2nd UPDATE: BlueScope Steel Loss Deepens As Materials Costs Rise

Australia's resources boom is killing off other sectors of the country's economy, the chief executive the country's largest steelmaker by revenue warned Monday, as BlueScope Steel Ltd. (BSL.AU) reported a deepening of losses during its fiscal first half to Dec. 31.

Booming prices for steelmaking raw materials are cutting profit margins for steelmakers worldwide despite delivering record profits for miners, while the commodity-driven strength of the Australian dollar is putting pressure on the domestic manufacturing sector and cutting demand for steel products, Paul O'Malley said.

"It's a tough time to be a manufacturer in Australia, in fact a very tough time," he said. "This economy needs to be more than just a one-trick pony."

Diversified miners including Australia's BHP Billiton Ltd. (BHP), Rio Tinto Ltd. (RIO), and Fortescue Metals Group Ltd. (FMG.AU) have announced surging profits over the past two weeks on the back of near-record prices for steelmaking materials, particularly iron ore and coking coal. European counterparts Anglo American PLC (AAL.LN) and Xstrata PLC (XTA.LN), which have significant operations in the country, have declared similarly impressive results.

But business leaders and economic policymakers, including Reserve Bank of Australia Governor Glenn Stevens and RBA board member Roger Corbett, have warned in recent months that Australia's mining boom is hollowing out other parts of the economy.

BlueScope said net losses in its fiscal first half ended Dec. 31 nearly doubled to A$55 million from A$28 million the previous year, despite revenues rising 13% to A$4.62 billion from A$4.11 billion.

The outcome also illustrates the stark divide between miners and producers in the steel industry, as iron ore and coking coal costs rise against a more restrained backdrop for steel prices. Steel is a crucial commodity for the world's manufacturing and construction sectors and a vital indicator of global economic health.

Each ton of steel requires around 1.5 tons of iron ore and 0.6 ton of coking coal. O'Malley said that the cost of raw materials, which BlueScope largely buys from its former parent company BHP, had risen to A$2.5 billion this year from A$400 million when it was spun out of BHP in 2002.

East Asian hot-rolled coil, a benchmark sheet metal product, has risen 18% to US$730 a metric ton from US$620 since the new year amid rising expectations of global growth, according to Commonwealth Bank of Australia. But record wet weather in mining regions of Australia has driven up prices of iron ore and coking coal still further.

BlueScope said the A$285 million deterioration in its underlying earnings from the second half of the 2010 financial year was largely caused by a A$356 million increase in materials costs, which was offset by only a A$106 million improvement in steel sale prices.

BlueScope's results were also hit by a stronger Australian dollar cutting into export margins and offshore profits, by lower steel demand in Australia, and A$16 million of negative accounting and tax changes, the company said.

O'Malley also said profits would improve by A$200 million if the local currency fell back to the US$0.8000 level it hovered below for most of the past two decades. It last traded at US$1.0115.

The strong dollar is trimming the value of BlueScope's offshore profits in local currency terms, O'Malley said, while upward pressure on the cost of Australian exports was cutting steel demand from the country's beleaguered manufacturing sector.

"Demand in Australia is 20% off where it was six months ago," he said.

Australia's construction and manufacturing sectors have been hit hard in recent months by a stronger currency and rising interest rates caused by the resurgent mining sector. Output in the two sectors has been in decline since August and May, respectively, according to the Australian Industry Group, a trade body.

On an underlying basis excluding one-off items, the company's net loss narrowed 11% to A$47 million from A$53 million. Management predicted that the company would break even in the second half of the year and proposed an interim dividend of 2 cents per share, including franking tax credits, compared to a halted payout the year before.

-By David Fickling, Dow Jones Newswires; [phone]; [e-mail]