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BlueScope warns high iron ore, coal prices will slash earnings

Investors punished BlueScope after the steelmaker warned higher prices for iron ore and coking coal would slash its first half earnings almost in half.

The stocks was sold off sharply, by 8.4 per cent to close at $11.18, despite a 17 per cent rise in underlying net profit to $966 million for the full year.

Releasing its 2019 full year results on Monday, BlueScope said its December half earnings before interest and tax (EBIT) were expected to be about 45 per cent down on the June half's EBIT of $499 million.

BlueScope chief executive Mark Vassella.

BlueScope chief executive Mark Vassella.Credit:Louie Douvis

The expected fall is due to higher costs of the key steelmaking raw materials iron ore and coking coal, combined with a weaker industry benchmark price for steel in the December half.

This is expected to affect the two key engine rooms of BlueScope's earnings, its North Star mill in America and its Australian Steel Products business, which makes the popular building material Colorbond.

In early trade the stock was down as much as 12.1 per cent to $10.88 before regaining some of the losses. The S&P/ASX200 Index rose 1 per cent on the day.

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The North Star Mill in Delta, Ohio, was a key contributor to BlueScope's 2019 results, delivering earnings before interest and tax (EBIT) of $654.7 million, up a hefty 52 per cent on the previous financial year. BlueScope said the asset operated at full capacity, and benefited from "strong steel spreads" and favourable exchange rates during the year.

BlueScope announced a $US700 million ($1.03 billion) expansion of the North Star Mill on Monday, with chief executive Mark Vassella describing North Star as a "a best-in-class asset", and that it was expected to deliver return on invested capital of 15 per cent or more once fully ramped-up.

"This is a brilliant business. We're thrilled that the project has been given a green light," he said.

The company's Australian Steel Products business delivered underlying EBIT of $535.4 million, down 9 per cent on the previous financial year. BlueScope said the result was affected by weaker domestic volumes due to slowing in the construction sector, while costs rose "due to short term operational instability and higher depreciation".

BlueScope's $966 million underlying net profit was ahead of Bloomberg consensus expectations of a $946 million result, while its total sales revenue rose 9 per cent to $12.53 billion.

The steelmaker will pay a final unfranked dividend of 8 cents per share on October 16.

BlueScope recorded a net profit of $1.015 billion, which was down 35 per cent on last year. But the previous year's result benefited from a series of unusual and one-off benefits to the tune of $743 million, including hundreds of millions of dollars of benefits from tax losses.

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