Rating Action Overview

• BlueScope Steel Ltd. continues to demonstrate financial policy discipline, operating below its policy of a maximum net debt of A$400 million for several years. Continuity of the policy should keep the Australian steelmaker's S&P Global Ratings adjusted debt-to-EBITDA well below 1.5x.
• We also expect BlueScope's free operating cash flow to fund most of its large development pipeline, including the generational No.6 blast furnace reline.
• We have revised the rating outlook on BlueScope to positive from stable. We affirmed our 'BBB-' long-term issuer credit rating on the company.
• The positive outlook reflects our expectation that we may raise the rating to 'BBB' in the next six to 12 months if the outcome of BlueScope's dividend and capital management review supports its existing maximum net debt financial policy targets and ability to sustain an FFO-to-debt ratio above 60%. This is even as the company undertakes its sizable capital expenditure (capex) program.

Rating Action Rationale

BlueScope has a record of maintaining conservative financial policies and strong operating performance. The company has reported solid earnings and cash flow in various market conditions notwithstanding a series of acquisitions. This has resulted in its S&P Global Ratings adjusted debt-to-EBITDA ratio remaining well below 2.0x since fiscal 2016 (ended June 30, 2016). During this period, BlueScope has undertaken more than A$1 billion of acquisitions in the U.S. and completed the A$1 billion expansion of its mini mill at North Star. It also reduced gross third-party debt to A$207 million as of Dec. 31, 2023 (from A$1.3 billion in fiscal 2016), translating to a net cash position of A$614 million.

We expect BlueScope to maintain its financial framework after a dividend and capital management review, which is expected to be completed by the end of 2024. We believe the company will likely retain its target net debt of about A$400 million. To adhere to the target net debt level, the company is likely to operate with low leverage levels even through weak industry cycles.

BlueScope's balance sheet is well positioned for an elevated capex program over the next two years. The company has a series of growth and sustaining projects that will see its capex increase to A$1.1billion-A$1.3billion in each of fiscal 2024 and fiscal 2025. Anchoring this capex spending is the No.6 Blast Furnace reline, which the company estimates will incur a total cost of about A$1.15 billion. The project will upgrade a critical aspect of BlueScope's infrastructure and will replace the No.5 Blast Furnace in late 2026. This project will help the company achieve its 2030 target of reducing carbon intensity of its Australian steel products by 15% and includes the introduction of a waste heat recovery system.

BlueScope's growth initiatives include a new metal coating line in Western Sydney. The facility will add 240 kilo-tonnes per annum (ktpa) of capacity for high value-added coated products. For the U.S. operations, a de-bottlenecking project at North Star is likely to expand capacity by over 500 ktpa.

BlueScope's financial position, together with its net debt target and other financial policy objectives, gives the company substantial flexibility to absorb potential project cost overruns without materially weakening credit metrics, in our view.

BlueScope's operating cash flow will be sufficient to fund capex projects while preserving credit metrics.  The company's earnings are becoming increasingly diversified by customer subsector and geography. That said, higher input costs and a weaker economic outlook for Australia mean fiscal 2024 earnings could be weaker than in the prior year. This is particular to the Australian steel products (ASP) business, which is exposed to weaker construction activity. That said, the ASP business has a margin profile and premium product offerings that provide resilience against weaker regional steel spreads.

We expect BlueScope's EBITDA margin to be 10%-12% over the next 12-24 months, with operating cash flow of about A$1.70 billion in fiscal 2024 and A$1.45 billion in fiscal 2025. The company is therefore well positioned to internally fund its capex pipeline while maintaining its conservative capital structure.

Outlook

The positive rating outlook reflects our view that we may upgrade BlueScope to 'BBB' over the next six to 12 months if the company's dividend and capital management review does not materially weaken its conservative financial policy framework, including its A$400 million maximum net debt target.

We expect BlueScope to sustain positive free operating cash flow through the cycle, supporting a conservatively leveraged capital structure. In our base case, we expect the company to maintain its ratio of funds from operations (FFO) to debt at more than 60% and ratio of adjusted debt to EBITDA at less than 1.5x over the next two years.

Downside scenario

We could revise the outlook to stable if the outcomes of the group's dividend and capital management review do not, in our view, support the group's ability to maintain a ratio of adjusted debt to EBITDA of less than 1.5x or an FFO-to-debt ratio of more than 60% through market cycles while funding the capex program.

Although less likely, we may also revise the outlook to stable if the competitive position of BlueScope's businesses erodes significantly, or trading conditions weaken materially in the group's core markets, and these factors are not mitigated by proactive and credit-supportive capital management actions.

Upside scenario

We could raise the rating over the next six to 12 months if BlueScope maintains a financial policy framework that supports a ratio of adjusted debt to EBITDA of less than 1.5x and an FFO-to-debt ratio of 60%, notwithstanding the capex program.

Upward rating momentum would also be reliant on the group maintaining and increasing its existing market positions through ongoing and timely capital investments.

Company Description

BlueScope produces and sells metal-coated and painted steel building products globally, particularly in Australia, Asia, North America, and New Zealand. The company offers steel slabs, plates, hot- and cold-rolled coils, coated, and painted strip products, roof and wall claddings, and purlins and house framings. It serves customers in the building and construction, manufacturing, automotive and transport, agricultural, and mining industries directly, as well as through a network of service centers and steel distribution businesses.

Our Base-Case Scenario

Assumptions

• Australian GDP growth of 1.4% in 2024 and 2.3% in 2025.
• U.S. GDP growth of 2.5% in 2024 and 1.5% in 2025.
• Annual average Australian to U.S. dollar exchange rate of US$0.68 in 2024 and US$0.70 in 2025.
• EBITDA margins of 10%-12% over the next two years.
• Capex of A$1.1 billion-A$1.3 billion in fiscal 2024, and a similar level in fiscal 2025.
• Annual dividends in line with company guidance of 50 cents per share (cps), with additional share buybacks likely using excess free cash flow subject to its financial framework.

Key metrics

Liquidity

We consider BlueScope's liquidity to be strong. We forecast the group's sources of liquidity will exceed its uses by more than 1.5x over the 12 months ending Dec. 31, 2024, and remain more than 1x over the 24 months ending Dec. 31, 2025. We also expect net sources of liquidity to remain positive even if the company's EBITDA were to decrease by 30% from our base case.

Principal liquidity sources:

• Cash and cash equivalents of about A$1.34 billion as of Dec. 31, 2023;
• Cash FFO of A$1.4 billion-A$1.5 billion in the 12 months ending Dec. 31, 2024;
• About A$1.3 billion of undrawn committed bank facilities available as of Dec. 31, 2023; and
• Working capital inflow of about A$35 million in 2024.

Principal liquidity uses:

• Debt maturities of about A$30 million in the 12 months ending Dec. 31, 2024;
• Capex of A$1.1 billion-A$1.3 billion in the period;
• Annual dividends in line with company guidance of 50 cps, with additional share buybacks likely using excess free cash flow.

Ratings Score Snapshot

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