BlueScope Steel Limited (BSL) Earnings Call Transcript & Summary

Good morning and welcome to the BlueScope FY '20 Financial Results Presentation. My name is Mark Vassella, and here with me today is Tania Archibald, our CFO. Together, we'll take you through our results, major initiatives and then take your questions. Starting with safety. Our health and well-being focus in the second half of FY '20 is centered around the effective management of COVID-19 while also ensuring the day-to-day safety of our operations. Our safety performance, frankly, needs more work as the number of people that are being injured at work is not acceptable. To do this, our new health and safety strategy is assisting us in placing a stronger focus on enhancing capability in our people and ongoing implementation of high-level controls for our critical risks. Tragically, in May, a contractor was fatally injured while working at the berth at the Port Kembla Steelworks. The company will learn from the findings of the investigation into this tragic accident. The company's underlying EBIT of $564 million was an excellent result in the context of the COVID-19 pandemic and the decline in steel spreads. The financial results this year, and in particular during the June half in which we delivered underlying EBIT of $262 million, show the strength of BlueScope's business model, our financial disciplines and, most importantly, the quality of our team. Speaking of our team, we've worked very hard over the past 6 to 8 months to maintain COVID-safe workplaces. We've adopted comprehensive health measures in all operating locations, a step made easier given our sites' low employee density and high degree of automation. And where possible, our employees are working from home. Pleasingly, we've not seen any closures due to COVID-19 infections to date. However, as a tragic reminder of how real this crisis is, we had the very sad news over the weekend of the passing of one of our Kansas City team members, Richard Sanchez. Richard had spent 45 years with us. Our thoughts and deepest sympathies go to his family at this time. Now if you'll permit me to reflect for just a moment. At the start of the year, COVID wasn't a word in our vocabulary. No one predicted this sort of phenomenon. Everyone was blindsided. And now engaging in blame games won't help solve this. From Jamshedpur to Auckland to Ohio, our plants have been affected by government mandates and responses. Our 14,000 strong BlueScope team rose to the challenge. Through a lot of hard work, we're good at industrial health and safety protocols. We've remained operational and safe at more than 150 plants worldwide. I won't criticize governments for their responses, though personally, I worry about the deep economic consequences of these decisions. We're at war with this pandemic and bad stuff happens. Our leaders have to fight as they believe and as their health generals advise them. The really critical thing for government, communities and businesses is to collaborate, to make sure we stay safe and, at the same time, economically sound. Community health is critical, but we also need jobs and industry. We need both for our long-term national well-being. Now turning to our businesses. The resilience of the model has been demonstrated with robust volumes in key markets. ASP saw its strongest domestic dispatch volume in the second half FY '20 since the first half FY '19, benefiting from solid ongoing construction activity. We applaud the decisive and substantive actions taken by state and federal governments to maintain broader building and construction supply chains. This has enabled us to maintain full employment in Australia, allowing the stimulus programs to be directed to areas of the economy with greater need. North Star dispatches were maintained above 90% of capacity in the second half of FY '20 compared to the rest of the U.S. steel industry at 50% to 60%. Strong cash flow was maintained. During the year, BlueScope generated $412 million of free cash flow before funding the North Star expansion and shareholder returns. After taking into account the North Star expansion spend, cash flow remained healthy at $238 million. This led to a $79 million net cash position on the balance sheet or over $500 million, excluding operating leases. And at June 30, we had very strong liquidity of over $3 billion. The quality of the North Star asset was highlighted by the high utilization levels amid accelerating U.S. capacity rationalization. The expansion project is on track and remains a capital allocation priority given its expected long-term value accretion. As we look to the future, our business is well positioned to address some of the emerging trends post COVID with the localization of supply chains, a shift towards lower density and regional residential housing, increasing alterations and additions activity, and growth in infrastructure to serve logistics and the digital economy. To the financial scorecard. I won't dwell on this page given my previous commentary other than to point out that despite the cyclically weaker conditions, the team nonetheless delivered an outstanding set of results with $564 million of underlying EBIT, 7.6% return on invested capital and $238 million free cash flow after funding the North Star expansion project. Reported NPAT of $97 million was impacted by a $197 million write-down of assets in the New Zealand and Pacific Islands segment as foreshadowed in July and reflective of the lower sustainable earnings in the current business model. Importantly, the strategic review of this business is substantially progressed, and I'll touch on this in a moment. Considering the strength of the balance sheet and the quality of our asset portfolio, the Board has approved the payment of a final dividend of $0.08, in line with last year. In terms of managing through COVID-19 and our response, looking across our portfolio, we were pleasantly surprised by the robustness of demand for our products. In Australia, as I flagged a moment ago, we saw very resilient demand. Broad recognition of the importance of the building and construction value chain led to ongoing high activity levels with no operational closures. Even now in Victoria, all of our sites continue to operate having worked constructively with the Andrews government to demonstrate the critical nature of the products we supply and our COVID-safe work practices. In North America, North Star's utilization remained above 90% during the second half of FY '20 as the impact of automaker closures was mitigated by an ability to pivot to other segments, a testament to their agility. We're pleased to see the rapid industry response, supply response to remove inefficient capacity. Some supply has returned, which we expected. This would appear ahead of the demand and is causing some near-term weakness in U.S. steel prices and spreads. We expect this to improve in coming months as demand continues to rebuild. In Asia, we saw a much better-than-expected recovery in China post the COVID-19 shutdown. In general, the ASEAN business has performed well, except for Malaysia, which was subject to a mandatory government shutdown. India made a solid contribution despite government shutdowns. New Zealand, too, was impacted by a compulsory government shutdown of operations during March and April. However, demand was generally resilient and recovered strongly when the operations recommenced. Broadly, setting aside the variable margin on foregone sales, we estimate the financial impact of unrecovered fixed costs during the various shutdowns to be around $30 million. This has not been adjusted out of our underlying results, and Tania will touch on each of the businesses shortly. In terms of addressing the potential financial impacts of COVID, the team took measured action to protect the business and balance sheet by pausing discretionary operational and capital spend, minimizing near-term North Star expansion spend during the second half of FY '20, canceling the on-market buyback, enhancing our available liquidity and freezing ELT and executive pay for FY '21. Looking to the future, we feel BlueScope has a terrific story around how we can help our communities adjust to life with and post COVID. We already see evidence of localization or reshoring of supply chains, which plays to our focus on serving the domestic markets in which we operate. In our key markets of Australia and New Zealand, we're seeing a rise in home improvements and extensions activity stimulated by both the redirection of discretionary spend away from travel and the like and through government stimulus such as HomeBuilder. We're starting to see a shift in preference towards lower density and regional residential housing, spaces which are at the heart of BlueScope's flat steel products offering and which plays to the more readily transportable nature of steel compared to other building products. We know that the digital economy and logistics are taking off, and so, too, the need for quality, Internet and data centers. Again, supplying the building products and solutions for the infrastructure that house these industries is a sweet spot for BlueScope. Further, as government spend on infrastructure ramps up, steel will be a key input required. And finally, if we see a preference towards private road travel away from, say, public transport or air travel, this will also be a steel consumption driver. Tania will take you through the detail across the segments in a moment. But at a high level, weaker commodity steel spreads impacted most businesses. The improvement of the Building Products Asia and North America segment was encouraging. As we continue to look to the future and the role we want to play as a company, we've been doing some work, including extensive consultation to better define our purpose. I'm pleased to introduce that to you today. Our purpose is that we create and inspire smart solutions in steel to strengthen our communities for the future. You've seen our strategy, but we continue to evolve it, informed by our purpose. Our focus is across 3 core activities: transform, grow and deliver. We'll transform our portfolio of businesses through a key focus on digital technology and through our approach to sustainability and climate change. We'll grow our portfolio of sustainable steelmaking and world-leading coating, painting and steel products businesses. And we'll deliver a safe workplace, an adaptable organization and strong returns. BlueScope remains steadfast in our commitment to play a proactive role in reducing the greenhouse gas emissions associated with the manufacture and use of our steel products. Through the year, we elevated our climate strategy to be a key component of our corporate strategy and made progress on assessing our Scope 3 emissions inventories. We continue to diligently pursue emissions reduction projects in line with our 2030 climate change target. However, performance in FY '20 was impacted by government-mandated shutdowns and planned and unplanned outages, resulting in a 1.2% increase in emissions intensity on FY '19. We flagged that our emissions reduction performance would not be linear, and we continue to believe we can deliver on the 12% decrease in emissions intensity by 2030. In the near term, we are contributing to key industry research, which will inform the refresh of our scenario analysis and development of a long-term carbon aspiration. We're continuing to progress our disclosures with the FY '20 sustainability report to be published in September, and we're ensuring we're across developments in low and 0 carbon steelmaking technologies across the globe. Looking to other key sustainability topics for BlueScope. I'm proud of the progress we're making in building on our resilience and embedding sustainability in all that we do. On supply chain sustainability, we've completed a pilot program of assessments of BlueScope sites, and we're making good progress on assessments of 120 of our priority 1 and 2 suppliers. On diversity and inclusion, we've maintained our high levels of female recruitment at around 40%, along with our focus on building the profile of STEM careers. We're working to build a more inclusive workplace and enhance our overall diversity across our global footprint. Our community efforts continue to actively promote local participation and collaboration to improve and empower the lives of the people working and living in our communities. We responded to the Australian bushfires with corporate and staff donations to the Red Cross Disaster Relief and Recovery Fund and, across our operations, contributed to the response to the COVID-19 pandemic. I also note, as previously disclosed, the civil proceedings brought by the ACCC, alleging contraventions of the Australian competition law cartel provisions, are ongoing. Turning to the USD 700 million North Star expansion project. It's now a year since we confirmed that the project would proceed. This remains a compelling opportunity for BlueScope to grow what is arguably the leading minimill in the U.S. Today, I'm pleased to report that we're progressing well and on budget. As we announced to you in April, construction and installation programs were rescheduled to minimize near-term cash spend whilst maintaining core program activities. This has had no impact on the overall budget and only a modest impact on the anticipated project start-up timetable. As you can see from the photos, civil and buildings works are well underway with significant progress on the melt shop building and on the shuttle furnace. OEM equipment manufacturing has continued with shipments commencing during the current half, including the EAF. With a strong balance sheet and full conviction in the value of this project, we'll be maintaining full momentum towards targeting commissioning during the half ending June 2022. It's well recognized that North Star is a best-in-class asset. It's an uncomplicated business model, producing great quality hot-rolled coil with a motivated and customer-focused team. The business has a history of cash generation and industry-leading margins. The relatively low-fixed cost base and operational flexibility has given North Star the ability to deliver returns across a broad range of spread scenarios, and its margins lead both electric arc, furnace and blast furnace peers in the U.S. North Star's location is no accident, being within close proximity to its customers and scrap suppliers, giving it a clear freight advantage. But the real x factor for North Star is the amazing team culture that drives the group to consistently deliver not only the great quality product but also great customer service. Consistent delivery in full on time and responsiveness makes North Star a preferred supplier for customers in our region, as evidenced by the Jacobson survey results. The trend in U.S. steelmaking is towards highly efficient electric arc furnace technology, a trend that's been supported by ongoing industry consolidation and rationalization, clearly evident by the significant supply side adjustments that have been observed over the last half. A year ago, we presented this chart to you showing that North Star's region would largely be in balance in the medium term. Updated for the latest capacity rationalizations and assuming a return to 2019 demand levels, we estimate that North Star's region will be short supplied in 2024, giving us even greater confidence in our ability to place our new volume. The company has now substantially progressed a strategic review of the current operations of the New Zealand and Pacific Islands business and is proposing to reconfigure the business by delivering a change in product mix, cost and productivity improvements. The intention is to deliver an appropriate level of profitability and sustainability by making the business more fit for purpose and fit for market. The proposed reconfiguration could see a substantial number of roles being made redundant. The cash cost to achieve is in the indicative range of $30 million to $50 million and would include make-good capital expenditure and redundancies. While we're confident we can deliver on this plan, in the event that the improvements are not achieved, the business may shift to external supply products, and primary steelmaking operations at Glenbrook may cease. So at this point, I'll hand over to Tania to take you through the segment performances, group financials and financial framework in detail.

Thanks, Mark. The Australian business delivered an underlying EBIT of $305 million and a return on capital of 11% in FY '20. Underlying EBIT in the second half was $177 million, up from $128 million in the first half. We saw strong domestic dispatches across the year, and despite the onset of COVID-19 in the second half, demand remained broadly stable, including in the June quarter. Spreads in the second half remained broadly similar to the first half, and we saw a moderate benefit from realized selling prices, which we foreshadowed in our guidance in February. In the second half, we also had the benefit from an improved contribution from export coke sales, which was up $17 million on 1 half '20. Looking at the specific segments in which we focus in Australia. In residential construction, volumes were stable with activity supported by a solid pipeline of existing work and the recognition by both state and federal governments of the importance of the building and construction value chain. This enabled activity to broadly continue uninterrupted in the half in the segments in which BlueScope focuses. Of particular note, the alterations and additions subsegment, which indicatively consumes around half of ASP's domestic residential volumes, remained strong. And in the June quarter, in particular, homebound consumers appeared to redirect part of their discretionary spend to home renovations and improvements. More broadly, sales volumes to residential construction were also underpinned by targeted campaigns focused on consumers, builders and fabricators. In the nonresidential construction sector, volume strengthened by just over 3% relative to the prior half with a strong pipeline of work. Strength was seen across commercial and industrial and social and institutional segments concentrated in Sydney and Melbourne. Sales into engineering construction held steady across the half, supported by demand in infrastructure projects such as renewables, particularly wind towers, bridges and road infrastructure. Demand in the manufacturing segment was generally stable. Sales into the mining segment also held steady, supported by solid mining consumables demand. And with the easing of drought conditions, we've started to see improvement in the agriculture segment. Stepping back for a moment to assess the state of the Australian building and construction industry, overall, we see activity levels in our key segments as being in good shape. Detached house approvals are still holding in a stable historic range, and private new home sales have rebounded strongly since the softer period in March to May. The alterations in addition to outlook remains healthy with homebound consumers redirecting discretionary funds towards renovations, and the government's homebuilder program is expected to support volumes in the near term, both in terms of detached housing and alterations and additions. Over the longer term, as Mark flagged, we see a positive shift towards remote working arrangements, supporting growth in regional areas, which are traditionally areas of strength for our residential products. We also see an emerging preference for lower density living, again, clearly favorable for BlueScope's range of products. In the nonresidential space, approvals remain at very good levels, and the government's focus on fiscal support through its major infrastructure program is likely to underpin demand in the medium term. Turning to North Star. This business produced an underlying EBIT of $190 million and a return on capital of just over 9% for the year. Underlying EBIT in the second half was $75 million. Whilst auto demand was robust through to February, the abrupt COVID-related closure of automakers from mid-March to mid-May resulted in a significant industry-wide drop in demand during the June quarter. The North Star team was able to maintain high utilization rates above 90% through the second half by pivoting towards other sectors. And as a result, FY '20 sales volumes finished only 3% lower than FY '19, which was a fantastic outcome in the circumstances. And I would note that, as of today, the North Star business is continuing to operate at full capacity. The second half was impacted by softer spreads. Realized prices were weaker than benchmark price movements, particularly in the June quarter with a very weak demand environment. Scrap prices were also a headwind during the half as availability tightened, particularly prime grades, which were impacted by lower arisings out of manufacturing, including reduced supply from the auto plants. Now that situation has since improved with the major automakers in North Star's region ramping back up to full production across July. North Star also saw some favorable cost benefits in 2 half '20. This reflects the highly flexible nature of the North Star cost base, and we would expect some of these costs to return as the production mix and activities normalize. We remain confident in the long-term attractiveness of the U.S. market. And whilst COVID-19 has certainly impacted activity across some of North Star's key markets in the near term, the underlying performance and future trends remain supportive of continued robust demand. In the auto industry, the impacts of the 2-month closure earlier this year are clearly evident on the chart. Auto demand is recovering and is expected to normalize to pre-COVID levels, albeit the time frame remains unclear. It's also worth calling out the growing shift towards light trucks and SUVs, which have higher steel intensity. It has taken a couple of months for the complex auto supply chains to ramp back up, and they now appear to have solid momentum. In the nonresidential construction sector, whilst there was a level of impact from COVID-19, the Architecture Billings Index clearly began to rebound in June. Manufacturing also saw a dip in the second half, which was brought on by COVID-19. Activity has since bounced back in recent months in line with underlying demand, which is well supported by a trend to reshoring of manufacturing. Moving on to Building Products Asia and North America. This business delivered an underlying EBIT of $155 million and a return on capital of 9.8% for the year. Underlying EBIT in the second half was $75 million, coming close to the first half effort of $80 million despite the seasonality of Chinese New Year and the impacts of COVID on markets, operations and supply chains. In China, the strong recovery from government-mandated COVID operational shutdowns early in the second half saw the business outperform expectations later in the half, a reminder that the business in China is highly seasonal with profitability broadly split 2/3 in the first half and 1/3 in the second half. It's a reflection of the strong performance of this business, but notwithstanding the 3- to 4-week shut in the second half, it delivered an EBIT comparable to 2 half '19 with underlying end-use demand remaining robust in the segments in which BlueScope China participates. In Southeast Asia, there was a good result as margins improved, offsetting slightly lower volumes. In Thailand, there was a strong performance enabled by the enhanced cost position from the new high-speed metal coating line, along with a strong sales performance. Vietnam held up quite well despite some early COVID-19 impacts. The good performances in Thailand and Vietnam have largely offset the impacts of the mandated operating closure in Malaysia and the exchange rate volatility impact on Indonesia's performance. The Southeast Asian businesses are now also seeing the full benefits of the Ignite cost and productivity improvement program, which has delivered an annualized benefit of $40 million on a run rate basis by the end of FY '20. But as always, we continue to balance performance on cost with investing for growth in the region. In North America, underlying demand remained stable, and volumes improved after a softer performance in FY '19. Results in the half were substantially up, reflecting much improved manufacturing performance and the impact of lower cost feed materials sourced in the first half. India delivered a solid result despite the government-enforced closure of operations in the second half with stronger margins, again, offsetting lower volumes. Turning to Buildings North America. This business delivered an underlying EBIT of $38 million for the year and a return on capital of 6.1%. Underlying EBIT in the typically seasonally weaker second half was $13.5 million. Sales volumes were softer due to COVID-19 impacts, including project delays and softer end market demand. These lower volumes adversely impacted productivity, but overall margins remained robust. And as foreshadowed in February, there was a modest contribution from the BlueScope Properties Group in 2 half '20. Turning to New Zealand and Pacific Islands. This business delivered an underlying EBIT loss of $5.8 million for the year with a second half loss of $18.7 million. Performance in the second half was significantly impacted by the month-long government-enforced closure from late March to late April. And we estimate the financial impact of unrecovered fixed cost to be around $15 million. That number is net of government support during the government-mandated closure period. Now this is a reasonably conservative estimate of the closure impact as it does not include the foregone variable margin on lost sales. While steel prices softened through the second half, as we expected, cost pressures continue to challenge this business, particularly elevated electricity costs, along with stable but high coal and alloy costs. As foreshadowed in Feb, we saw a similar net vanadium contribution in 2 half '20 to the first half. End market demand continues to be relatively strong across most New Zealand construction segments. And in particular, there was strong pent-up demand immediately following the restart of operations going into May and June, and that strength in demand has continued through to today. Turning to the underlying EBIT group walk forwards. On the left-hand side from FY '19 to '20, what you see here is a result of much lower spread environments in both the U.S. and across Australasia. This was particularly evident in the U.S., where benchmark spreads contracted by over USD 150 a tonne driven predominantly by a drop in regional hot-rolled coil prices of around USD 250 a tonne. Lower Asian hot-rolled coil prices impacted both Australia and New Zealand with the benchmark index contracting by just under USD 70 a tonne. Higher iron ore prices also impacted Australian steel products. And whilst we saw the benefit of falling coal prices, this was effectively offset by lower export coal contributions. Although cost improvement initiatives across the company more than offset escalation, 2 key factors weighed on the cost position. Firstly, the various government-mandated site closures in China, New Zealand, Malaysia and India unfavorably impacted conversion costs by around $30 million. This reflects the unrecovered fixed cost impact only and does not include the margin on loss sales during the closure periods. And secondly, the significant reduction in vanadium slag prices reduced the contribution that this byproduct provides to New Zealand steel by around $38 million. Volume performance was also reduced from FY '19 to '20, largely driven by COVID impacts in the second half. I'd also like to point out that EBIT was boosted by $19 million in FY '20 due to the impact of AASB 16 leases. On the right-hand side of the page, looking at the first half to second half FY '20, realized spread improvements in Australia and Asia were broadly offset by weaker spreads at North Star and New Zealand. In terms of costs, government-mandated site closures had a negative impact on conversion cost efficiency. But pleasingly, the performance on cost improvement initiatives was very strong and escalation was well contained. We also saw the benefit of the substantially improved manufacturing performance in Building Products North America. Volumes were impacted in the second half, largely due to seasonality and a range of COVID-19 impacts across our footprint. Finally, many of you will be aware that, in May, we experienced a cyber incident, which saw unauthorized parties access our network. As a result of our ability to quickly detect and respond to the incident, we experienced no material impact on our operations and sales. However, the episode did trigger a number of manual processes for a short time and also highlighted areas where we can enhance our cybersecurity measures, and we've made good progress on these since the incident. On this page, we've set out the effects of the adoption of the new lease standard AASB 16 from 1 July '19. It's important to point out, as I'm sure you all know, these are noncash accounting impacts to reflect a change in the accounting treatment of pre-existing operating leases. These changes have no impact on our underlying risk profile or cash flows. There is no impact to our bank facilities or Reg S bonds, and the new approach taken by the accounting standard is consistent with that already used by the ratings agencies. The key numbers that will be of interest to you are the $430 million increase to net debt as at 30 June, the $114 million increase to EBITDA and the $19 million increase to EBIT in FY '20. I'll take a moment now to run through our financial framework and key financial indicators. The financial framework remains as relevant as ever, and we feel it positioned us well at the start of the pandemic. As a recap, we have 3 key focus areas: firstly, in delivering returns greater than our cost of capital and maximizing free cash flow generation through the cycle. Secondly, we seek to maintain a strong balance sheet and credit metrics given the ability to robustly weather industry and economic cycles whilst providing the capacity to deliver on value-accretive opportunities. And finally, we remain disciplined in our capital allocation, balancing shareholder returns with investing for long-term sustainable growth. Having the financial framework in place for many years now means that we are confidently working our way through the current macro uncertainties whilst continuing with the long-term value-accretive expansion project at North Star. Group ROIC for the year was 7.6%, down from the previous year, principally driven by cyclically lower spreads. In the context of lower spreads, the North Star and Australian businesses continued to perform well. Building Products at 10% ROIC is still not at the level we are targeting, but creditable considering the COVID-19 impacts across markets, supply chains and operations during the second half. China is performing well. And in ASEAN, we've made significant inroads on cost and productivity, positioning the business well as conditions improve. The Buildings North America and New Zealand businesses do not currently meet our expectations at performance, and Mark has already covered our plans to sustainably improve the performance in New Zealand. Overall, looking through the average of the last 3 years, the group has delivered ROIC at a solid level, around 16%. Turning to cash flow. Despite weaker spreads, the group generated solid annual cash flow of $412 million for FY '20 before investment in the North Star expansion project, which is a good outcome in the prevailing conditions. The second half saw a mild working capital benefit, which is a somewhat typical pattern but represents a strong result with the challenge of COVID-19 impacts during the half. Financing and taxation costs remained relatively modest, and I'd also note that we still have around $1.3 billion of tax losses in the Australian consolidated tax group, which means there will be no Australian income tax payments until these losses are recovered. You can see on this slide that net working capital moderately improved by just under $100 million, which was a very good performance, driven by close management of data books and inventories in the face of COVID-19 uncertainty, and this will remain a key focus area. Turning to our capital structure. The balance sheet is in a very strong position of $79 million net cash compared to our target of around $400 million net debt. I know we flagged a preliminary unaudited net cash position of around $100 million in our 17 July release. The final position of $79 million net cash reflects our final review of operating lease treatments under the new AASB 16 standard. Excluding operating leases, the position at 30 June was $509 million net cash compared to $693 million at the same time last year. Clearly, the strength of the current balance sheet positions us well given the significant capital expenditure on the North Star project during FY '21 and in light of current market conditions. Liquidity remains in excellent shape at over $3 billion. Over the 6 months, we took a range of measures to strengthen our financing lines, including increasing and extending the syndicated bank facility which now sits at $1.205 billion and is undrawn at this point. On capital expenditure. One of the actions we took, which was announced in April, was to pull back discretionary capital spend and minimize near-term spend on the North Star expansion project for a period of approximately 6 months. At that time, we guided to 2 half '20 North Star spend of approximately USD 90 million to USD 100 million and other CapEx of around $200 million, and both spend areas have come in close to that guidance. With the financial outlook remaining uncertain, we are continuing with a prudent approach to CapEx. This is reflected in the 1 half '21 guidance of approximately $130 million on sustaining and growth capital, excluding the North Star project. I will highlight that 1 half '21 CapEx remains constrained and will likely increase as and when conditions improve. For the North Star project, we expect approximately USD 375 million to USD 450 million to be spent this year, broadly split evenly across the 2 halves. In FY '22, we expect a further USD 125 million to USD 200 million to be spent on the project. Turning to shareholder returns. As Mark flagged, the Board has approved the payment of an $0.08 per share final dividend. Given the large CapEx program in FY '21 and uncertain market conditions, there is currently no active buyback program. And with that, I'll hand back to Mark.

Thanks, Tania. Now turning to the outlook. As noted in our 17 July release, at the beginning of the first half of FY '21, lagged steel spreads in North America and Asia are lower than the second half FY '20 averages, and that remains the case today. Orders and dispatches in Australia continue to remain stable, and North Star is dispatching near-full capacity. There's a high level of uncertainty in the current environment given the risks of COVID-19, which could disrupt demand, supply chain and operations, combined with broader macroeconomic weakness dampening demand. In light of this, we are not providing specific underlying EBIT guidance for the first half of FY '21, but rather, we'll provide more granular comments on the key drivers across our businesses. For ASP, domestic dispatch volumes through to the current point remain very good with strong demand in construction markets driven by the trends and stimulus that we discussed earlier. In Victoria, we really haven't seen any impact from stage 4 restrictions to date. However, overall, we remain cautious as to how long these positive conditions may last. Lagged benchmark spreads are currently weaker than last half, and we also expect a moderate unfavorable impact from realized spreads. For North Star, on the demand side, lead times are out to 4 weeks, which is good in the current market, and service center inventories have come down. The dispatch rate is currently close to full capacity with solid demand driven by the construction and auto segments. In construction, we're seeing particularly good demand from racking and guardrail applications. And in auto, the big 3 in North Star's regions are back to full production. As flagged, steel spreads are currently significantly weaker than last half. Spot spreads are around USD 180 per metric ton compared to the lagged average in the second half of FY '20 of USD 276 per metric ton. We do expect a level of volatility in prices and spreads over the coming period as supply and demand levels recover. In scrap markets, obsolete scrap remains readily available, and prime scrap availability has improved dramatically, as Tania flagged. For the Building Products segment, the outlook, absent any further COVID-19 shocks, we expect demand in India and ASEAN to continue to improve and a no repeat of the Malaysia shutdown. In North America, at this point, demand remains stable. However, margins are likely to be softer on weaker steel process. We're optimistic on the outlook for China operations this half with ongoing recovery from COVID-19 and favorable seasonality. For Buildings North America, we expect a weaker result in the core buildings business with lower volumes, largely driven by COVID-19. BlueScope Properties Group is expected to generate a stronger contribution on project timing. For New Zealand, unlike the second half of FY '20, we currently expect to be able to operate fully throughout the period notwithstanding the current level of restrictions. Demand is robust, but it's unclear if this will hold throughout the half. Further, lagged steel prices are currently slightly weaker than the second half of FY '20. And finally, I'd note that BlueScope's AGM is coming up on the 19th of November, and we'll provide an update on trading conditions in that forum. To summarize, our performance in the last half demonstrates yet again that BlueScope is a truly transformed company, one capable of withstanding some of the toughest conditions the economy has thrown at us. We believe that we have an asset portfolio, a dedicated team of 14,000 people and the financial disciplines that make us an advantaged steel building products company. Further, we're well positioned for growth as we have a portfolio that can deliver on post-COVID community trends toward lower density housing, e-commerce and onshoring of supply chains. We're innovating to drive intermaterial and broader growth in Australia. We're expanding in the best-in-class U.S. minimill for growth in FY '22 and beyond. We have an outstanding suite of Asian coating and painting assets well positioned in higher growth economies, and we're transforming how we do business through digital technologies. Thanks for your time this morning. And with that, I'll turn it over to Q&A.

[Operator Instructions] Your first question comes from Lee Power with CLSA.

If I look forward to first half '21, North Star looks like it's going to be very tough on your sensitivities. I know you've talked to the variable cost nature of that business, and you called out workers as the x factor. Can you maybe just talk a little bit about the at-risk compensation and how much of that is linked to profit, which seems like it's going to be hit pretty hard versus production metrics, and how that kind of -- how we should think about that, given utilization obviously held up very well?

Yes. Thanks, Lee. So the way we've set up the compensation structures for North Star is about 50% of the REM for the team there is variable and based on safety, production, profitability, customer service. So it's a highly variable comp structure that we have in place that allows us to flex, obviously, in times like we're seeing right now. So that's a significant advantage for us, not dissimilar to many of the minimill companies in North America, albeit we probably have a slightly higher fixed component at around that 50%. So we're well positioned for that. As you rightly point out, I mean spreads aren't great in North America at the moment. We've seen some blast furnaces come back on. That's probably ahead of demand, firstly. And secondly, I suspect, it's probably my opinion, probably more driven by the operational security risks of having blast furnaces banked than anything else. So yes, we're in a soft spread point of the cycle right now, but that's the beauty of this business. I mean we're looking at this capital expansion over 20 years of long-run average spreads. We have points like this. We've talked about that previously. We saw supply side adjustments in that second half as a result of the softer spreads, and we would expect that cycle to continue and our spreads to improve.

Yes. So it sounds like you -- given what you said, I mean you're reconciling that kind of stronger demand, all the commentary that we're hearing and weigh your spreads just on capacity additions coming back. I know that you've hopefully given a slide on 15, which looks at all the capacity additions that are coming in and what's being removed. I mean how do you think about that on a production basis? Because a lot of that capacity that's coming out, surely that's being run at very low utilization.

Yes. Look, I think that, that's the beauty of our model here, Lee. We -- the team just did a remarkable job, I've got to say. If you think about 40% to 50% of our volumes going into the automotive industry, that gets shut for 2 months. That team pivots, moves to other segments. The segments that aren't as profitable as we would've -- as we would like our auto segments, which is why we're in those segments to start with. But the ability of that team to pivot and move and keep our capacities at that plus 90% level when the rest of the industry was at 50% or 60% is just, quite frankly, an outstanding result. So we think about production in terms of running the plant full. We have the flexibility to be able to adjust, I mean literally overnight in terms of what we need to do from a production point of view. That business has such credibility in the market that when they go knocking on doors to talk to customers about volume, customers talk to us. They want our product, and this has been the thesis we've been pushing on the North Star investment right from the get-go. When we go and talk to customers, they want the product out of North Star because of the superior quality of the product and the fact that the team do such a great job there in terms of customer service. So the way I think about production for North Star as we run that asset flat out. And this second half has demonstrated that even in the circumstances we faced with the shut of the auto industry, the team were able to continue to operate at high levels of utilization, not the profitability that we would like, obviously, but certainly at high levels of utilization, which is a really strong position for us to be in.

Yes. I was more talking about like the capacity that's coming out of the market. I mean how -- I guess I was trying to get at what -- like what utilization you think that's being run up because I noticed you have the capacity coming out, but it means that -- those tonnes are clearly not going to -- those plants are clearly not being run at a high utilization rate like you.

All you can really look to, Lee, is that 50% to 60% for the rest of the industry. So that tells you the number that capacity is coming out at. I suspect there's assets there that are running at lower capacity than that. I mean the difficulty with the blast furnaces is it's very challenging to run them at low levels of capacity. Hence, we saw such a supply side adjustment. Look, I think the way I'd sum it up is as we look at the market dynamic, as we look at the capacity rationalization, from my perspective, everything I've seen since we announced this project a year ago does not detract from our hypothesis about this model being the right place for us to invest. I think the structural changes that we're seeing are a positive for North Star. There's no way they're a negative. They're a positive for North Star. And the chart, we've included there on 16, which will change again, and we'll continue to update it, but we've seen that slightly positive shift towards opportunity in the market for us when we're making steel in FY '22 and beyond.

Your next question comes from Nick Herbert with Crédit Suisse.

A few for me, please. I'd like to start with ASP. Just wondering if you can talk a little bit to its operating leverage. Just interested to understand a bit more about what a potential downside scenario could look like if domestic volumes weakened from here. Obviously, subject to spread, if you took second half spreads or spot as a scenario, just what that sort of volume earnings trade-off could look like to perhaps sort of guide to where that would need to get to get to an earnings or cash breakeven?

I'm looking at tenure here, and we'd have to do some fast math for you on that, Nick. I think...

Maybe the key way to go with this is the cost base of the Australian business, it operates on the basis that it's got to be -- the steelmaking front end part of the business has got to be cash breakeven at the bottom of the cycle. It has a highly competitive cost base. Bottom of the cycle, roughly, roughly around USD 190 a tonne. Southeast Asian spreads are clearly higher than that at the moment. Spot spreads have actually, I think they're probably more around sort of $250, low $250 sort of mark. So it's all about the cost base of the business and the fact that at bottom of cycle spreads, it's not a drain on the balance sheet. That's the way to think about the business.

Okay. And I guess then if we do have a downside scenario in terms of volumes, I guess can you just talk through a little bit around the potential cost levers that you have to reduce costs in that scenario?

Yes. Look, I mean, clearly, what would happen if we -- and it goes back to the point I made earlier about North Star. I mean, it's hard to run blast furnaces at less than a certain level of capacity. And I mean, in our view, as we went through the GFC, was you can't really run the blast furnace at much less than sort of 80% capacity as the sorts of numbers we think about when we run a blast furnace and maintain the security of the asset. So Nick, what would happen is if we saw volumes domestically fall below those levels, we'd have to grow our export volumes. That's really where you get to, and that's why so much work has been done in recent years for us to continue to grow our market share and push into material products. We again saw another growth in the half of our residential steel framing products. We've continued to push into areas like coil plate as import replacement. So all of that work that goes on in the Australian steel products, sales and marketing group to actually continue to grow our share, to continue to replace into material products is all to compensate or mitigate for volume downturn but a strong result for the company for the year, ASP. I think they did a really nice job in terms of the overall volumes where they landed. If you had given me at the start of the year, last year's volumes, plus a couple of percentage points given COVID and the like, I would have taken that in a heartbeat. So the team did a nice job.

And maybe one final area of clarification for you, Nick, just as a rough guide. Raw materials make up around 60%. That's clearly variable. The other variable conversion cost would be around 20%, and then you've got about 20% of the fixed cost base just as a rough guide for the ASP business.

Got it. Yes. And then maybe just sort of staying on ASP. With your experience of COVID, just wondering if that's changed your thinking in any way around the long-term viability of steelmaking at Port Kembla in the context of the just cost and the alternatives that you've dealt at potentially importing down the track. Yes, understand the reline is still a long way off, but just interested in your latest thoughts there if that has changed.

Yes. I think it has, Nick, and I think that's what we're signaling with some of those sort of longer-term trends. From our perspective, it's the shift towards more localized supply chains. I think not surprisingly, everyone from Canberra down has discovered that we don't make as much here in this country as we should have. I say surprise -- they shouldn't be surprised because we've been yelling at them for the last 10 years about the importance of local industry and local manufacturers. So the fact we've been able to hang on and survive and prosper, I think, will be the net beneficiaries of this as companies readjust, as the economy readjusts and realizes that it's just not a free option to export your manufacturing capability and expect it to be available when you want to turn the tap on, been a stark example for us in the last 6 months. So that relocalization of supply chains, the shifts that we're seeing from all of our workplaces, we're certainly rethinking how we'll go back to work, but the shifts we're all seeing in terms of working from home, not necessarily needing everybody being in the CBD, people spending their money on home renovations, alterations and additions because they can't spend their money on overseas travel. They're all positive trends for us. So certainly, there are things that have changed our thinking as we've come into COVID. We weren't really expecting it obviously, but they've changed our thinking. And again, I think they're all a net positive for steelmaking and manufacturing in Australia. None of that is negative. That's all a positive and has changed in our favor.

Okay. Great. And then final one, just it's great to see the strong utilization. I'm just wondering if you could talk to the margin impact of that pivot to other products you mentioned and what we should be factoring in, in terms of a realized spread just with that change in product mix.

I won't give an exact quantification for it, Nick, but you can clearly see that there was a fairly hefty level of discounting that went on as a need to get those volumes away. Still profitable volumes. But clearly, when you're going into other segments very quickly, there's clearly a degree of discounting that went on. We would expect to see a substantial normalization back to where we were once we're back at that sort of normal run rate with the full complement of auto in there.

Your next question comes from Owen Birrell with Goldman Sachs.

Just a few follow-up questions from the previous ones asked. Just firstly, on North Star, Mark, can you just reiterate those comments you made about the big 3 autos in your region? I think I missed those before.

In that supply chain rebuild? So of course, we have Chrysler, GM and Ford all within the region of North Star. And post those shuts, we have started to see, obviously, those supply chains rebuild, and those big companies come back to work. Of course, there's many other auto companies, the transplant is I think they were originally called, that have moved into the southern part of the U.S., but the big 3 local for us are Chrysler, GM and Ford.

And did you give an indication of what level of utilization they are back to?

No. I didn't, and we don't know that. But if you look at the sorts of run rates of automobile sales, I mean pre COVID, we were 16 million to 17 million units. That dropped to the low double digits. And as I understood, the last data I saw, it's back running at an annualized rate of about 12 million units as the sort of numbers that we're talking about. I mean if you think about back to the GFC, it bottomed out even lower than that. The GFC went as low as 9 million units. So it's about -- it was about 12 million units per annum, and we understand that, that is continuing to grow as they get back to the higher levels of pre-COVID activity.

And did you have a sense of what levels of utilization we're likely to get back to by the end of the year? Is there any sort of forecast out there?

Sorry, Owen. I didn't get the start of that question. I'm sorry. It's dropping in and out a little bit. Apologies. Sorry, technology.

Yes. Just wondering if there's any levels of utilization that you're expecting these -- the orders to get back to by the end of the year.

Well, the forecast for autos is to get back to the more normal levels. And as Tania pointed out in the charts, as we went through, we love that U.S. auto industry because it's actually going to higher levels of steel intensity with SUVs and pickups. So there is no expectation that I've read or seen or heard where one would expect the auto industry to actually decline. And in fact, the comment we made about changes in COVID or post COVID, there's a strong case and argument in the U.S. that as people shy away from things like airline travel post COVID, they need bigger and better motor vehicles. So from our perspective, we don't have any expectation that the automobile industry will structurally change post COVID.

Okay. And then just a follow-up on the Aussie markets. A good chart there showing the improvement in the A&A activity. I'm just wondering if you can give us a sense on what your read on the take-up of HomeBuilder is at the moment. I mean we've sort of heard conflicting comments around strong take-up or weak take-up. Any sense on the level of take-up and your exposure to that?

Yes. I think the way we'd summarize HomeBuilder is it's too early to say there's been a dramatic impact or material impact on our numbers. What we've seen as we went into COVID was quite a high degree of utilization of the pipeline. So activity that was booked, many builders, customers wanted to get their houses done, and there's no doubt that had a pull forward for us. And people reflected on what was going to happen from an economic perspective. As we've talked about, we've seen absolutely strength in the renovations or alterations and additions piece. So that's been a positive for us. And again, that's about half of our COLORBOND sales. So that's a very important segment for us. What our building customers have told us is HomeBuilder, no doubt, had a positive impact on confidence. Customers weren't visiting or weren't attending display homes. Post HomeBuilder, people were back in display homes again. So the way we describe it is we're actually not seeing a huge impact from HomeBuilder right now. But looking forward, we think it's absolutely a positive from a stimulus perspective.

Yes, the contracts need to be signed by 31 December, and then you actually need to have started work within 3 months.

Yes.

So I think there's every chance that it would potentially have a stronger impact in the second half as opposed to the first half, but it all remains to be seen.

Okay. And just same in Australia. Can you give us a sense of what your proportional splits are by state in terms of Victoria and South Wales?

I don't know that we provide that detail by state, mate. So it's not -- we provide detail on just about everything, but what we don't -- I'm not -- we don't provide it by state. So I'm not sure we give that information out, Owen. You want to talk to the IR.

I'm just trying to get a gauge of...

Owen, if there is anything specific afterwards, I'm sure they can give you some guidance, but we don't split it out by state, mate.

Sure. And just one final one for me. Any update on the search for a new CEO for Building Products Asia?

Yes. No. Good question. No. That search is well progressed. We're into it. We've got a couple of very high-quality candidates that are locals in the ASEAN region. We're progressing, and I would hope that we'll have some really positive news in the next little while around that.

Your next question comes from Brendan Fagan (sic) [ Lyndon Fagan ] with JPMorgan.

First question is just on the CapEx guidance. Just wondering what that looked like in a typical environment, i.e., how much have you actually cut that down by and whether we need to think about some catch-up CapEx in future periods. That's the first one.

Yes. Well, let me just -- I'll just make a quick comment, then Tania can give you a bit more color. One thing we don't do and have never done is high-grade the assets. So that's a really important message for you guys to take away. There's nothing that's going on, quite frankly, since we started this process way back in 2011 and shut the blast furnace and reconfigured our assets. There's nothing that we've done to high-grade these assets. We're very mindful of the fact that we only have one blast furnace now. We need to look after it. So from our perspective, there's no high-grading of the assets. What we've done in the last 6 months because of the COVID situation is really just push out some of the capital numbers into a period until we get a bit of line of sight of activity levels, and Tania can give you the specific numbers about that.

Yes. The way to think about CapEx in a more normal basis is it's generally around $300 million for sustaining CapEx across the year. And then generally, the growth capital outside of North Star will generally be something like $100 million to $200 million depending on the profile of what we're doing. So maybe $150 million on top of that. You can see that we're still maintaining a fairly hefty run rate, to Mark's point, around maintaining the assets. So there's still a pretty healthy level of sustaining CapEx in there. We've had a fairly substantial pullback on the other growth CapEx, though. And as and when conditions improve, then we'll just continue to monitor that and decide what is the right point to bring some of that CapEx back on.

Okay. And then another fairly quick one. Just on your coke sales, a pretty strong year at 785,000 tonnes. I noticed you guided to 650,000 to 700,000. So -- and that's sort of a medium-term horizon, I guess. But was there anything particularly strong this year that sees that revert down? Or -- I'm just trying to understand that a bit better.

The higher volumes was just purely timing just in terms of when ships actually left. What we did see was a recovery in the coke market, particularly towards the back end of the half. There's quite a bit of strength that's being driven by China at the moment. I think the way to longer term think about coke more broadly is -- the way we sort of think about it is it gives a broad contribution somewhere in the range of $10 million to $30 million per annum. I think if you sort of went to the midpoint of the range, that's probably a good starting point. So certainly, a bit of strength in the market at the moment, but whether or not that's a structural shift remains to be seen.

Great. And just a final one for me. I'm sure you've mentioned this previously, but in terms of the full exit of manufacturing in New Zealand, you are able to give us an indication of how material that sort of cost would be?

Look, the way we think about those things, it's early days to be talking about a full exit, Brendan (sic) [ Lyndon ]. What we've said is we think we've got a plan that we can reconfigure the business and focus more domestically from that perspective. So we're not at that point yet, obviously. So what we're going to try and do here, mate, is do as much domestic manufacture as we can in New Zealand at the time. Any particular closure costs, as you will recall from our closures at Port Kembla, whilst there's large numbers involved when you have to renegotiate contracts, when you have to go through the whole redundancy post, Lyndon, there's a large number in that, but there's also typically a very large working capital release that comes with those sorts of closures as well. And if you'll recall back in those days, when we closed the blast furnace, there's about a $350-odd-million cost at Port Kembla and a similar amount of working capital release. So in terms of absolute cash costs, we're not at that stage where we've started to think about those numbers yet or obviously share those numbers because their plan is still to try and get plan A in place in New Zealand. But if we got to that point, we'd obviously be talking to you guys about what the cash costs are but also what the cash releases are when you close a facility like that.

Your next question comes from Peter Steyn with Macquarie.

Just a quick question. Sorry, taking the supply/demand debate a little further in the U.S. Could you give us a sense of what the comparative supply addition is by market? So really, what I'm trying to assess here is you're going to be more exposed to auto relative to some of the peers that are bringing capacity on. So is that going to substantially revert your pricing position quite rapidly in the second half of this calendar year? So how do you think about the balance of what's coming back in the market by market?

Yes. So clearly, as the auto industry rebuilds and we move back to our more typical customer and product mix, we would expect to see an improvement in spreads. As Tania highlighted, moving quickly to new segments to place tonnes took a level of discounting that's obviously impacted our current level of spreads. So as we move back to fuller utilization and the mix that we typically had pre COVID, one would expect us to get back to the sorts of spread levels that we had given that product mix, Peter. So yes. The short answer, I think, is -- what I'm trying to convey is, as we get back to that right product -- the pre-COVID product mix, we would expect our margins and our spreads to reflect that higher level of performance compared to where we are currently as we shifted to lower profitability segments.

And would it be fair to say that the new supply coming or the supply that's returning to the market is a lot more nonresidential building orientated in general and maybe lower value fabrication?

Look, I think what I'd say here is that blast furnace capacity that's coming back on is often more focused on the auto segment, but more the auto skins and the primary supply. You'll recall, most of our supply into that or in fact, all of our supply into that auto segment goes through the second and third tier processes for auto and through the service center segment. We're not a big customer or supplier -- sorry, a big supplier of the auto guys directly. That's never been our space, and it's not really a space that we choose to play in. So the blast furnace capacity that came off that you saw with AK, you saw with ArcelorMittal and U.S. Steel, quite a bit of that was directly related to the large auto contracts that they had, and of course, they had to adjust down when the auto industry closed for that couple of months. What we're able to do because of that second and third tier supply chain was shift, and we're not completely dependent on that direct auto business. So that's again really the reflection of the flexibility that we have in that model and the capability of that team, mate.

Perfect. And then I just wanted to, again, just talk about the Australian demand scenario because you guys had a very strong second half dispatch out of the mill locally up almost 9%. And you mentioned TRUECORE up 10%. How are you thinking about the construction market as we roll forward into the back half of this year in the context of, obviously, COVID sales disruptions but also construction rates seemingly holding relatively well? And we've spoken about HomeBuilder response. But if you can just give us a sort of broad thought process of maybe the next 2 quarters of thinking at this point in terms of what you can see in the market and then maybe just a little more about what's happening on TRUECORE in particular.

Well, let me start with the outlook bit first, and the short answer is no, I can't give you any guidance. I'm sorry, Peter. We're struggling with even 6 months of EBIT guidance. I mean what I'd say, I don't want to sound flippant, but boy, it is actually really difficult to call. I mean part of the reason we've struggled to come up with the first half guidance is the outlook is just so uncertain. If you think about the sorts of changes we've seen in Victoria with the range reduction of restrictions, I mean that makes it very difficult. We've got a good line of sight on the next couple of months, clearly. July, we've started at the levels of activity that we finished at, which was very encouraging. August, the outlook looks okay as well given where we are right now. So I'm sorry to sound a bit evasive. But quite frankly, we're managing the business on a month-by-month basis. And if something were to happen that was untoward or there was some extraordinary change or there was a move to further restrictions in another one of the big states like New South Wales or Queensland, then that would have an impact on us, and that's part of the reason we've been a bit circumspect in terms of the guidance. What I would say, though, is that I think the building blocks have been put in place subject to a further serious deterioration in community health or the spread of the disease. I think the building blocks are in place for levels of activity to continue at that sort of pre-COVID level. Nothing I've seen suggests that the market has structurally changed. Of course, the question we have is whether there are -- whether there is that further deterioration, which we just can't call. I mean we wouldn't have called a second wave in Victoria we're reacting to that. So no, I'm sorry, I can't really give you guidance for the next couple of quarters because it's just -- it's really hard to say. Having said that, the work we're doing around intermaterial share growth, things like TRUECORE, we're continuing to see positive strides as we push that product into not only resi housing, but 2, 3, 4 story renovations. That's a product that's continuing to gain in terms of market share. So the team in ASP continue to work on those sorts of initiatives to grow our share. But I'll take a pass on further guidance just because, quite frankly, mate, it's just so uncertain, very hard for us to say, Peter.

Maybe just to clarify, we don't actually disclose the actual TRUECORE volumes, but the way to think about it is it's around about 10% of a sort of 500,000 to 800,000 size market. So we've got a share around about 10%, which is...

Yes. There still lots of further growth opportunity for us in that space, which is why you see us continue to promote it. And 23rd of August, first episode of the block, please make sure you're all watching. You'll see it highlighted again.

I appreciate that. I wasn't so asking for specifics on guidance, but just your flavor of qualitative perspective, but that was great. I'll leave it there.

Thanks, mate. Yes, appreciate it. Thanks, Peter.

Your next question comes from Simon Thackray with Jefferies.

Just a couple of follow-up questions really. Mark, Asian overall coal prices and spreads are fairly unusual position in China importing coil at the moment, and we're seeing China heavily investing in Brazilian infrastructure to try and liberate some of this iron ore and probably reduce the dependency on Australia, which will honestly take some time. But do you guys have some thoughts about Asian spreads under these -- under this sort of rather unusual scenario going forward?

Yes. I think, mate, you've just done the understatement of the year in terms of rather unusual scenarios. You've been around long enough like me to just remember the last time China was a net importer of steel, mate. It's quite extraordinary to think there's a country making 1 billion tonnes of steel a year, and they're a net importer. It is quite remarkable. Obviously, you can't buy it and build a mountain out of it. So it's being utilized. And obviously, their economy, and we're seeing it in our China business, the economy is really, really going along quite nicely inside China. So it is a pretty extraordinary set of circumstances. You look at iron ore pricing. You think about the net import of steel into China. We're seeing an influence China is having on pig iron pricing. So we're seeing that even up in North Star. We've certainly seen the pig iron supply chain impacted by China, trying to get all the iron units they can. And of course, I read last week, as you obviously did as well with interest, the movement to the supermaxi ships out of Brazil to get more iron ore. It's a fascinating game. I'm not sure that I've got much more insight on it other than, as you said, it's highly unusual and very interesting set of circumstances at the moment.

Actually as a follow-on question on pig iron, so you are feeling that a little in North Star on the imported -- in terms of the reference price for the pig iron.

We've seen some impact. There's no doubt in terms of the price of pig iron and China placing large orders for pig iron, which is redirecting material into that market. Yes, we've seen an impact.

And do you flex the recipe accordingly? Or do you just grin and bear it in terms of the pig iron's impact?

Yes. We have good long-term supply arrangements with our pig iron suppliers. So because we've been a user for many years now, we have good long-term supply arrangements. So it's less about us not getting access to the product and more about the price we have to pay for it. So we can flex it and -- but it drives the utilization of North Star for us to run the higher levels of volumes. Pig iron sweetens the mix. In the current environment, we are able to flex it a little to our advantage, but it is certainly -- we've certainly seen an impact from China. No question.

Sure. Okay. I might just flip across to New Zealand. Just noting in your new purpose statement and then in your transform, grow, deliver statement on Page 6 of your presentation, you state clearly secure the future of steelmaking in New Zealand. So that implies a commitment. I know you've spoken to it, a commitment to steelmaking across the Tasman. So whilst the strategy substantially progressed, can you talk through what this means in terms and the conditions that needs to be met to secure the future of steelmaking in New Zealand?

Yes. That's pretty simple, mate. I mean the -- to secure the future of steelmaking in New Zealand, we needed to be able to make a long-run acceptable return. And we need the external environment to support what we're doing from our carbon and manufacturing, local content perspective. That business is currently struggling under the weight of high energy costs. Its coal costs have increased. We have work to do internally around productivity, and that's the task that the team have in front of them. So that comment around securing the future of steelmaking in New Zealand is actually more a question than it is a statement. We need to work out if we can secure the future of steelmaking in New Zealand.

Got it. Got it. And 2 quick follow-up ones. Just the Steelscape on the West Coast has some -- I understand some new domestic capacity, local capacity in terms of coil in terms of products. Is that a threat to Steelscape on the West Coast, do you think?

I think you're probably talking about the steel dynamics project that's been announced for that part of the region. Is that what you're talking about?

Yes.

Yes. Yes. No. That's actually probably a net positive for us, mate, because it gives us the opportunity to potentially look for some material there. But that's a large investment, the steel dynamics making that will service the Mexico market and the Southern U.S. market. It's not a market in that southwest, where typically there's ever been a flat-rolled products manufacturer. There's rerollers, obviously, CSI and UPI on the West Coast, but it's the first time there's been a large hot-rolled coil EAF producer that will be in that region, but it's largely focused on the Mexico market and that Southern, Western U.S. market.

Sure. Okay. That does sound encouraging. And then just on your digital technologies. Can you just talk a little more maybe to this investment, again in your transform, grow, deliver, digital technologies? What that might mean for intermediaries in the downstream distribution, if anything at all? Does it change the way you would look at the supply chain, let's say, in ASP?

No. Not really, mate. I mean what we're focused on and what it means for our customers is actually a whole lot of better customer service and customer information. We're still struggling under the weight of legacy IT systems that aren't very flexible or aren't very user-friendly and the shift in the Avenir project, which is a base system investment we've been working on for the last year or so now, is really to put us into a position where our customers get much greater transparency and information around where their steel is, where we are in terms of rolling programs, our flexibility to manage their inventories in a much more sophisticated way than we have in the past, and it's arming our internal teams with the ability to respond to our customers much more quickly. So it's less about disrupting the supply chain, more about improving our levels of service and the optionality and transparency that we give our customers. Quite a lot of the digital focus within the business has been around the internal improvements. So we're looking at a range of projects, and I know there's some information included in the pack around coating mass optimization, around the amount of inventory that we have in the supply chain, around automation. So quite a lot of the digital focus is around internal efficiencies and productivity. And the external facing component is all about improving our customer -- the offers for our customer and the transparency and information we provide our customers.

Your next question comes from James Brennan-Chong with UBS.

A question. Just coming back to industry dynamics in the U.S. again. Sorry, I keep harping on about it. But Mark, I like what you said before about blast furnaces looking to secure assets during this part of the cycle, and that has sort of meant that they've brought capacity back online from being idle despite low demand and low prices. With that in mind, how then do you think about long-term closures from these guys? In your bridge to 2024, you look for about 3.6 million tonnes of blast furnace closures. If they couldn't stay out of the market in these current conditions, what do you think is needed medium term to actually see those guys exit the market? I guess, specifically, in that 3.6 million tonnes that you're looking to see exit, what steel price do you assume during the next 2 to 3 years is needed to get them out?

Yes. Thanks, James. Look, the way we think about it again is the work we did around this project was obviously extensive, and we looked at 20 years of long-run average spreads. That's really what we've based our assessment on and based our investment on at any point in time. I mean right now is the classic example. We're well below the average. And one might say to us, "What the hell are you guys doing, investing in that?" But clearly, we think beyond just the current cycle, so we're very comfortable that at those long-run average spread numbers. We've got an investment here that's going to be incredibly value-creating for BlueScope. So I wouldn't say to you that I've got a chart that I'm sort of picking blast furnaces and a price point when they fall out. Right now, the sorts of spreads we're experiencing, it's got to be a world of hurt for companies that don't have the flexible, low fixed cost structure that we have. And you've seen that with the performance of the blast furnace operators in North America versus the electric arc furnace operators. And you've seen it with much of the quite rapid capacity closures that we saw now. My point around operational security is if you bank a blast furnace, you can't leave it banked forever, as you know. And the longer it stays in that state, the more damage you're actually doing to the asset in terms of its long-term life. So there will be assets that will come back on. There'll be assets that reach end of life. And then companies will need to make decisions about whether they want to reinvest in those blast furnaces and reline them or whether they shut them for good. We don't spend too much time speculating on that. We're just really quite confident that at the long run average spreads and the quality of the product that we make and the customer service that we provide, that North Star is in a position where we're going able to place those tonnes. So I wouldn't say to you that I've got a particular price point where I think a particular blast furnace is going to shut. I look more at those longer-term trends, and I think they're favorable for North Star. And as I said, what I've seen in the last 12 months, for me, is a structural positive for North Star. It's not a negative. It's more a structural -- a shift to the structural positive from a North Star perspective.

Yes. Maybe one of the other factors just to remind everyone is U.S. Steel buying into Big River, the fact that they're putting their money into the minimills. That's where U.S. Steel's capital allocation is going to go longer term. It isn't going to go into maintaining high-cost legacy blast furnaces. So directionally, you can see that's where the capital is going to go.

Got it. And just, I guess, an extension to that. You've got an 18-month period where you're thinking you can ramp up North Star. Given your ability to shift tonnes in a weak market right now, there's clearly strong acceptance for your material, why the long ramp-up? Or what are the things we should think about that might actually bring that forward? Presumably, it wouldn't take 18 months to ramp that asset up to 18 months up to...

What we're building the biggest case, James, was the ramp-up schedule of the original equipment manufacturers gave us, and that's based on their history and their experience with people installing assets like this. Clearly, what we will be doing when we have access to the assets is ramping it up as quickly as we can. But just in terms of how we put the business case together, our request to the Board for the money, we figured we'd take the external advice on the 18 months. If I can do it in a faster time than that, rest assured, we'll be pushing as hard as we can to get it ramped up as quickly as we can.

But it is probably worth calling out. This is an enormously complex brownfield project with many, many integration points back into the existing operations. So it's not a walk in the park. This is a very, very complex project that we're undertaking here, and that's what's reflected in that 18-month time frame.

Understood. So it's much more about the complexities of integrating the new shuttle furnace rather than you being wary about what the market might be by FY '22, 2023? Yes.

The 18 months is totally an operational estimate. It's actually got nothing to do with market conditions or spreads, mate. It's actually what the OEM equipment suppliers tell us you typically need to take a new plant from 0 to 850,000 tonnes.

Your next question comes from Paul McTaggart with Citigroup.

So just a quick question about things that might keep you awake in the night and the year ahead or looking to the year ahead. So you mentioned China, very strong and that's obviously holding up well in prices. Conversely, weak ex China steel production is meant that coking coal prices are pretty low and many producers are now kind of shutting in production. What if -- what's going to happen when world ex China comes back online, with China steel production driving back up coking coal prices? And if China stays high, if China's demand stays high and keeps up buying oil prices, then you've kind of got a double whammy from your raw material cost input to your NOLS. What can you do? Is there things you can do to ameliorate that impact?

I mean typically, what would happen in that circumstance is steel prices would increase. So that would ameliorate the problem. And unless there was some change where China, all of a sudden became a large exporter of steel, we've seen that confidence and strength in hot-rolled coil prices or seen them strengthen in recent times in the ASEAN region because of the net import position of China. So if we were in a circumstance of coal costs increasing, iron ore staying high, then I would expect to see steel prices to increase as well. And again, back to our long-term spread models. When you see your spread dip to unsustainably low levels, there's typically a supply side adjustment. So back to the comment Tania made earlier about the cost position of the ASP business, that $300 million of cost that the team got out, the fact that they continue to effectively offset the escalation in costs, which is no easy task for the team, continues to hold us in really good stead in terms of supply side adjustments. So that's what I would expect to see. If you saw coal costs increase, China continue as it is, iron ore costs stay high, that would be reflected in steel prices.

I think it's probably worth adding, though, there's probably a bit of an aberration been going on with iron ore for some time. And it seems to be, yes, demand is strong coming out of China, but there's also been some pretty hefty supply restrictions from a number of suppliers, particularly with Brazil and the COVID impacts. Now our understanding is that, that situation is starting to improve, and I understand the level of activity coming out of Brazil is now improving. I look at all the forward curves, as I'm sure you do as well, and you can all see iron ore prices getting -- having some relief off into the future.

Yes. Unfortunately, one of those idiots that forecast those have been wrong for a long time. I'm expecting they'd come down, but they don't.

When you get that right, can you let us know? That would be helpful because we can't get it right either. So it's okay.

Yes. Anyway, the bottom line is that in that environment, you'd expect strong steel prices to be able to kind of offset input costs essentially.

I mean that's typically what's happened. You see an increase in raw material costs, it flows its way into steel pricing, yes.

There are no further questions at this time. I'll now hand back to Mr. Vassella for closing remarks.

Okay. Thanks, everybody. Thanks for your time. I know it's a busy week. We appreciate you giving us a little bit of your week. So thank you very much. If you've got any further questions, please feel free to reach out to Don and the IR team. But thanks for your time. Take care. Stay safe.