HRc, a major semi–finished steel flat product that is used primarily by OneSteel in the manufacture of pipe and tube. Prior to the merger with Smorgon Steel, OneSteel purchased between 400,000 and 450,000 tonnes of HRc in any given year. Figure seventeen depicts the volatile nature of prices of HRc for imports into Asia.
LONG PRODUCTS INTERNATIONAL PRICES Figure eighteen represents the international prices for long products such as structural beams used for construction, merchant bar which is used in a wide range of applications including machinery and manufacturing equipment, rebar which is used as reinforcing for concrete, and lastly wire which is used for anything from springs to fencing. the graph is in Australian dollars. International prices for long products have a direct impact on OneSteel’s revenue because they influence both the export and domestic prices at which OneSteel’s products can be sold. PRICES FOR STEEL RESIDENTIAL CONSTRUCTION MATERIALS this graph represents prices of steel products used in Australian residential construction as measured against an index. OneSteel produces structural steel and reinforcing products. the rise in steel prices depicted in Figure nineteen reflects strong international demand for steel, which pushed up prices for steelmaking inputs such as scrap steel, iron ore and coking coal. ONESTEEL DOMESTIC PRICES In response to the rise in raw material input costs that are depicted in Figures fifteen, sixteen and seventeen OneSteel has been implementing price increases since February 2004 to recover those higher costs. Figure twenty represents an index of OneSteel’s domestic steel prices. In the 2006/07 financial year OneSteel achieved a 5.3% increase in the average price of steel per tonne, or a 2.6% increase excluding exports and special projects.
VOLUME OF IMPORTS INTO AUSTRALIA A higher volume of steel imports into Australia puts downward pressure on domestic steel prices. the volume of imports in some of OneSteel’s product lines remains at higher than historical levels as illustrated in Figure twenty one. the data include approximately 90,000 tonnes of OneSteel imports of finished and semi–finished product associated with production disruptions at the Whyalla Steelworks blast furnace in the latter part of the 2004 calendar year.

Product Processes

Typical steel companies tend to be only manufacturers of steel, meaning they have to purchase raw materials and also sell product through independent distribution networks. As a result such companies can be squeezed by both raw material providers and distributors, and some of the value that can be created in the manufacturing process gets transferred. For that reason OneSteel was established with its own iron ore mine for raw material to feed the Whyalla Steelworks as well as with its own distribution network.

One of OneSteel’s key competitive advantages is its iron ore mines that are situated just 60 kilometres from its largest production facility, the Whyalla Steelworks in South Australia. Almost half of the 2.6 million tonnes of steel that OneSteel expects to produce each year following the merger with Smorgon Steel will be made at the Whyalla Steelworks using iron ore. OneSteel’s three other production facilities are electric arc furnaces that make steel by melting scrap. With the addition of Smorgon Steel’s recycling business, OneSteel is also naturally hedged in scrap.

Mining Tenements

Outlined in yellow in Figure twenty three is OneSteel’s tenement covering its mining operations at the Middleback Ranges in South Australia. Also highlighted are the locations of the current operating mines: Iron Knight, Iron Duchess, Iron Duke and Iron Magnet. The mines are located approximately 60 kilometres from OneSteel’s Whyalla Steelworks.