BlueScope, the Australia steel maker, today announced what it called a “game changer” agreement with its employees to cut 500 jobs and freeze wages for three years.
The agreement is a significant and essential step to achieving the company’s $200 million cost cutting target, according to CEO Paul O’Malley.
And it keeps the Port Kembla steelworks from shutting.
The reason why the unions and other employees had to come to agreement is that global steel production has increased and demand from China has fallen.
In other words, there’s too much steel being produced and not enough customers wanting to buy.
Steel demand in China has grown nearly six-fold in the last 15 years, but has now plateaued.
This chart shows the story of global demand:
At the same time, there is a surplus of steel production globally and there’s still capacity to make more, as this chart prepared by BlueScope shows:
BlueScope has returned to profit. In August it announced a 2014-15 net profit of $136.3 million on a total revenue of $8.5 billion, the company’s best performance since the GFC. The result was $218.7 million better than 2014. Underlying profit of $134.1 million is 9% higher.
However, at that time Asian hot rolled coil steel prices were below $US200 per tonne, down from an average of around $US295.
According to O’Malley, those prices mean it would be better to buy in steel from offshore rather than continue to operate BlueScope’s Australian steelmaking operations.
The decision will preserve around 3000 jobs in the Illawarra region.
These latest cost cuts are part of the plan to return the company to a competitive position.