Good morning, and welcome to the BlueScope FY2022 Financial Results Presentation. My name is Mark Vassella, and with me today is Tania Archibald, our CFO. This morning, I'll take you through the highlights of the last year, and then Tania will address segment and balance sheet performance. Before we wrap up, we'll have plenty of time for your questions. We're joining you today from Melbourne, part of the Eastern Kulin Nation, and I'd like to acknowledge the traditional custodians of this land, the Boonwurrung and Wurundjeri peoples. We pay our respects to elders, past, present, and emerging, and to all First Nations people with us today on the call. Our FY2022 results are a record performance, with the highest profit in our 20-year history as a listed company.
While this has been an extraordinary period for the steel industry in terms of demand and pricing, this result also reflects many years of investment and transformation, which has allowed us to reap the benefit of those conditions and demonstrate the incredible leverage within the BlueScope portfolio. The record result is a credit to our entire 15,000-strong team, and I wanna thank them for their tireless efforts. As I mentioned in February, the sheer level of demand in many of our regions has meant that we've not always been able to live up to our own high expectations of timely delivery and customer service. I'm aware that supply chain disruptions, including from major flooding events on the east coast of Australia and the impact of labor and logistics constraints, are common areas of concern across the economy.
I'd like to reiterate that we remain extremely focused on meeting the needs of our customers and improving our performance. On climate action, we've continued to take significant strides as we seek to reposition the business for a low-carbon world. We're working hard to deliver on our 2030 targets and the 2050 net zero goal and are progressing a range of abatement projects and collaborations to get there. We're proud to have been recognized as a Steel Sustainability Champion and also to achieve ResponsibleSteel certification for our Port Kembla site, being the first steelmaker in Asia-Pacific and the fourth site to be certified globally. It's been a major year of achievement and progress for us in the U.S., with the expansion of North Star and the acquisitions of both the MetalX ferrous scrap and Coil Coatings businesses. Just last week, a third recycling site.
Our total investment in the U.S. is now around $5 billion with nearly 4,000 employees. The network that we've assembled forms the backbone of our U.S. value chain and positions us very well for future growth. In addition to the investment in growth we've made across the U.S., we're continuing to progress our broader growth and transformation initiatives with the continued rollout of our digital program and further progression of key projects, such as the addition of metal coating capacity and a new pipe and tube mill in Australia. The feasibility assessment phase of the Port Kembla reline project is also well progressed, and we anticipate moving to execution phase early next calendar year. In parallel with this investment for future growth, we've been able to reward shareholders with returns of nearly $1 billion, and still we finish the year with a healthy net cash balance sheet.
As always, safety comes first at BlueScope. Over the last year, we've continued the evolution of our overall approach and organization-wide safety culture as we seek to take our performance to the next level. This is about supporting our leaders and empowering our people to increase our capacity in how we manage risk. As we previously shared with you, this includes the formal introduction of lead indicators, which help us better understand our capacity to manage risk going forward. These lead indicators provide critical information to assist us in reducing the future frequency and severity of incidents. As you can see from our results, FY2022 saw a strong performance on our lead indicators, with over 243 team-based health, safety, and environment risk control improvement projects.
This metric represents the implementation of innovative and practical risk control improvements across the business, which enhance our safety resilience while empowering our people to identify opportunities and be part of the solution. In addition to these projects, over 1,300 of our leaders have now participated in the Safety HSC Risk Management program. We've also had more than 100 of our supply chain and industry partners participating in this program. During the year, we were proud to have this program recognized by the World Steel Association, being awarded the winner of World Steel's Safety and Health Excellence Recognition in 2021 for leadership and culture. On our lag indicator, TRIFR, at 7.1, this remains slightly above the long-term average of five to seven , with the FY2022 injury profile continuing to be lower severity injuries, such as sprains and lacerations.
2.5% or seven of these injuries had the potential to be a fatal incident, and one of these resulted in a permanent incapacity. This performance should be viewed in the context of sustained pandemic impacts, including substantially high numbers of new employees, record activity levels, a significant impact from absenteeism due to COVID, and the successful execution of major capital projects. In particular, I would like to call out the North Star expansion team for their incredible safety performance, which was achieved under very challenging conditions. We continue to see a supportive long-term outlook for steel and favorable industry end-use trends, and our portfolio of businesses is well-positioned to benefit from these. The focus on climate change continues to accelerate.
We're working hard to pursue the decarbonization of our operations, and we're excited by the role our products play as a vital input for a clean energy future. Adding to this, the robust pipeline of public infrastructure and non-residential investment is supporting demand in the steel-intensive building and construction segments across our key markets. The now established trend to remote and hybrid working environments is supporting the shift towards lower density and regional residential housing. This is a sweet spot for BlueScope's products such as COLORBOND and TRU-CORE. Despite recent increases in interest rates, we continue to see a solid pipeline of demand for our products in residential construction applications. The transition to the digital economy is driving demand for steel-intensive e-commerce infrastructure, including warehouses, distribution centers, and data centers, creating a supportive backdrop for all of our businesses.
Recent macroeconomic and geopolitical volatility has continued to reinforce the importance of domestic supply chains and sovereign manufacturing capability, which aligns perfectly to BlueScope's strategy of focusing on our domestic markets. On the supply side, capacity consolidation and rationalization has transformed the U.S. steel industry, which is clearly exhibiting enhanced supply side discipline, and China's efforts to reduce exports and limit overproduction and emissions are also major structural positives. To our financial highlights. Underlying EBIT in FY 2022 was a record AUD 3.79 billion, more than double that of FY 2021. The second half of FY 2022 delivered an underlying EBIT of AUD 1.58 billion, the second-highest in our history, only to the first half of FY 2022. Return on invested capital also hit record levels at 42%, up from 25% last year.
Reported NPAT substantially increased to AUD 2.81 billion. Free cash flow after Capex of AUD 1.7 billion reflected our strong earnings performance and continued investment in the business, such as the North Star expansion project. We also saw elevated net working capital due to higher steel prices and activity levels, and this will be a key focus for us over the next 12 months. The balance sheet remains very strong, with net cash of AUD 367 million at 30 June, down from six months ago, reflecting the acquisition of the Coil Coatings business for approximately $500 million. Now, while these record results reflect the hard work and diligence of the entire BlueScope team, they're also the result of many years of hard work to get the business model to its current state of resilience and strength.
Our business is placed at all points in the cycle to generate quality earnings, capitalize on growth opportunities, and deliver returns to shareholders. It's on the back of this ongoing confidence in the business that the board has approved a final unfranked dividend of AUD 0.25 per share. Additionally, with AUD 353 million bought since February this year, our buyback program is being increased to up to a further AUD 500 million over the next 12 months. Again, these results are a credit to the entire BlueScope team, who've continued to make a remarkable contribution against the backdrop of challenging operating conditions. Looking across our businesses, all of our operating segments delivered record underlying EBIT contributions in FY 2022. Tania will take you through the segment detail in just a moment.
However, the common thread across the business was the robust demand and higher steel spread environment that drove these strong performances despite supply chain and pandemic-related disruptions. We saw a strong performance from our North American businesses. North Star delivered an underlying EBIT of $1.9 billion, and the team have done a spectacular job of operating the facility to maximize output while delivering on the expansion project. Buildings North America, which is now being combined with the new Coated Products business to form a single reporting segment, also had a very strong second half with healthy demand and margins. The Buildings and Coated Products North America segment was led by an extraordinary contribution from the Coated Products North America business, with strong market conditions and margins.
In Australia, we saw domestic sales volumes of over 2.5 million tons, with strong demand across all end-use segments, particularly from building and construction applications. Strong steel prices and spreads also contributed to the performance. We saw similar conditions in New Zealand and the Pacific Islands. As we look to the start of the first half of 2023, we're noticing some level of customer hesitancy impacting on demand across a number of our businesses, caused by the combination of the falling price environment and temporarily high channel inventories. Our purpose and strategy continue to focus and guide us. Our purpose continues to resonate throughout the BlueScope team as we work to support each other, our customers, and our communities. While FY 2022 saw us benefit from a number of macroeconomic industry tailwinds, our strategy has guided us in deploying our financial strength.
Recapping the pillars of our strategy. The transformation element speaks to how we're striving for a digital future in manufacturing and seeking to delight our customers. As a large-scale manufacturer striving to meet the needs of our customers, investments in robotics, automation, and digital technologies more broadly need to be core to our customer experience and manufacturing excellence programs. Transformation also speaks to our approach on climate change and sustainability, where we need to continue to embed sustainability at the heart of what we do. This was a core principle in the recently announced program of work to develop an urban master plan for the 200 hectares of excess land we hold at Port Kembla. On growth, we have an incredible footprint across Asia with tremendous upside potential. We're striving to deliver on the promise of our earlier investments with an equal focus on growth and sustainable returns.
In the U.S., we'll continue to build out the North American value chain with a focus on integrating our recycling assets, the Coil Coatings business, and building out our customer offers. In Australia and New Zealand, our intermaterial growth strategies will continue to be driven by our comprehensive sales and marketing programs, backed up by ongoing product and service innovation and differentiation. As always, being a capital-intensive and cyclical organization, we remain acutely focused on the need to deliver strong returns and robust cash flows and above all, keeping our people safe. As I mentioned earlier, it's been a year of major achievement and progress in the U.S. Firstly, the construction phase of the expansion of our best-in-class North Star mini mill is substantially complete, with the team now commencing ramp-up of the project. Next up is the debottlenecking opportunity, which we'll begin to assess during that ramp-up period.
Following its establishment through acquisition earlier in the year, BlueScope Recycling has continued to grow through a range of low capital capacity projects and the acquisition of a new site. Late in FY 2022, we completed the acquisition of the Coil Coatings business, and it's great to welcome 570 new colleagues to BlueScope. This business provides us a range of near-term synergies and medium to longer-term growth potential through process and technology upgrades, product development, and the introduction of branded and packaged products. All up with these investments, we've built an exciting platform for future earnings and growth. To be clear, this growth potential is not just from the individual initiatives I just mentioned, but also through the opportunity of future vertical integration across our U.S. value chain, particularly through the potential addition of cold rolling and metal coating.
We continue to see the U.S. as a great place to make and sell flat steel products, and at full capacity, North Star will represent approximately 5% of total annual U.S. flat steelmaking production. Our confidence is supported by recent consolidation and rationalization of capacity in the U.S. steel industry that continues to underpin supply side discipline, the U.S. remaining a net importer of steel and the expectation that steel demand will continue to grow over the coming decade in line with large-scale infrastructure requirements, development of steel-intensive renewable energy systems, and the build-out of e-commerce infrastructure. Touching on the North Star expansion in a bit more detail. Construction is substantially complete, with the new equipment running well. We've also welcomed the complement of new employees into the business. The first coil was produced back in June, and we're commencing the 18-month ramp-up to full run rate.
The capital cost estimate remains at approximately 10% above the $700 million initial estimate we outlined some three years ago. Considering the environment of pandemic-related disruptions and inflation over the last few years, this is an excellent outcome. We'll now begin to assess the hot strip mill debottlenecking project, which has a high-level pre-concept estimate of about $100 million, with implementation expected to come after the ramp-up of the current expansion project. I'm pleased to advise that North Star has recently entered into a multi-year contract with Cleveland-Cliffs for the supply of HBI from their Toledo plant as part of North Star's diversified metallics supply arrangements. The photos on slide two show the second caster in operation. It's an impressive facility. BlueScope Recycling is performing well.
The business provides North Star with important supply surety on scrap and brings us a crucial presence and expertise in scrap processing. This expertise will enable North Star to improve the quality and quantity of obsolete scrap it uses and reduce the reliance on prime scrap. We're now in the process of expanding and improving the processing capacity through capital-light investments. We're also delighted to announce the acquisition of a third site in Mansfield, Ohio, expanding direct access to the regional scrap pool. Following these investments, we expect BlueScope Recycling will be able to supply over 40% of North Star's post-expansion requirements. We're excited about the establishment of a significant national painting footprint in the U.S. with the acquisition of the Coil Coatings business. This is a major strategic opportunity for BlueScope. I had the opportunity to visit all of the seven sites last month.
It was terrific to meet the team and welcome them to BlueScope. We're all enthusiastic about integrating the business into our portfolio and getting after the opportunities that we see. The business has been renamed BlueScope Coated Products and is the second-largest metal coil painter in the U.S. with around 900,000 metric tons of capacity, painting a range of finishes on steel and aluminum substrates for a wide range of applications, including building products and manufactured goods, as well as offering a range of value-added services. The business has a history of robust financial performance with a sales mix focused on U.S. end-use segments that are attractive to BlueScope.
This acquisition provides a rare opportunity to fulfill a key strategic growth initiative with immediate access to the large and growing Eastern U.S. region, along with a longer-term opportunity to further integrate our U.S. flat steel value chain. Along with the near-term synergies, we see significant potential for medium to longer-term growth through product development and branded products consistent with our customer service and value proposition around the globe. Moving from the U.S. to Australia, where the Port Kembla Steelworks is approaching its 100th anniversary in 2028. Many of you have visited the Port Kembla site and will appreciate that it's a major manufacturing precinct of strategic importance to the region and Australia's sovereign steelmaking capability. Several years ago, we began to ramp up the focus on how we can better leverage technologies to optimize our operations, supply chains, and customer interactions.
Today, we have a broad range of initiatives in robotics, automation, and other digital technologies which are delivering the next wave of customer growth and productivity improvements. These digital technologies will also support a range of carbon intensity reduction initiatives, such as the now operational blast furnace digital twin model. When we hold our investor day at Port Kembla next month, I hope that many of you have the opportunity to see firsthand these promising advances in modern manufacturing capabilities. We continue to make good strides to reduce energy use and greenhouse gas emissions intensity of our existing process assets, including increasing scrap utilization, trials of biomass injection into the blast furnace, and a range of off-gas heat and energy reuse opportunities. We're also playing our part in pursuing breakthrough technology with continued progression of the assessment of a pilot hydrogen-based direct reduction iron melter and a hydrogen electrolyzer.
For a hard-to-abate industry, these are important developments. During FY 2022, we established BlueScopeX, our vehicle for direct investment in startups in the decarbonization and energy-efficient building space. The feasibility study of the comprehensive reline and upgrade of the mothballed No. 6 blast furnace is progressing well, and we expect to move into execution phase early next calendar year. As a reminder, this project includes a range of improved environmental controls, along with technology options that will enable greenhouse gas reductions over the medium to longer term. Importantly, the reline provides a bridge to our adoption of breakthrough lower-emission steelmaking once they're technically and commercially viable. BlueScope has also commenced the development of a master plan for the approximately 200 hectares of excess landholdings adjacent to the Port Kembla Steelworks.
The 18-month program, which will be led by world-leading architects and urban designers, the Bjarke Ingels Group from Denmark, will create a vision for the reimagination and transformation of land surplus to our steelmaking needs, with the potential to unlock a wide range of new uses and enable significant long-term economic and social value for the region. Before I continue, I'd like to take a moment to address a key issue facing the future of our major industrial assets and the nation, and that's energy. We're very concerned about the state of energy markets in Australia.
Although we have contracts in place for the next couple of years, which insulate us from near-term extreme spikes that we've seen recently in gas and electricity prices, in the medium term, sustained high prices and supply shortages risk undermining the international competitiveness of the steel industry and its broader ecosystem of channel partners, end customers, and suppliers. High energy costs undermine the transition to low-emissions iron and steelmaking, which require significantly more electricity. Regardless of the technology pathway eventually adopted at Port Kembla, transition can only occur if we have firmed, affordable, renewable energy. In the interim, continuing supplies of competitively priced natural gas supplemented with renewables will be essential until green steel technologies are commercialized. For too long, domestic industry has suffered from broken energy markets and neglect by big energy.
Any future design of energy markets must therefore strike the right balance between affordability, reliability, and sustainability. In short, Australia needs an orderly energy transition that will ensure the sustainability of key national assets, such as the Port Kembla Steelworks, and crucially, the thousands of downstream companies in the building and construction industry and our broader customer base. With BlueScope's unique perspective and direct experiences from our businesses overseas, we know how beneficial to the economy these interventions can be. In the U.S., for example, we operate in a highly competitive energy market with a mix of energy sources ranging from coal, gas, renewables, and nuclear. We have certainty of supply and of affordability. With this market structure, we've had the confidence to invest more than $2 billion expanding our US portfolio over the last two years.
At home here in Australia, however, we are far less confident about the investment environment because of the ongoing dysfunctionality of the domestic energy market. I believe this is a fixable problem, and I'm hopeful that we might see some real progress following the comments and signals by both the ACCC and the new federal government. In FY2022, we continued our progress in addressing climate change. Our steelmaking emissions intensity reduction through the year has kept us tracking well towards our 12% reduction by FY2030. Midstream emissions intensity increased in FY2022 on lower dispatch volumes due to near-term supply chain constraints and disruptions. We anticipate this performance will improve as conditions normalize. We're working hard across our businesses to achieve our 2030 targets. While continuing to accelerate our action on emerging and breakthrough technologies, particularly for our Port Kembla and Glenbrook steelmaking sites.
At our Glenbrook site in New Zealand, we further developed our decarbonization plan for our ironmaking facility. We're actively evaluating plans for alternative technologies and are working with the Victoria University of Wellington in New Zealand on hydrogen ironmaking, with the potential to convert ironmaking in the future if the technology is viable. Outside of the topic of climate change, we continue to embed sustainability in all that we do. On diversity, we continued our efforts in better reflecting the communities in which we operate through the year, with female representation continuing to grow across all segments of the workforce, with overall female representation now reaching 24%. We're also seeing tailored beyond gender strategies emerging across our businesses, which are designed to suit local community needs.
One such example is a focus on ethnicity in the U.S., where ethnically diverse candidates comprised 42% of all new hires into the buildings business. On sustainable supply chain, we've substantially ramped up our supplier assessment process in the second half as pandemic conditions have continued to improve. As at 30 June 2022, we have completed our engage and assess process with over 300 of our suppliers, and 139 of them were completed during FY 2022. These were a mix of assessments of new suppliers and reassessments of previously assessed suppliers, with over 80% of these being completed via the independent EcoVadis process. For FY 2023, we're gearing up for a return to third-party onsite audits. I'll now hand over to Tania who will take you through the more detailed financial data.
Thanks, Mark. The Australian business delivered a record underlying EBIT of just under AUD 1.3 billion and a return on invested capital of 37% in FY 2022. The second half result at AUD 610 million was marginally below the first half, reflecting broadly strong performance across the year. Domestic volumes hit record levels in FY 2022, exceeding 2.5 million tons. Despite strong customer demand, second half dispatches were moderately lower than the first half due to a range of supply chain disruptions, including multiple East Coast flood events and rail outages. The premium branded suite of products continued to perform well with the likes of COLORBOND, TRU-CORE, and TRU-SPEC, all seeing record sales volumes through the year.
Specifically, TRU-CORE continued its growth trajectory in FY 2022, up 22% on FY 2021, representing continued share growth in the detached residential light gauge steel framing segment. Realized spreads in the second half were broadly flat to the first half as strong demand conditions alleviated rising raw materials costs. The second half result included a one-off unusually large non-cash benefit of AUD 53 million from the revaluation of the Finley Solar Farm Power Purchase Agreement, which is treated as a financial derivative under AASB 9. This was driven by unprecedented conditions in energy markets in the second half, which has resulted in an increase in projected future electricity prices. Looking at the specific segments for ASP, across the board, we saw lower dispatches in second half 2022 relative to the first half, primarily due to supply chain disruptions from both pandemic and weather-related impacts.
Underlying demand remained strong through the period, which is helping to maintain a solid pipeline of future activity. Sales into building and construction segments remained at historically robust levels, driven by a combination of supportive macro factors and our own focused sales initiatives. In the residential sector, we continued to see strong detached housing starts with a solid pipeline of work, including from the HomeBuilder program and demand from the continued shift in consumer preference to detached housing and regional living. Home improvement activities were also strong, supported by rising house prices, redirected discretionary spend, and the pipeline of projects from the HomeBuilder program. In terms of non-residential construction, the commercial and industrial sub-segment remained strong with a solid pipeline of work, combined with rebounding confidence to support strong demand, including in e-commerce infrastructure.
The social and institutional sub-segment also remained strong, particularly driven by ongoing government investment in health, education, and defense projects. Underlying demand in the engineering, manufacturing, agriculture, mining, and transport end use segments remained solid, although dispatches were impacted by supply chain challenges and weather events. Looking at the macro conditions of the Australian building and construction industry, we continue to see a strong pipeline of activity. While detached house approvals have pulled back from recent record highs, they've continued to show resilience at the top end of the historical band of 90-100,000 approvals, demonstrating that underlying demand for detached housing remains strong while following the end of the HomeBuilder program. While rising rates have seen some curtailment of demand, ongoing labor and supply chain constraints may provide a buffer as they elongate the pipeline of work.
In addition, we see a continued trend towards regional areas and lower density living, which are traditionally areas where our flat steel products are popular. Alterations and additions approvals have pulled back from recent highs, but remain around double pre-pandemic levels, with consumers continuing to direct discretionary funds towards renovation activity. In the non-residential space, approvals remain at very good levels. The government's focus on fiscal support in health, education, and defense projects, along with a good pipeline of projects and solid confidence levels in the commercial and industrial sector, is likely to underpin demand in the medium term. Overall, our view remains that underlying demand is strong. However, looking at volumes at the start of 1H 2023, the channel is somewhat congested from delayed arrivals of imports, and we have the sense that particularly distribution customers are well-stocked. Nonetheless, the overall picture for volumes across the half is positive.
The North Star business produced an outstanding result with full-year underlying EBIT of AUD 1.9 billion and a return on invested capital of 67%. Following record spreads in the first half of FY 2022, realized spreads moderated in the second half, however, remained at levels two to three times that of the long-term average. Steel demand remained supportive during the second half, despite ongoing supply chain challenges and the historically weak level of new vehicle sales driven by supply disruptions to automotive producers. North Star dispatched steel at full capacity through the year, other than during scheduled maintenance outages in November 2021 and March and April 2022, and this was an excellent achievement given the magnitude of the expansion and integration works that continued throughout the year.
Conversion costs decreased in 2H 2022, mainly due to reduced employee profit share plans, which naturally wind up and down in direct correlation to business performance. Outside of the profit share, we did see some modest increases in labor, refractories, and consumables costs. BlueScope Recycling was brought into the North Star segment upon acquisition of the MetalX Ferrous business, and we're making good progress on integrating the business into the broader group. Taking a quick look at activity levels across North Star's end-use segments. In auto, despite continued strong underlying demand for vehicles, the automotive segment remains impacted by low vehicle inventories stemming from the semiconductor shortage and other supply chain disruptions. Encouragingly, the continued trend to more steel-intensive SUVs and pickups has continued. Non-residential construction has recovered to pre-pandemic levels, supported by consumer confidence in government stimulus programs.
The Architecture Billings Index remained in expansionary territory throughout the year, supportive of future demand, although has moderated more recently. The manufacturing sector continued to run at historically robust levels in FY 2022, despite challenges from disruptions to supply chains and labor availability. Robust household demand and a solid pipeline of work have supported activity levels. However, in recent months, activity has pulled back somewhat as the economy adjusts to higher interest rates. Turning to the new Buildings and Coated Products North America segment, which combines the Buildings North America and BlueScope Coated Products businesses. This segment delivered an EBIT of $97 million and return on invested capital of over 16% for FY 2022. The second half EBIT of $79 million saw a significant improvement in the performance of the Buildings North America engineered buildings business.
Strong margins were achieved through better realized prices and lower steel input costs. The business also benefited from substantially fewer pandemic-related impacts to labor, materials, and supply chains. Underlying demand and order intake are at healthy levels on solid activity in the logistics and warehousing end-use segments. Good progress has been made in delivering sustainable engineering and manufacturing capacity increases across the business. BlueScope Properties Group delivered a negligible contribution in 2H 2022 due to project timing, and that is that no projects were realized in the half. More broadly, the build-out of the BlueScope Properties Group pipeline of projects is on track as we seek to generate more consistent earnings profile from this business. Lastly, the newly established BlueScope Coated Products business acquisition became effective on 28 June 2022, which resulted in no earnings contributions in FY 2022.
This business will be included in this segment going forward. Building Products Asia and North America delivered a strong full-year result of AUD 419 million EBIT and a return of invested capital of just over 26%. The second half result of AUD 153 million was predominantly driven by the North American business, which again delivered robust margins, albeit lower than the first half on falling prices. Performance in the Southeast Asian businesses was reasonable, albeit impacted by higher cost inventories, particularly in Thailand and Vietnam. China delivered a softer result in the second half on typical seasonality. Although broader Chinese economic activity slowed on COVID lockdowns, our China business remains focused on relatively high-growth segments, including auto, electronics, logistics, and food and beverage, which have generally outperformed the broader economy.
In India, performance remained relatively stable on robust demand despite continued pandemic impacts across operations and supply chains. As previously announced, BlueScope has reached an in-principle agreement with Tata for the supply of coated and painted products to the Tata BlueScope Joint Venture, and initial seeding product volumes have commenced. The New Zealand and Pacific Islands business delivered an outstanding result in FY 2022 with an underlying EBIT of AUD 229 million and return on invested capital of over 54%. In the second half, the business delivered AUD 142 million of underlying EBIT. Domestic demand remained strong in the second half, driven by ongoing strength in construction and infrastructure activity, including robust residential demand. Dispatch volumes improved in the second half, given reduced pandemic-related disruptions to operations and supply chains relative to the first half. Margins benefited from strong demand conditions and favorable realized pricing.
Coal, freight and energy costs were higher during the half. However, these were broadly offset by an increase in vanadium by-product contribution and the net ETS impact from the escalation of NZU prices. Turning to the underlying EBIT group walk forwards. I'll focus my comments on the left-hand chart with FY 2022 performance compared to FY 2021. The standout driver of the earnings increase were the significantly higher realized steel spreads, with rises in selling prices doubling the increase in raw material costs. You'll recall that U.S. Midwest hot-rolled coil prices exceeded $2,000 per metric tonne in 1H 2022. Conversion costs were also higher. However, as I mentioned in February, around half of the cost escalation relates to employee profit share arrangements, which naturally wind up and down in direct correlation to business performance.
The balance of the conversion cost increase was largely general cost escalation, predominantly in freight, and then to a lesser extent, labor, consumables, and services costs. These were partially offset by an unusually high non-cash contribution of AUD 56 million from the revaluation of the Finley Solar Farm power purchase agreement, as I mentioned earlier. On the right-hand side of the page, the key driver of the softer 2H22 performance was higher raw materials costs, predominantly in coal, but also scrap and external steel feed in our coating businesses. The volume and mix impacts were predominantly driven by lower dispatch volumes in ASP on supply chain disruptions. Turning now to the financial framework and key financial indicators and settings. The financial framework remains unchanged and is integral to our success in managing the business through the peaks and troughs of the cycle.
By way of recap, we have three key focus areas. Firstly, in delivering returns greater than our cost of capital and maximizing free cash flow generation through the cycle. Secondly, we seek to maintain a strong balance sheet and credit metrics, giving the ability to weather cycles and providing the capacity to deliver on value-accretive opportunities. Finally, we remain disciplined in our capital allocation, balancing shareholder returns with investing for long-term sustainable growth. As I mentioned at the first half 2022 results, we'll be operating outside of our target capital structure for a period of time, with the intent of retaining a stronger balance sheet to prioritize key investment priorities for the purposes of delivering long-term sustainable earnings and growth. On ROIC, the group delivered a record return on invested capital of just under 42%, up significantly on FY 2021.
This is an excellent outcome with very strong contributions from North Star, New Zealand Steel, and ASP. More importantly, it highlights the operating leverage that can be delivered from the high-quality assets within the portfolio. On cash flow, in line with our growth strategy, we saw significant investment during the year on asset expansions and acquisitions in the U.S., as well as strong returns to shareholders. Thanks to the strength of the balance sheet and nearly AUD 1.4 billion in cash flows in 2H 2022, BlueScope remains in a net cash position. As foreshadowed in our May update, with the relative strength in raw material and product prices, combined with continued supply chain disruptions, net working capital remained elevated during 2H 2022. Our debtor book remains in a healthy state, albeit elevated with rate or price impacts and continued high levels of domestic activity.
Focusing specifically on inventory, the ASP and Buildings and Coated Products North America segment saw the largest increases. The rate increases are all essentially in line with higher prices for steel and raw materials and will naturally fall as prices fall and make their way through the value chain. While the volume variance is showing as net zero change, there are offsetting movements within this. ASP's inventory volume increased, reflecting continued high levels of domestic demand, which naturally necessitate higher levels of activity together with ongoing supply chain disruptions. In Buildings and Coated Products North America, volume increased due to the acquisition of the Coil Coatings business and ongoing investment in the Properties Group. Offsetting these two is the Building Products segment, where volumes eased during the half as supply chain activity improved.
We do expect the build observed in working capital to progressively release in line with declines in steel and raw material prices and as efficiency and supply chains recover. We're working hard to optimize our inventory positions while meeting the needs of our customers. Turning to our capital structure. The balance sheet remains strong with AUD 367 million net cash at 30 June. We have ample liquidity of over AUD 3 billion and have maintained our investment-grade credit ratings from Moody's and S&P. As we flagged for over 12 months now, we have focused on using our financial strength to invest for long-term sustainable growth and to reposition the business for a low-carbon future. In the short to medium term, we will be retaining balance sheet capacity to fund these priority investments.
In the longer term, we will continue to target around AUD 400 million net debt. On capital expenditure for FY 2022, sustaining asset spend was broadly in line with our normal range, with growth capital focused on the North Star Expansion project. In the current half, there remains a tail of approximately AUD 80 million of capital on the North Star Expansion project. Other projected growth spend of approximately AUD 120 million relates to a range of activities across the group, including the new Australian metal coating line and new heavy structural pipe and tube mill, and continued investment in process automation. On the No. 6 Reline project, we're making very good progress and an update will be provided at the November AGM. We've also just closed on the acquisition of a second ferrous scrap business, as Mark mentioned, for approximately $80 million.
In terms of future investment priorities, as I mentioned earlier, we have a solid pipeline of projects that we're working on. With the expansion of North Star and the acquisitions of the MetalX ferrous and Coil Coatings businesses, we've spent around AUD 2 billion on major strategic priorities over the last few years, which strongly complement our current operations, markets, and expertise. We have a further AUD 1.9 billion of investment projects under evaluation, all of which we've previously flagged. It's an exciting pipeline of work with the six identified projects in various stages of progression. Turning to shareholder returns. In alignment with our financial framework, our approach is to seek to distribute at least 50% of free cash flow to shareholders in the form of consistent dividends and on-market buybacks.
The strength of the financial performance and balance sheet is highlighted by the record level of shareholder returns in FY 2022, especially considering the significant investments in growth undertaken during the year and the retention of a net cash balance sheet. A reminder that in August 2021, the board approved a new target of AUD 0.50 per share per annum of ordinary dividends, which we expect can be sustained through the cycle under most scenarios. Although naturally, the board reserves the right to change this approach. In alignment with this approach, the board today approved a AUD 0.25 unfranked final dividend. We've now fully consumed our previously accrued Australian tax losses and expect to shortly resume cash tax payments. Going forward, we expect to be able to apply a level of franking to dividends, beginning with the interim dividend in FY 2023.
Buybacks will continue to be an important component of our capital management approach, given their flexibility in managing capital and the EPS enhancement they deliver. With AUD 353 million spent in 2H 2022, the board has today again approved lifting the available buyback capacity to up to AUD 500 million. This buyback is intended to be conducted over the next 12 months and will be continuing to take a nuanced approach to execution. Finally, I'll run through the outlook across the individual segments before handing back to Mark. For Australian Steel Products, we expect a lower result compared to 2H 2022. While domestic volumes are expected to be similar to the last half, we are expecting softer realized spreads driven by weaker lagged benchmark spreads. We're also expecting an unfavorable impact from higher-priced raw materials in inventory.
Coated earnings are expected to be lower, and of course, the 2H FY2022 AUD 56 million non-cash contribution from the revaluation of the Finley Solar Farm PPA derivative is not expected to repeat in 1H23. For North Star, we expect a result around a quarter of the 2H22 performance due to benchmark Midwest hot-rolled coil steel spreads continuing to contract back from record highs, partially offset by favorable realized pricing. The expansion will progressively ramp up during the half, but is not likely to make a meaningful contribution to volumes in the early stages. For the Building Products Asia and North America segment, we expect a result around two-thirds of the second half performance. For North America, we expect a lower result due to cyclical margin compression from falling US steel prices.
In ASEAN, we expect softer results on weaker demand, driven by congested channel inventories and the falling price environment. India will also see a softer result with weaker demand in the falling price environment. In China, we expect to see a stronger result on typical favorable seasonality. For the Buildings and Coated Products North America segment, we expect a result around twice that of 2H 2022. We expect a strong contribution from the engineered building solutions business, which is benefiting from expanded margins on lower steel feed costs. A negligible contribution is expected from BlueScope Properties Group due to project timing, and a small contribution from BlueScope Coated Products is expected as we integrate the business. For New Zealand and Pacific Islands, we expect a moderately lower result than 2H 2022, mainly due to higher coal costs. With that, I'll hand back to Mark.
Thanks, Tania. Turning to the group outlook. Underlying EBIT in the first half of FY 2023 is expected to be in the range of AUD 800 million-AUD 900 million, driven by significantly lower Midwest U.S. hot-rolled coil steel spreads and weaker Asian hot-rolled coil steel spreads. Our expectations are subject to spreads, foreign exchange, and market conditions. In summary, BlueScope is a very different type of steel company, one that's uniquely positioned to grow and deliver across our major markets. We're optimistic about the future. The benefits we're seeing today with a record result and an average ROIC exceeding 20% over the past five years have been underpinned by the decisions that have been made over the last decade. We're now seeking to lay the foundations for future growth and returns for decades to come.
With the ongoing dedication of our 15,000-strong BlueScope team and our robust balance sheet and financial disciplines, we're focused on investing for long-term sustainable earnings and growth, carbon-proofing our business, and delivering solid returns to our shareholders. We have a high-quality asset portfolio positioned to capitalize on favorable industry and end-use trends, such as structural changes in the U.S. and China, trends toward lower density and regional housing, and the need for e-commerce, logistics, and green energy infrastructure. We're particularly excited by our growth platform in the U.S. With the expanded North Star facility ramping up, the debottlenecking project and build-out of the value chain ahead of us. The new BRM and BCP businesses, as well as the medium-term expansion of the Properties Group.
We're highly focused on the task of transitioning our business to a low-carbon future, as demonstrated by the plans and commitments we laid out during the last half, and the collaboration and concept studies we're progressing on. Before I hand over to Q&A, I'd like to acknowledge the significant loss to Australian manufacturing and to steelmaking in particular, with the tragic passing of Ray Horsburgh. I worked for Ray for nine years. He was one of a kind, a passionate manufacturer, a devoted family man, and a terrific bloke. I pass on my deepest sympathies to his wife, Pam, and the Horsburgh family. He will be missed. Thanks for your time this morning. With that, I'll turn it over to Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Simon Thackray with Jefferies. Please go ahead.
Thanks very much. Good morning, Mark. Good morning, Tania. Just on cash, the cash flow outlook, taking your comments, Tania, about the working capital impacts in the second half, can you just give us a sense of your expectation for first half 2023, noting your comments about falling steel prices and the channel in particular, how operating cash flow is tracking, year to date, on the basis that steel prices have fallen, quite significantly?
Good morning, Simon. Nice to hear from you again. Look, it's actually tracking pretty well, but, you know, the reality is that we've done pretty well on pricing, and that obviously does take some time to work its way through, I guess, the value chain, eventually through the P&L, through the balance sheet. It will naturally fall as prices fall, but remember, domestically, we're doing quite well on pricing, so that obviously has a little bit of an impact. It increases the lag in effect.
That makes sense. On that point about domestic dispatches, you made a comment in your prepared commentary that the first half 2023 dispatches will be, I believe, similar to the second half 2022. Do I read this right? That that's a function of the fairly full channel inventories, that the impact of that on dispatch volume will be an equivalent impact as seen in the second half 2022 from the weather and supply chain disruptions. Is that the way to think about it?
What we're actually seeing at the moment in the channel is that there was obviously quite a number of imports that customers looked to bring in over an extended period of time. A lot of those imports were quite late in arrival. I think they all finally turned up at the same point. Our sense is that while the underlying demand is still quite strong, the channel is quite full, and it's just gonna take a little bit of time for that to work its way through. While we would have perhaps might have otherwise anticipated an increase or an improvement in dispatches, given all of the supply chain constraints that we had in the second half, that's not likely to happen.
Okay. That's helpful. Finally, Mark, just on the Capex update, I noted the AUD 70 million for pipe and tube in Port Kembla. I'm sorry if you've mentioned this before, I must have missed it, but first half 2022, that was absent the slides. Just the rationale for that. As an addendum to that, with cold rolled and painting capacity in the U.S. into the future, just how do we think about that from a quantum of investment, potential quantum of investment and timing?
Yeah. Good morning, mate. No, no, you didn't miss the pipe and tube. We hadn't told you before. It's okay. You haven't.
I feel better now.
No, you haven't dropped the ball. We've been looking for a little while at pipe and tube and trying to get our head around just where the market's at and what the capacity expansion is into ranges that we don't currently make, so heavier wall thicknesses, bigger sizes. It's effectively, again, another move, a bit like we did with our plate processes, moving into an import space to try and improve the supply chain. You didn't miss it. In terms of cold rolling and metal coating, our quantum's probably $500 million, but I'll qualify that by saying, you know, really early days. We're just at pre-concept.
If you think about a combination of a cold mill and a metal coating line, we're probably looking at about AUD 500 million would be an early estimate.
$500 million.
U.S.
Yeah.
Yeah. Sorry. $500 million is an early estimate.
Excellent. All right. Thank you very much.
Thanks, Simon.
Thank you. Your next question comes from Paul Young with Goldman Sachs. Please go ahead.
Thanks. Morning, Mark and Tania. Continuing on the theme on demand, yeah, reasonably robust backdrop, particularly regionally across all the assets. A question specifically on Southeast Asia, Mark, and what demand trends you're seeing there. I think you said that, again, it's channel inventories and falling prices, but are you seeing any slowdown in real demand across Southeast Asia? Second to that, can I just move to China and I guess your guidance, which you're using $590 a ton. The HRC spots are $605, yet you're calling it somewhat a recovery in China. Just wondering what you're seeing in China, 'cause that 590 does seem a little conservative.
Okay. Let me start with the ASEAN business. We were actually in Thailand last week. We had our board there for the first time in four years, we got a little bit of up close and personal experience last week in Thailand. Rather than it falling, I guess the way I'd describe it is it's still softer than we'd like. There's some pressure from imports coming out of China, and it is not, it's certainly not, it's not as fantastic as we'd like it to be. We spent quite a bit of time with the team last week. We've got some new leadership up there. They're putting together a strategy that's thinking very carefully about the market where we can make inroads, where we think we can make some money.
You know, as we called out, probably not yet delivering on the promise out of those Southeast Asian assets, and we're gonna double down our efforts there and think about how we can continue to improve on that business. The China issue specifically, I mean, you know, we give you an estimate of hot-rolled coil. They do bounce around. It's really hard for us to obviously forecast it, but we give you a point-in-time estimate. It probably looks a little bit conservative on those numbers today, but they move around. All we can really do is give you our best guess of it and then as those hot-rolled coil prices move around, I mean, you guys are in a good position to be able to think about the differences in relation to that.
Paul, maybe if I can just add, I wondered if you're also just looking specifically at the outlook on our China business. It's probably worth just calling out that the China business is actually a little bit different to the ASEAN businesses, which are really coating and painting businesses. The China business is much more a pre-engineered buildings business. Yes, it has coating and painting, but it's the economics of that business are by and large driven by the pre-engineered buildings business, which plays in very select parts of the economy which are performing well. It's probably a little bit disconnected to what's going on more broadly in China and what's going on in ASEAN.
Yeah. Okay. Thanks, Mark. Thanks, Tania. Mark, maybe just moving to the U.S. and digging into this, the scrap strategy a little bit here. You made a small acquisition in late in the year or late in June. You're targeting 40% self-sufficiency. If I did the math, is that around 1 million tons or thereabouts when I think that you get to 2.9 million tons per annum on North Star? You know, where does this acquisition take you to as far as your scrap output?
Yeah, your numbers are pretty good, sort of 900 to 1 million. We've. The acquisition of the new facility, it's about 100 miles from North Star, so it's in our relative backyard from a scrap perspective. A long-established business. We were happy to get the opportunity to pick it up, so it adds to the mix of the MetalX acquisition and now part of the BRM unit. As we called out, that gives us about a 40% coverage at that elevated level of production. At this stage, we think that's a reasonable level of coverage. I wouldn't signal that we've got any other great intentions to race out and buy a whole bunch more.
From our perspective, that gives us a nice level of backward integration into scrap and allows us to apply the same sorts of processes we're thinking about with MetalX/BRM in terms of further processing obsolete, improving the quality, reducing our reliance on prime, and giving us some surety of supply. Yeah, it was an opportunistic, but we think quite valuable outcome for us.
Okay. That's great. All right. I'll pass it on. Thank you.
Thank you. Thanks, Paul.
Thank you. Your next question comes from Peter Steyn with Macquarie. Please go ahead.
Mark and Tania, thanks very much for your time. Just wanted to dig in to your North Star guidance for the second half very briefly. You've obviously guided spread outcomes. You've spoken to the prospect of doing a little bit better relative to benchmark. Curious whether there's anything on the cost side of the business that we need to think about just calibrating that outlook for a quarter of the EBIT in the first half.
Not overly so, Peter, and I should have said good morning. No, it's really, we're coming down in line with the spreads. We'll do a little bit better in a falling price environment. Conversion costs broadly look okay. There is, of course, a little bit of a carryover. We do have some level of escalation in our conversion costs around labor, although that's more to do with more people that we actually have on board as we've taken on as part of the expansion project. There's a little bit of an increase in consumables and moderately so around refractories, but not overly so. Probably what we might be calling out is a little bit of a higher cost around some of the raw materials.
There's some lagged pig iron that might be flowing through into the first half 2023 that might pull it back a little bit. By and large, there's not too much that you need to focus in on there.
Perfect. Embedded in that spread projection, given the averages to date, it does suggest that you're expecting in your outlook commentary further price weakness beyond spot?
Well, we've seen the prices obviously come down. You guys would have seen there was a couple of price increase announcements this week. The current market's about 800, 810. We've seen Nucor and ArcelorMittal come out with $50 increases, so you know, and the future's outlook is a little more positive as well. I'm not, I don't know that we're calling or suggesting that we're gonna have any sort of significant reductions, further reductions in pricing. I think we're starting to see the bottom peak of where the pricing's gonna go to under the current circumstances.
Yeah. I think the spread is actually broadly in line with pricing and scrap.
Yeah.
in terms of current levels. Yeah.
Thanks, Mike. I won't labor it. I just wanted to go into the inventory conversation very briefly, with a keen focus on the risk, and just trying to work out whether you'd believe that you've adequately covered the risks in the short run of those inventory positions, particularly in Australia and maybe to a lesser extent what you've outlined in ASEAN, just in the context of what we're seeing from a demand perspective and confidence levels and the like that are likely to flow with high interest rates.
Yeah. We've got very careful processes around inventory management and NRV risk in particular. There's an extensive review that's undertaken. We would anticipate that part of the relief valve here will actually be exports. There will be a level of export activity that's underway at the moment, just to make sure that those inventory levels come back across the next, you know, 6-12 months.
Thanks, Tania. Appreciate that. I'll leave it there.
Thanks, Pete.
Thank you. Your next question comes from Lyndon Fagan with JP Morgan. Please go ahead.
Oh, thanks very much. My first question was just to try and pick up again on that cold rolling capacity that you need another $500 million or call it AUD 700 million. I'm just wondering when we think with regards to your vision for the U.S., how many more pieces of the jigsaw puzzle are potentially missing that might sort of be this type of order of magnitude. I guess I'm looking at slide 35 with AUD 1.9 billion future investment. I guess we need to up that by another AUD 700 million at least. Yeah, if you wouldn't mind sharing some thoughts about your U.S. vision and how we, I guess, satisfy that.
Good morning, Lyndon. Thank you for the question. I don't know that we've got a predetermined number of jigsaw pieces that we need to fill out. The Coil Coatings acquisition was really quite opportunistic for us. If you think about our ability to buy those seven sites, if we were trying to construct that, I mean, it would take us 10 or 15 years to construct a portfolio of assets like that and would cost us, in terms of replacement value and construction cost, more than we paid for the assets, certainly. We saw that as quite an opportunistic acquisition and an ability for us to accelerate our growth into that market.
As we think about the value chain, Lyndon, it's different from Australia. We don't need to be completely vertically integrated. We're demonstrating that with scrap. I don't know that we need at all to be 100% vertically integrated into scrap. That's why we're sort of looking at the level we're at now and thinking that's a reasonable level of coverage for us to have. Of course, the U.S. being such a vast country and our sites spread across the country, the vertical integration that you see in Australia and New Zealand, that's not required in the U.S. There's lots of options, lots of steel makers, lots of rollers that we can get our material from.
We think cold rolling and metal coating, particularly given the expansion out of North Star, the additional hot-rolled coil, so it's early days, but may provide us with an opportunity to take advantage of certainly some cold rolling and some metal coating and thinking about that now with our expanded footprint of the Coil Coaters business. We have quite a presence in Ohio now. Pat Finan and I spent two days in a car and covered about 600 miles. I've seen more of Ohio than most people in the last month. We've got quite a presence in Ohio, and a couple of our coating lines are not too far in terms of location from the North Star facility at Delta. That's the way we're thinking about it, Lyndon.
It's not. I wouldn't say there's a predetermined view. I do think you probably need to add AUD 700 million to the AUD 1.9 billion that we've got laid out as projects for the future. They're the sorts of considerations we take into account as we think about the market, as we think about the outlook, our capital commitments when we're making recommendations to the board about what we think the buyback should be. Getting that balance right, mate, between returns to shareholders, the investment profile that we have, is very much the consideration that we take to the board.
Thanks, Mark. The deployment timeframe for that 700, I'm assuming that doesn't fit within that FY 2023-2027 chart there or is it that it-
Oh, no. I would
-it does and-
I would think it would, mate, but towards the back end. You know, we've just really kicked this work off. These are big, complex pieces of analysis that we need to go through. There's probably at least a year of analysis to go into it before we get to a point where we'd even have to start and think about spending any sort of money. Yes, you would see some of the capital in that 2023-2027 timeframe, but it would be at the back end of it.
Okay. Thanks for that. I'll pass it on. Cheers.
Thanks. Thanks, Lyndon.
Thank you. Your next question comes from Daniel Kang with CLSA. Please go ahead.
Good morning, Mark. Good morning, Tania. Just interested in your comments on congested channel inventories across most of your businesses actually. Are you seeing any evidence or do you expect customer destocking to emerge? Should this happen, what are the levers you'd be looking to prioritize to soften the impact?
Yeah, look, I mean, destocking, this, as you know, mate, you've seen this, you've seen nearly as many cycles as me. I mean, when prices fall, customers destock. That's what they do. They don't wanna be caught with high cost inventory. It's why we've seen a bit of a pullback, particularly in that service center distribution segment, where people watch prices fall, so they don't wanna make large commitments in that falling price environment. As Tania highlighted, I think we're seeing a bit of an unusual bump here. The constraints we had specifically in Australia around our supply chain, trying to satisfy the requirements of our customers in that unprecedented demand period. The issues we had in terms of just getting steel that we had out of our facilities manifested itself in people placing some import orders.
That stuff's arrived as a lump. There's already a bit of an overhang in the inventory profile of some of our customers and in some of our markets. That's really what we're calling out, Dan, that we think it might result in some slowing of volumes, but I think that's a temporary measure. I don't see it as a structural change. We're still really quite optimistic about the underlying demand outlook, so I think that will be absorbed into the market, and we're very mindful of that in terms of how we think about our inventory levels to ensure that we're in the best position to meet the backlog that we currently have and the demands of our customers. Our backlog is improving.
The team are doing a great job in terms of eating into that backlog. That's how we're thinking about it, mate. I think it's the typical cycle that you see, particularly with the distribution service center guys. When prices are falling, they tend to take a step back from the market.
I appreciate that, Mark. Just to delve a little bit further on your U.S. metallics supply, mentioned the potential to upgrade obsolete to reduce reliance on prime. Just wondering what the realistic level of reduction on prime that we should expect and over what timeframe. Just on pig iron, if you can just talk us through the company's supply sources, you know, following the Russia-Ukraine situation.
Yeah, sure. I mean, on scrap first, I don't have a number I can give you, but what I can tell you is we're being really surprised and impressed by the improvement in quality that we're getting out of the MetalX acquisition. That was work that we were doing with MetalX pre the acquisition on additional sorting to ensure that the obsolete scrap we get from those processes has particularly a much lower copper content, which is what's required for the automotive industry. That means we can move away from prime and use more of the higher quality, better spec'd obsolete scrap. That's the intent. The timeframe of that is right now.
We have capacity in BRM with that sorting and processing, and we're looking at some quite low Capex additions, you know, $4-$6 million for us to expand that capacity, and allow us to sort more of the obsolete and sort it in a more forensic way to actually make the quality better. That's real-time in terms of the opportunity, and we'll expand that into the Mill Iron facility that we've bought as well. They're not big capital numbers, and they're not long timeline projects. That's the obsolete scrap story. In terms of pig iron, we were a purchaser of pig iron from Ukraine. That's clearly stopped, given the awful circumstances that Ukraine finds itself in. We were also a purchaser of pig iron from Brazil.
We found other sources of pig iron that we've been able to source. Pig iron's a product that we manage quite carefully, particularly from a sustainable supply chain perspective, to make sure we understand the risks, and we've done a lot of work in Brazil in that space. As we've called out today, we're thrilled to have signed a multi-year deal with Cleveland-Cliffs, where we're taking HBI from their facility just very close to us in Toledo, 30 or 40 miles up the road. It's a multi-year deal where we'll take a chunk of their HBI. That metallics mix that we have for North Star moves all the time. We've got control over some of it now with the scrap investments.
that makes us feel better about surety of supply, but we're forever looking from a value and use perspective at what's the right metallic solution and mix for us at North Star.
Excellent, Mark. Thanks very much. I'll pass it on.
Thanks, Daniel.
Thank you. Your next question comes from Megan Kirby-Lewis with Barrenjoey. Please go ahead.
Thank you. Morning, and thanks for taking my question. Just wondering if I could get some additional commentary on pricing in the domestic environment, and in particular, what we should be thinking about for COLORBOND for FY 2023. Just if there's anything, I guess, of note in terms of price realization on some of those other value-added products, that would be great. Thank you.
Sure. Welcome. Nice to have you guys covering us. Nice to have you on board. Pricing specifically for COLORBOND over the period we're reporting, we've talked about price increases in the range of 6%-8%. Of course, as you know, COLORBOND is priced relative to its intermaterial competition. It's not an import parity pricing model, so a different model from the other parts of our portfolio. Of course, what we're seeing with pricing ramp up over the last year has been price increases in that commodity space as we apply the import parity price model and then apply the premiums that we do for domestic supply.
Sure enough, as it's coming down, the same situation's reflecting in the market with prices coming off and our forward prices are reflecting the drops that we've seen in hot-rolled coil pricing both in Asia and in North America. That's the split. I wouldn't expect or I don't think we have budgeted, certainly not in the first half, any further price increases from a COLORBOND in relation to COLORBOND and our more commoditized products, the import parity pricing model products will obviously reflect those movements in hot-rolled coil and import prices.
That's great. Thank you.
Thank you.
Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.
Thank you. Morning. Can I ask a question on North Star just to follow up. North Star, the raw material situation as it relates to realized spreads versus benchmark spreads. Tania, could you just explain your comment on pig iron and the lag there, why it might be different to a benchmark? With this Cleveland-Cliffs supply, HBI supply, what kind of volumes and are these volumes indexed in terms of their pricing?
Morning, Pete. All I'm basically referring to there is that when the whole Russia-Ukraine situation obviously occurred in the second half, we looked to preserve pig iron. We've been a little bit skinny, and also made sure that we secured supply. We're very happy with our supply arrangements. What it means is that there is some, probably some slightly higher cost pig in the value chain, which will work its way through, and that's what you'll see reflected in the first half 2023. I'll hand over to you, Mark, on the second part of the question.
I'm sorry, Pete, can you give me the second part of that question again?
It was the supply agreement with Cleveland-Cliffs. What kind of
I'm sorry.
Volumes and what kind of pricing structure is there? Are they indexed? You know, is the price
Yeah.
-indexed or .
Yeah. Yeah, look, we haven't committed to talk publicly about a volume number, but it's a material amount of HBI and it is an indexed base price. We've struck a pricing formula. Again, we won't talk about that in great specifics as you'd understand, but it's an index-based pricing model around scrap.
Okay. There, I take it then that the period to period variability won't change, but will there be a step change in your realized spread once that kicks in? As in, is it above the current scrap price?
No, no. That you won't see a material change in spread, Peter. It's actually more about again, the mix of metallics, where we get our supply from, the pressure that applies to the scrap market. This is another string to our bow. It's close. It's a tight supply chain. They're a good supplier. It was really about adding to the metallics mix at North Star rather than any material change to our spreads.
De-risking the supply chain.
Correct.
in effect.
Yeah, correct.
Okay, got it. ASP volumes, so the comment that the channel is congested. Can I ask what kind of product is in excess? As in, are distributors carrying excess of commoditized product or is it a higher value product?
Sorry, you go, Mark.
No, no, go.
I was gonna say it's more of the commoditized end.
Yeah.
More of the black steel hot-rolled coil plate, maybe a bit of the metal-coated as well.
metal coated, yeah.
We're not referring to the COLORBOND, for example.
Good. Just one last one. The increase in conversion costs due to the employee profit share plan. Can I ask what decrease have you embedded in your first half guidance in terms of that employee profit share?
Yeah. I won't call out a specific number, but what I would say is that around half of the escalation that occurred across the year and across the half basically relates to employee profit share programs.
The variabilizing of that cost, Peter, is something we think that's quite important. We've been working hard on it for a while now, and I mean, it is in effect a bit of the North Star model. We took the learnings from the North Star model and have rolled it out across our other businesses and had increasing support for that across our employees. In a year like we've just had, they rightly benefit from that. But in a first half outlook where it's a lower number, that unwinds. It's exactly the way we like to have our costs as variable as they can be to sort of match the market conditions that we have.
Good. Okay, got it. I'll leave it there. Thank you.
Thanks, Peter.
Thank you. Your next question comes from Anderson Chow with Jarden. Please go ahead.
Good morning, Mark. Good morning, Tania. Just a couple questions. First one is on the U.S. coil coating business. You talk about the long-term aspiration of CRC capacity, but I just want to kind of get a sense of the near term driver for the business. How much more sort of Opex do you think you might need to spend in order to drive up the utilization and sales volume? Is there a sense that you could invest?
Not material, Anderson. We put some money aside in an acquisition like this. I should understand, particularly around things like safety. Although I must say I was pleasantly surprised with the work that Cornerstone had done from a safety perspective as I saw their sites just last month. We would naturally own a little more from spares, particularly critical spares. So we put aside a little bit of capital as part of the acquisition business case to improve some of the buffers and do some more work from a safety perspective. I'm looking at Tania now. I think it's sort of AUD 10 million-AUD 20 million.
Yeah.
As I recall. It's not a material amount and really just brings those sites up to the standards that we apply across our other sites in BlueScope.
Thanks. Just a small question on dividend policy. You talk about sort of starting to pay fully or partly franked dividend. Are you likely to change that AUD 0.50 per share cash dividend at all? Still sort of similar mix between cash dividend and share buyback?
This is the change that we announced back in August 2021, where the board announced that they would be looking for a AUD 0.50 per share dividend, equally split AUD 0.25 per share per half. We believe that at a certain point that we'll obviously have a healthy level of franking associated with that. We're not quite there yet, although we anticipate that that dividend in 1H 2023, which we paid in 2H 2023, we anticipate that that'll have a healthy level of franking associated with it.
What we announced back in August 2021, around the AUD 0.50 per share, the buyback is then the flex that sits on top of that and obviously takes into account where we are with our capital program, where we are with the balance sheet, and what the outlook looks like. There is no intent to change that. Now obviously the board reserves the right to change that as appropriate, but we're not flagging any. The introduction of franking does not mean that there'll be any change to that particular policy.
Sure. Okay. Thank you.
Thanks, Anderson.
Thank you. Your next question comes from Lee Power with UBS. Please go ahead.
Morning, Mark. Morning, Tania. Just on BlueScope Properties negligible contribution in first half 2023. I think you've allocated a couple hundred million dollars more capital into that business. What's kind of the timeline for that? When do we think that flows through and you get kind of more of a normalized earnings rate?
Good morning, Lee. I think it's more like FY 2024, and I think that's consistent with what we've called out for some time. These projects do have a fairly healthy lead time, probably around 24 months. We're not anticipating any meaningful contribution in 1H 2023. We certainly had nothing in 2H 2022. I think it's more likely FY 2024 is when we'll start to see those kick in on a more consistent basis, and that's obviously what we're looking for, is that level of consistency. There may be some upside opportunity if something comes in a bit earlier, but I wouldn't be calling that at this point.
Okay. Thank you. Just on the Capex, look, I understand you got several larger projects kind of at varying stages of approval. Like how do you think about expansion projects? If we take like ASP and metal coating as example, do you think about them on a mid-cycle basis when you're assessing them? Or do you look at kind of the point in the cycle and think about your comments around, you know, stock and what's gonna happen beyond.
First half 2023?
Yeah. I mean, the very nature of our investments, Lee, are that these are 10-, 20-, 30-year investments. We look at it long run averages. We look at it the bottom of the cycle so that we can understand the impact. We still have that mantra inside our business that our businesses have to be cash break even at the bottom of the cycle. There's a range of. We're pretty good at the black hat stuff, given what we've been through. We know how to do that. We look at it across a range of numbers, but you won't see us justify anything on elevated COVID pricing spreads. That's not how we think about these investments. They have to be able to run through the cycle.
It's the justification and the methodology we used around the Aristotle North Star expansion, no different to a pipe and tube mill or an MCL7 or anything else we're thinking about.
What those high spreads have certainly done is given us the capacity to,
Correct.
Fund them with confidence.
Fund them.
Yeah.
Yeah.
What about on the flip side? Like if you think about ASP and potentially volumes coming under pressure, like how do we think about, you know, metal coating in ASP and some of the capacity that you're thinking about spending there?
Well, I mean, as we've, when we get you guys down at Port Kembla, we'll perhaps go into this a little bit more. I think one of the things that's really interesting around ASP, and the team have done a fabulous job in this, is how we continue to push into that inner material growth. You think about the opportunity that's still there for us. I mean, many hundreds of thousands of tons potentially in the framing market as we continue to grow share in that space. COLORBOND continues to take share. We're gonna refresh the palette this year with COLORBOND. There's more work being done around that. Our thinking, our justification, the investment profiles that we are making in Australia are about us having the capacity to deal or to satisfy the share growth that we see coming.
I don't know that we're, well, clearly not calling that we're at peak steel cycle right now in terms of domestic markets, in some of those areas where the team in Australia have done a really nice job to continue to grow.
Excellent. Thank you. Thanks for the response.
Thanks, Lee.
Thanks, Lee.
Thank you. Your next question comes from Chen Jiang with Bank of America. Please go ahead.
Good morning, Mark, Tania. Thanks for taking my questions. A few from me, please. North Star expansion, you mentioned it's not going to be a meaningful contribution to the earnings from the ramp up. Does that mean the dispatches from the expansion are going to be marginally higher for this half versus the prior half? Thank you.
The best way to think about it, Chen, is we've actually been in a transition from hot commissioning towards operational startup over the last month. If you take the start of August as being the start of ramp up, what we've consistently called out is a linear ramp up plan. If you do that calculation, you'll probably come up with something like around 60,000 tons is what would fall into the current half. Of course, there's seasonality impacts that also come into play for 1H 2023. There's less business days, et cetera. That's why you only see a marginal impact reflected in the outlook.
Great. Thanks for that, Tania. A second question on North Star. Are you able to give us some color on the demand from your customers' orders from North Star and from that region? Understand the spread is around one to two months lag. How should we think the demand for North Star, you know, for this half? Thank you.
Yeah. We still see a strong demand environment, Chen. I mean, there's been some disruption, obviously, in the automotive industry, around the chip supply and some of the supply chain issues that they've had. The last numbers I saw, I think, from an auto annualized number was about 13.5 or 14 million units. It's been as high as 17, so that's off a little bit, and that reflects those supply side shocks. The team at North Star, again, because of the quality of the product and their customer book, are able to adjust to those sorts of fluctuations and move volumes. You know, from an underlying perspective, as we call out in the broader North American investment piece, we still see demand being strong.
We still see quite a large amount of investment to continue to come from the infrastructure bill, from the green energy expenditure, and we're continuing to see the rationalization of the industry and consolidation of the industry. We're optimistic about the demand outlook, not just in the next half, but in the longer term from a North American perspective.
Thanks for that, Mark. Another question from me, please, in regards to your mix of prime and obsolete scrap used in the North Star. Understand now 40% of scrap from North Star is internally sourced. How should we think of the mix of. At the moment it's 50/50. How should we think of the mix of usage? Because prime scrap has been trading at a significant premium to obsolete scrap recent years. How should we think, you know, are you going to reduce the prime scrap usage significantly, I mean, in the midterm? Thanks.
Yeah. That's exactly what the recycling acquisitions give us the opportunity to do to further expand the work we were doing with MetalX before we acquired them around more sophisticated processes, better processes to sort through obsolete scrap and effectively give us, Chen, a bit of a different grade in between obsolete and prime. That reduces our reliance on prime. Yes, we had seen those margins run up. They've compressed back again, but we had seen those margins run up over the last year. So that is actually. That's absolutely what's driving us in terms of thinking about how we can get a better economic and value and use outcome for North Star through the processing of the obsolete scrap.
Maybe if I can just add a little bit more just in terms of, I think the benchmark we put out there is something like 75% scrap. Historically, that would have been weighted towards prime versus obsolete scrap. Obviously, the 25% is pig iron. What we'd be doing is looking to flip that equation, looking to weight it more towards the obsolete, a low residual obsolete and less of the prime.
Great. That's good to hear. Thanks, Mark and Tania. Last question from me, if that's allowed. Just switch it back to your Australia business. The Australia coated products, the prices directly referenced to Asia HRC prices. Are you being able to share with us the demand or like, you know, orders from your customers in resi and non-resi sectors from Australia? Understand the spread or the prices is three to four months lagged. Does that mean BlueScope has a lot of visibility, you know, for your earnings for this half because it's almost locked? Thank you.
Yeah, sure. Chen, I mean, that's really what we're calling out on slides 19 and 20. If you look at the domestic ASP outlook, we're still good from a detached housing perspective, albeit off that home builder peak, still really strong in the alterations and additions space, still good from an industrial and commercial perspective. We're looking at still good levels of demand and the macro environment notwithstanding interest rate rises, the macro environment supporting that outlook for the next six months.
You're right, Chen. We've got a line of sight to pricing out towards probably the back end of October. It's really only November, a bit of November and December, that we'd be looking at in terms of.
The pricing is still not confirmed.
Correct.
Yes.
Okay. That's very helpful. Thank you. That's all from me.
Thank you, Chen.
I'll pass it on. Thanks, Mark and Tania. Thank you.
Thank you.
Thank you. Your next question is a follow-up from Simon Thackray with Jefferies. Please go ahead.
Thanks Mark and Tania. There's been a lot of discussion obviously on the metallics for North Star. You've now, I think, invested around AUD 320 million in recycling, and I know you have your own ROIC hurdles for that investment. Just parking that to the side for a second, with this change in mix, as you explore this change in mix towards more obsolete over prime, if we take a through cycle view of spreads, what's the margin accretion that you would anticipate from this investment and the pursuit of obsolete over prime?
Look, I'm gonna call too early there, mate, 'cause we've just started this process. I think your math's right. If you think about the sort of $300 million, our internal hurdle rates are 15%. That's a good way to think about the scrap business. In terms of future benefit for North Star with the beneficiation process, it's probably just too early for us to call, mate. Clearly we think there's an opportunity there. I'd be reluctant to put a number on it at this early stage, but we think there's a benefit there from a cost perspective, but we also think there's a significant benefit there in terms of allowing us to decrease our reliance on prime and focus more on that intermediate or beneficiated grade of obsolete.
I'll probably call too early at this stage on giving you a margin number, if that's okay.
No, that's all right. That's all right. Just a quick follow-up, maybe Tania, on the Capex profile for future growth, and I'm excluding the AUD 500 million for cold roll and painting in the U.S. Interestingly, no sort of observable inflation in the numbers there other than maybe the Australian coating that seems to have gone up. Is there any risk in your forward estimates of inflation or do you feel like you've covered that off in the estimates?
These are very preliminary estimates, Simon. I mean, a lot of these projects are still at concept, pre-feasibility stage, moving through feasibility. Yes, there is absolutely the risk of escalation and it's probably in Capex. I think it's the one area where there's probably a higher risk. There's a fairly hefty labor component that does go into capital projects. We're very mindful of that risk, and we'll give an update once we work our way through those processes, particularly on the Reline project. We'll be giving an update at the November AGM and of course in February. We'll give an updated view at that point. I would say yes, there is risk there around escalation.
Just on the coating then. That's gone up, I think, the Capex bill for Australian coating is increased sequentially, I think, by about AUD 50 million from memory or AUD 25 million, I can't recall. Just the rationale behind that, is it an expectation of? Is it just Capex? Is it just inflation?
It's a little bit of Capex, but also location. The location that we're looking at the moment is the preferred location, a little bit higher cost. There's some extra civils and infrastructure that needs to go into that location. It's a little bit of a mix there.
So it is that process-
Got it.
Simon, as we're going through, you know, concept, pre-feasibility, feasibility, this firms up. As Tania's called out, with the blast furnace and the metal coating line, as we've gone through the process, we get the ability to firm up those costs and that's what we reflect in the estimates that we give you guys.
Good as gold. All right. Thank you.
Thanks, Simon.
Thanks, Simon.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Vassella for closing remarks.
Thank you, everyone. I know it's a busy time, but thank you for your time this morning, and we appreciate your support. We look forward to seeing you over the next week or so. Thanks all. Take care.