BSL Bluescope Steel Limited

Australia's steelmaking industry was among the biggest losers in the country's listed materials sector Monday, despite the announcement of a carbon pricing scheme the previous day designed to protect the struggling sector.

BlueScope Steel Ltd. (BSL.AU)--the country's second-largest manufacturer by revenue and largest steelmaker by output--ended down 6.7% at A$1.26, while its peer OneSteel Ltd. (OST.AU) fell 4.9% to A$1.93, against a broader S&P/ASX Metals and Mining Sector down 1.4%.

The drops came despite a generally positive outlook on the companies from equity analysts, who said that a A$300 million assistance package offered to the energy-intensive industry, alongside other compensatory measures, should soften much of the blow to the sector from the A$23-a-ton price to be introduced from next July. BlueScope described the proposals Sunday as a "pragmatic solution to a complex problem" while OneSteel called it "appropriate and sensible."

Morgan Stanley estimated that the overall plan would leave the companies' earnings barely changed over the four years from 2013 that the A$300 million package is available. "It's a sensational outcome for them, although it was probably factored into the market last week," said one analyst for a European bank in Sydney, who didn't want to be named.

"They've got some pretty generous compensation up front, and some of that almost certainly helps them in the short term," said Tony Wood, an energy expert at the Grattan Institute, a Melbourne-based think tank.

But other analysts argued that the broader problems for the sector still left a bleak outlook. "Whether there's a steel industry in Australian in five years' time remains to be seen," said one Sydney-based analyst for a U.S. financial group, who also didn't want to be named as he wasn't authorised to speak to the media.

The companies are two of Australia's biggest emitters. In the Australian government's most recent greenhouse and energy list reported February, BlueScope was recorded as having emitted 12.2 million metric tons of carbon dioxide equivalent while OneSteel accounted for 3.9 million tons.

The campaign against the carbon package by the two companies was among the most fierce in Australia's industrial sector, with the companies warning that the country's steel sector--based heavily in core constituencies for the country's leading Labor party--could be driven overseas if it was not given protection.

But the major hit on the sector has come from the general macroeconomic backdrop. BlueScope's costs for its raw materials--mainly iron ore and coking coal--have increased to A$2.5 billion from A$400 million when it was spun off from BHP Billiton Ltd. (BHP) in 2002. The strengthening of the Australian dollar to US$1 from US$0.80 had also reduced earnings by A$200 million a year, Chief Executive Paul O'Malley said at the time of first-half results in February.

The strong currency has hit demand in the companies' domestic markets and has raised the price of Australian steel relative to its international competitors, which are already performing poorly due to an overcapacity of steelmaking worlwide.

"Over the past five years China has built too much steel capacity," said Christina Lee, a steel analyst at Macquarie Bank in Singapore. "Across Asia right now I would say the sector is around the middle to the bottom of the cycle."

A composite index of steel products compiled by analysts Meps decreased in June, with the consultancy saying that consumers were restricting purchases, fearing a weakening of the global economy.

-By David Fickling, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com

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