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The steel stock I want in my portfolio in 2014

Production of steel is at the heart of worldwide industrial development. Whether it’s cars, trucks, ships, oil rigs, bridges or buildings, steel is the backbone for construction. Australia’s leading steel manufacturer, in terms of volume produced, is BlueScope Steel (ASX: BSL).

BlueScope Steel is a flat steel producer and supplier of steel products and solutions focused on global building and construction market. It operates mainly in Australia, New Zealand, Asia and North America.

The other major Australian player in steel is Arrium (ASX: ARI), formerly known as OneSteel. Arrium is an iron ore producer and metals grinding producer, as well as a manufacturer of recycled steel products and reinforcing bar and rod long steel products, including rail and wire.

Arrium does not work in the flat steel market, so it doesn’t directly compete with BlueScope. In October 2013, BlueScope agreed to acquire the OneSteel sheet and coil processing and distribution businesses in Sydney, Brisbane, Adelaide and Perth.

BlueScope’s strategy is to grow shareholder value by expanding its global building solutions segment, develop a leading position in painted and coated steel in the Asia-Pacific region, improve profitability in manufacturing and distribution operations in Australia and New Zealand and maintain profitability of its hot rolled products in North America, while exploring potential growth options.

Despite setbacks in profitability since the Global Financial Crisis, last year BlueScope turned in an excellent result. It has dramatically improved its balance sheet by reducing debt. In two years, the ratio of debt to equity has virtually halved from 28.7% in June 2011 to 14.8% in June 2013. This is largely due to strong partnerships with other international steel manufacturers and an improving worldwide market for its steel businesses.

Foolish takeaway

Prior to the Global Financial Crisis, BlueScope was one of the best performing blue-chip stocks on the Australian Stock Exchange. Rising from $27 in June 2004 to $46 in June 2008 the share price slumped to $1.50 by June 2012 as it struggled with significant contraction in its markets and massive debt. Now there appears a lot more confidence with today’s share price at $5.70.

Can that performance continue, at least in part? The answer is yes. It all depends on earnings growth, which looks positive, and a continued strengthening of the balance sheet. I am watching this stock closely. For the medium to long term, I intend to purchase at closer to $5.00.

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Motley Fool contributor Chris Koenig does not have shares in the companies mentioned. 

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