Why Cheap Energy Could Be the Key for BlueScope Steel

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Ben Bernanke gives a speech on Monday in the US. He may try to ‘walk-back’ the minutes of the December Federal Open Market Committee meeting. Those minutes suggested that at least one FOMC member wants to end the Fed’s bond buying program this year. If he’s feeling bold, Bernanke will fly the inflationist flag.

Other than that, though, the only real data that gives you any insight into what’s actually going on in Australia’s economy comes out tomorrow. November housing financing and credit card data come out tomorrow. If the miners and China cannot lead us to the mountaintop, maybe a new housing and lending bubble can!

In the meantime, new Japanese Prime Minister will lead the charge for a 2% inflation target in Japan. Abe is putting pressure on current Bank of Japan governor Masaaki Shirakawa to ramp up the money printing, devalue the Yen, and make the economy hum. Shirakawa’s term ends in April, giving Abe a chance to put his own counterfeiter at the helm of Japan’s central bank.

That is probably not good news for BlueScope Steel, which, among other things, is struggling with the strong Australian dollar (the Aussie dollar will get stronger if the Yen is made weaker).

BlueScope announced it would lay off 170 workers at its steel mill in Hastings, Victoria. It also cut production at the facility. The company has cut over 1,000 jobs and made two consecutive $1 billion losses.

You can’t blame consecutive $1 billion losses only on the strong dollar. High energy costs, labour costs, competition, and low productivity are also factors, as, of course, is the management. What’s incredible is that BlueScope is actually considering building a $300 million plant…in the United States!

The Australian reported last week (during everyone’s holiday) that low US gas costs encouraged BlueScope to investigate building a ‘direct reduced iron’ plant in America. Now our knowledge of iron making is somewhat limited. But from what we can gather, ‘direct reduced iron’ is a process where iron ore lumps, or fines are reduced in the presence of natural gas. Reduction means that carbon and oxygen are burned off (below iron’s melting point) to produce iron pellets or pig iron.

Other than the high-quality ore, the key is cheap energy. The US has a lot of it with its shale gas revolution. BlueScope is studying whether those cheap energy costs make it possible to profitably produce steel in the US. That’s amazing.

Lower energy costs change a lot of things. This is why we think the shale revolution could be such good news for Australia, provided the stocks aren’t sabotaged by criminal mischief makers issuing bogus press releases to the ASX. More on that tomorrow.

Dan Denning,
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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