18 Feb 2014

Steel merger makes sense - Fletchers

9:26 am on 18 February 2014

Fletcher Building's deal to sell its Pacific Steel division will help ensure that the steel-making industry in New Zealand remains competitive, the company says.

The company is selling the business to Australian-owned BlueScope Steel in a deal worth $120 million.

More than two thirds of Pacific Steel's 300 workers will shift to BlueScope's New Zealand Steel factory in Glenbrook, South Auckland. The remainder will be given the opportunity to retrain at Fletcher Building when the Pacific Steel mill closes at the end of 2015.

Fletcher Building investor relations and capital markets head Phillip King said Pacific Steel's factory was old and small and struggled to compete globally.

"There's a lot of excess capacity globally, and the product is a global commodity, so over the last eight years we wouldn't have earned our costs of capital, or anywhere near it," Mr King said.

"The fortunes have improved in the last couple of years but generally we'd say earnings have been volatile and it's been hard to achieve costs of capital or better."

Two of the past eight years had been loss-making, and five other years had returned less than 5 percent, he said.

"So not a high-yielding industry, and one which actually has quite high capital investment requirements as well.

"So it makes sense to merge the two operations together, because you can get the scale of efficiencies you need to drive earnings."

The deal would have to be cleared by the Commerce Commission but was expected to go through by the end of June, Mr King said.

Fletcher Building expects to record a one-off cost of up to $19 million from the sale.