Good morning, welcome to BlueScope's First Half FY 2022 Financial Results Presentation. My name's Mark Vassella, I'm speaking to you from Kansas City, the head office of our Buildings North America business. In Melbourne today is Tania Archibald, our CFO. I'll run you through the highlights of the last six months, Tania will address segment and balance sheet performance. Before we wrap up, we'll have plenty of time for your questions. Six months ago, I presented to you a very solid set of results, today I have the pleasure of taking you through an even stronger set, a record for any six-month period for our company. It's been an extraordinary period for the steel industry in terms of demand and pricing, also for BlueScope, where the many years of portfolio transformation and investment are now allowing us to reap the benefits of those conditions.
Fundamentally, our record performance is a credit to the 14,0000 BlueScope team members who put in an exceptional effort to maintain safe operations and retain a strong focus on our customers and communities in the face of unprecedented challenges. Speaking of customers, 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 issues, shipping resources, and freight costs are common areas of concern across the economy. Rest assured, our customers remain at the heart of our focus, and we'll continue to invest to improve their customer experience while working within the supply chain and labor constraints that are prevailing at present.
Whilst BlueScope is not alone here, we're doing everything we can to meet the needs of our customers and improve our performance. As always, safety comes first at BlueScope. In the last six months, we've continued to focus on evolving our overall approach and organization-wide safety culture as we seek to take our performance to the next level. On climate action, we've taken large strides. During the half, we were proud to release our initial climate action report, setting out our comprehensive climate change strategy, including expanded 2030 targets, our 2050 net zero goal, transition pathways, and our approach to climate capital allocation. We were also excited to announce collaborations with Rio Tinto and Shell to support our work to develop future low-emission steel-making technology.
Today, we're announcing that we'll move to the formal feasibility assessment phase of the Port Kembla, Blast Furnace Reline project. The feasibility study will examine a comprehensive upgrade of the blast furnace facility, with a sharp focus on how best to deliver greenhouse gas abatement and incorporate new environmental management technologies. Critically, the project ensures the supply of steel for Australia from 2026 while providing a bridge to transition to low or zero carbon technologies once proven at scale and commercially viable for the Port Kembla Steelworks. In the U.S. in December, we were very pleased to complete the acquisition of MetalX's ferrous scrap business, establishing BlueScope Recycling. This business, which we'll look to grow in the medium-term, will help underpin North Star's supply chain and its great competitiveness, particularly at a time when we're on the cusp of commissioning the 850,000 ton expansion.
The expansion project is progressing well, and we expect the first coil to roll through the end-to-end process around the middle of this calendar year. Upon completion, BlueScope will have an annual production of 3 million tons per annum at North Star, equivalent to approximately 5% of U.S. domestic flat steel production. To elaborate on safety, we remain fully committed to our people-centered approach that's focused on engagement and learning as we seek to take our safety performance to the next level. Core to this approach is the acknowledgment that humans make mistakes, and that designing and strengthening the risk-based controls will give us greater capacity to recover when things go wrong. To illustrate our progress, we have 250 risk control improvement projects identified across the business, and over the last six months, our teams have completed 55 of them. At 31 December, we've had more than 1,100 employees participate in the continued rollout of our HSC risk management program, including the board, ELT, and a number of external supply chain partners.
At 7.0, our one half FY 2022 TRIFR remains at the top end of the long-term range of 5- 7, with the majority of the injury profile continuing to be lower severity injuries, like sprains, strains, and lacerations. As I've said over the last year, we're continuing to evolve our approach to safety by focusing on reducing the severity of actual and potential incidents so that when an incident does occur, its outcome, especially to our people, is minor. As such, we've included severity measures to complement and add context to our traditional lagging indicator of TRIFR. Each half, we'll convey the number of injuries we observed in the period that resulted in a permanent incapacity and the number and rate of injuries that had the potential to be fatal incidents.
In the first half of FY 2022, there were no injuries resulting in a permanent incapacity, and the rate of injuries that had the potential to be fatal remains low, at less than 3%. Against a challenging backdrop of strong demand, pandemic-related disruptions, and labor constraints across our businesses, our people have shown great determination in maintaining their focus on the risks in front of them, whilst at the same time looking for safety improvements in the way we make and handle our products. We remain committed to improving our performance and caring for our people by engaging with and empowering them and by focusing our resources on the significant risks. As I mentioned earlier, I'm pleased with the progress we're making with our safety evolution, and look forward to seeing the benefits of this cultural shift over the coming years.
If I take a holistic view for a moment, over the last five years, BlueScope has delivered an average return on capital of over 18%. We have a resilient portfolio of businesses that are well-positioned to participate in an exciting long-term outlook for steel, supported by favorable industry and end-use trends. Steel is and will continue to grow as a vital input to support the transition to clean energy sources, such as wind and solar, together with energy transmission. On the supply side, consolidation has transformed the U.S. steel industry, supporting enhanced supply-side discipline. China's efforts to reduce exports and limit overproduction and emissions are also major structural positives. The combination of government stimulus and infrastructure programs and recovery in consumer sentiment is driving robust construction and infrastructure demand across our key markets.
The U.S. Build Back Better stimulus program is one such example. The move towards remote and hybrid working arrangements is accelerating a shift towards lower density and regional residential housing. This is a sweet spot for BlueScope's products, such as COLORBOND and TRUECORE. This trend is giving us the confidence to explore options to increase metal coating capacity in Australia. The digital economy and its need for supporting logistics infrastructure continues to grow, creating demand for warehouses, distribution centers, and data centers, creating a supportive backdrop for all of our businesses. To our financial highlights. Underlying EBIT in the first half of FY 2022 was AUD 2.2 billion, being nearly double that of our last half and over 4x that of the first half in FY 2021. Return on invested capital was 43.7%, up from 11% last year. Reported NPAT was up AUD 1.3 billion to AUD 1.6 billion.
Free cash flow after CapEx of AUD 688 million reflected our strong earnings performance, was partly offset by both CapEx for major projects, such as the North Star expansion, and increased net working capital due to higher steel prices and activity levels. Net cash was AUD 696 million at 31 December, slightly down from six months ago, reflecting working capital growth amid extraordinary demand conditions, the acquisition of the MetalX assets, and increased shareholder returns. The board has approved an interim unfranked dividend of AUD 0.25 per share. Additionally, with AUD 285 million bought since August 2021, our buyback program is being increased to allow up to a further AUD 700 million to be bought over the next 12 months.
These impressive results are a credit to the entire BlueScope team, who've made a remarkable contribution in the midst of the pandemic and extraordinary customer demand. As I look around our footprint, North Star delivered underlying EBIT of AUD 1.2 billion, driven mainly by record Midwest hot-rolled coil spreads. The team continued to do a remarkable job to dispatch every ton possible while working alongside the expansion project. Australian Steel Products shipped incrementally better domestic volumes than last half, with strong demand across all end-use segments, particularly from building and construction applications. Strong steel prices and spreads also contributed to their performance. The Asia and North America Building Products segment was led by an extraordinary contribution from the Coated North America business, with strong market conditions and cyclically lower cost steel feed given their supply chain structure.
The China and Thailand businesses made solid contributions, whilst Indonesia, Malaysia, and Vietnam were all impacted by pandemic-related disruptions to demand, operations, and supply chains to some degree. Similar to Australia, the New Zealand and Pacific Islands segment benefited from strong demand. Buildings North America saw strong demand, but a reduced performance from the core Engineered Building Solutions business due to high steel feed costs and margin compression. The segment benefited from the performance of the Properties Group. Our purpose and strategy continue to focus and guide us. We continue to be encouraged by the resonance of our purpose through the BlueScope team as we work to support each other through what is now the third year of pandemic impacts.
While we've been the beneficiary of macroeconomic and industry tailwinds recently, our strategy continues to see us deploy our financial strength to transform our business, to pursue growth opportunities, and to deliver returns to our shareholders. Over the last six months, we've also made meaningful progress on the delivery of our climate action program and continue to drive the digital transformation of our operations. We've also focused on developing our growth projects, which are at various stages of evaluation and planning. We continue to embed sustainability in all that we do. Significantly today, we are very pleased to confirm that BlueScope's Port Kembla Steelworks and steel processing sites have been awarded ResponsibleSteel site certification.
ResponsibleSteel is the global steel industry's first sustainability standard and certification program, which was designed by business, civil society, suppliers, and consumers. The independent third-party certification process has taken almost two years, involving multiple teams across our business. Certification followed a rigorous audit of the 12 sustainability criteria, which cover environmental, social, and governance issues. We've continued to make progress on gender diversity in the half, with female workforce participation rising to 23%. During the half, we commenced monitoring beyond gender metrics such as ethnicity, First Nations, and disability as we strive to better reflect the communities in which we operate. We were also encouraged that our employee survey has shown that more of our people feel safe to speak up, be heard, and feel welcome.
On sustainable supply chain, we've completed our engage and assess process with 250 of our suppliers, 46 of which were completed in the first half of FY 2022. The mix of assessments of new suppliers and reassessments of previously assessed suppliers largely used the independent EcoVadis process. Unfortunately, delays were observed with many suppliers due to the impact of the pandemic-related disruptions on their businesses and teams. On climate change, it's been a very busy six months with the release of our initial climate action report and the initiation of two important collaboration initiatives. We've signed memoranda of understanding with Rio Tinto to explore technological and process options for low-emission steel making, and with Shell to explore and develop renewable hydrogen projects at Port Kembla.
The projects will focus on piloting an industrial-scale 10 MW hydrogen electrolyzer, a hydrogen direct iron reduction furnace, and iron melter, all powered by renewable electricity. Working with Shell, BlueScope will also collaborate with governments, private enterprise, and research institutions to develop a hydrogen hub in the Illawarra. Our increased commitment to this critical area was demonstrated by the full-time appointment of Gretta Stephens to the expanded role of Chief Executive Climate Change & Sustainability. Gretta relinquishes her oversight of the New Zealand and Pacific Islands business. Robin Davies, formerly president of North Star, has been appointed to that role. I welcome Robin to the ELT. Turning to the Port Kembla Blast Furnace Reline project. As I mentioned in my introduction, this project is designed to build a bridge to a low-carbon future. In September, we laid out our decarbonization strategy, our net zero 2050 goal, and decarbonization pathways.
We believe this is an exciting time for the steel industry as new technologies emerge to address the fundamental challenge of decarbonizing the steelmaking process. A reline of No. 6 Blast Furnace will secure BlueScope's domestic ironmaking needs from 2026. The campaign life of the furnace of up to 20 years aligns with our decarbonization strategy, our 2050 net zero goal, and provides a challenging but credible timeframe for the development, scaling, and commercialization of new low-emissions technologies. To be clear, the reline does not lock us into blast furnace steelmaking for the full 20 years of the campaign if new technologies emerge. This is due to the strong earnings and cash flow of the ASP business.
Achieving this will be dependent on several enablers, including access to low-cost green hydrogen, firmed and affordable renewable energy, the development of suitable raw material supply chains, and appropriate policy settings. The scope of the project is far broader than either a mid-campaign reline or even a typical end-of-life reline, in that it encompasses modernization and upgrading of the blast furnace facility and related infrastructure. It also includes comprehensive environmental and technology upgrades, including options that will enable greenhouse gas emissions reduction over the medium to longer term. These opportunities are part of a broader suite of climate-related projects at Port Kembla that have the potential to reduce greenhouse gas emissions intensity by up to 20%. Collaborations with governments, technology vendors, supply chain partners such as Rio Tinto and Shell, and industry bodies will be crucial to making sure we're ready to implement the best available technologies.
Following the completion of the pre-feasibility study, the preliminary indicative cost estimate of the reline is now around AUD 1 billion, up from the initial indicative range of AUD 700 million-AUD 800 million. This is due to a broadening of scope and expanded environmental measures. BlueScope will commit during FY 2022 to approximately AUD 120 million of long lead time items critical for the delivery of iron making capability from 2026. CapEx is expected to peak in FY 2024 and FY 2025, with approximately 50% of the total spend during that period.
I'd also note the decision to bring forward the likely transition timeframe to 2026 will result in a step-up of non-cash accounting depreciation of the existing No. 5 Blast Furnace assets by around AUD 40 million-AUD 60 million per annum, with a circa AUD 15 million impact in the second half of FY 2022. No. 6 Blast Furnace was installed back in 1996 and provided a reliable source of iron to the Port Kembla Steelworks until its decommissioning in 2011, when we transformed the Australian business to reduce exposure to the oversupplied export market. This slide shows not only the No. 6 furnace, but the full iron-making facility that supports the furnace, a significant operations in its own right. As you can see, the orange call-out boxes highlight the activities undertaken during a typical reline, focused primarily on the interior of the furnace.
In Blue, you can see the upgrades to the supporting infrastructure to enhance the overall efficiency of the facility, as well as improve the way we handle raw materials and byproducts, such as the new slag granulator facility. Lastly, in green, you can see examples of the technology we're investing in as part of the project to enable improved environmental and emissions performance. This is an exciting project for our company, our people, and the local community. Turning the focus to our growth projects, we expect to commission the North Star expansion later in this half. The ladle metallurgy furnaces are currently being commissioned, and the installation of the caster and shuttle furnace is nearing completion.
The first coil is expected to roll off the line around the middle of this calendar year, slightly later than our previous expectations, given the complexity of the project and managing around the pandemic. We expect the ramp-up to full run rate will take around 18 months, and we now expect the total cost to be around 10% above the $700 million initial estimate, which reflects the work done to achieve commissioning as soon as possible and some inflationary pressures seen across the U.S. economy. It's a credit to the entire project team that they've managed to progress the work, all the while managing the pandemic and brownfield expansion risks. More broadly, our decisions are based on a long-term perspective that we continue to see the U.S. as a great place to make and sell flat steel products.
Recent industry consolidation brings a step change in supply-side discipline relative to the previous decade. The U.S. remains a net importer of steel, demand is expected 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. It was with that backdrop that we had the confidence to acquire the ferrous scrap processing business of MetalX in December. Now named BlueScope Recycling and Materials, MetalX is North Star's largest scrap supplier, supplying around 20% of their scrap requirements. This acquisition helps underpin North Star's supply chain and its great competitiveness, bringing us a crucial presence and expertise in both prime and post-consumer scrap processing.
It also brings with it an opportunity to improve the quality and quantity of obsolete scrap that we can use through enhanced processing technologies, reducing the overall reliance on prime scrap. We'll continue to review the optimal mix of merchant and internal scrap supply from BlueScope Recycling, and we expect to grow this business in the medium term.
I'll now hand over to Tania, who will take you through the more detailed financial data.
Thanks, Mark. The North Star business produced an outstanding result with an underlying EBIT of $1.2 billion in 1H 2022 and ROIC of just over 76%. This very strong result was driven by record-high spreads in the U.S. On average, realized spreads increased materially in the half in an environment of strong demand and supply-side constraints, and notwithstanding the ongoing issues in the automotive sector, where production has been limited by the semiconductor shortage. Across the half, the supply side gradually caught up with backlogs, and at the back end of the half, we saw lead times normalize. The mill generally operated at full capacity, notwithstanding the broader impacts of the pandemic, and dispatches remained strong. Although towards the back end of the half, we did experience some temporary logistics constraints on dispatch activities.
In terms of conversion costs, we saw some cost pressures during the half, although more than half of the increase in conversion costs was driven by employee profit share plans, which naturally wind up and down in direct correlation to business performance. The acquisition of the MetalX ferrous scrap business closed in late December. Going forward, the activities of this business will be reported within the North Star segment. To take a quick look at activity levels across North Star's end-use segments. In auto, despite strong underlying demand for vehicles, the automotive segment remains impacted by low vehicle inventories stemming from the semiconductor shortage. Auto volumes are expected to rebound on the back of pent-up demand, although the timeframe for this remains uncertain. Non-residential construction has remained relatively stable at historically robust levels, supported by consumer confidence and government stimulus programs.
The recent softening in the Architecture Billings Index is a return to more normal levels. The manufacturing sector is also running at historically robust levels, and whilst some supply-side challenges have arisen from disruptions to supply chains and labor availability, this has not derailed growth, instead extending the pipeline of work. The Australian business delivered a very strong underlying EBIT of AUD 688 million and a ROIC of over 35% in one half 2022. Domestic volumes remained at record levels across all key segments and up slightly from the prior half. The premium-branded suite of products continued to perform well with the likes of COLORBOND, TRUECORE, and TRU-SPEC all seeing record sales volumes in the half.
We also saw an improved contribution from the downstream businesses, including Lysaght, Fielders, Orrcon, and BlueScope Distribution, driven by strong margins and robust demand and dispatch volumes. Realized spreads improved in the half as stronger prices more than offset higher raw materials costs in both domestic and export markets. Similar to North Star, we saw conversion costs increase across the half. Around half of the increase in conversion cost is driven by employee profit share plans, which are directly linked to business performance. Finally, as flagged at the AGM, export coke sales were up AUD 16 million on H2 2021. This continued elevated performance on export coke is due to further strengthening of coke prices on robust demand, which more than offset higher raw materials costs.
Looking at the specific segments for ASP, sales into building and construction segments improved slightly on the prior half, remaining at record 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 following 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 subsegment also remained strong with a solid pipeline of work, combining with rebounding confidence to support strong demand, including in e-commerce infrastructure. The social and institutional subsegment remained strong, particularly driven by ongoing government investment in health, education, and defense projects.
Sales into the engineering sector remained robust on infrastructure investment, particularly in transport. Manufacturing sector demand again improved on increased activity within residential construction and favorable government policies, spurring a rise in orders for manufactured goods. Demand in the agriculture, mining, and transport sectors all held firm with supportive sectoral conditions. More broadly, whilst overall demand conditions are robust, supply chain delays and labor availability remain major challenges across all sectors. Looking at the macro indicators of the Australian building and construction industry, we see a strong pipeline of activity. Whilst detached house approvals have pulled back from recent record highs, they've showed resilience, demonstrating that underlying demand for detached housing remains strong following the end of the HomeBuilder program. Alterations and additions approvals have pulled back from recent highs, but remain at elevated levels, with consumers continuing to redirect discretionary funds towards renovation activity.
For residential construction more broadly, we are clearly seeing the trend towards regional areas and lower density living, which are traditionally areas of strength for our flat steel products. 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 solid pipeline of projects and high confidence levels in the commercial and industrial sector, is likely to underpin demand in the medium term. The strength in approvals more broadly should be supportive for ASP's dispatches through the current half, although labor and supply chain constraints may further elongate the pipeline of work. Building Products Asia and North America delivered a significantly higher result of AUD 266 million EBIT and a ROIC of 32%.
This was predominantly driven by continued cyclical margin expansion in the North American business as North American flat steel prices rose rapidly relative to feed costs. The North American business saw strong demand, moderately tempered by constraints in the supply chain, including raw materials and logistics availability. Performance in the Southeast Asian businesses was solid, given they all experienced substantial pandemic-related impacts on demand, operations, and supply chains. China delivered a stronger result on typical seasonality. Although broader China GDP growth has eased, our China business is targeted at relatively high-growth segments, including auto, electronics, logistics, and food and beverage, which have generally outperformed the broader economy. In India, performance was up slightly on stronger demand, despite continued pandemic impacts across demand, operations, and supply chains.
I'm also pleased to advise that subsequent to Tata Steel's acquisition of Bhushan Steel, BlueScope has finally reached an in-principle agreement with Tata for the supply of painted product from Tata Steel to the Tata BlueScope Steel joint venture. The product will be supplied from Tata Steel's plants located at Angul and Khopoli, which were formerly part of the Bhushan Steel Group, and we look forward to the continued growth of this business. The New Zealand and Pacific Islands business again strengthened with an underlying EBIT of AUD 86 million and ROIC of almost 62% for the half. Domestic demand remained strong, particularly in construction and infrastructure applications. Sales of metal-coated and painted products were particularly strong on the back of robust residential construction demand. Despite the strong demand backdrop, sales volumes were impacted by pandemic-related disruptions to supply chains in the half.
Margins improved off the back of stronger regional pricing, partially offset by higher raw materials costs. Conversion costs were higher in the half due to pandemic-related disruptions to operations and supply chains and higher freight, consumables, and labor costs. Pleasingly, we did see a moderation in energy costs during the half. Turning to Buildings North America, which delivered an EBIT of AUD 18 million and ROIC of 7% for the half. The overall performance of this business has been heavily impacted by record high steel feed costs, together with pandemic-related impacts to labor, materials, and supply chains, all of which are expected to substantially improve in the near term. Underlying demand and order intake are strong, and considerable progress has been made in improving engineering capacity within the business.
The Properties Group, which operates within this business unit, delivered a stronger contribution on the prior half on the timing of project completions. More broadly, the build-out of the Properties Group pipeline of projects is on track as we seek to generate a more consistent earnings profile from this business. Turning to the underlying EBIT group walk forwards. I'll focus my comments on the right-hand chart with one half 2022 performance compared to two half 2021. You can see the benefit of sustained strong demand conditions and higher prices in our key markets. This is partially offset by higher raw materials costs, including iron ore, scrap, and alloys, and higher externally sourced feed costs.
Conversion costs were also higher, although around half of the escalation in conversion costs is fully variable as it relates to employee profit share arrangements, which naturally wind up and down in direct correlation to business performance. For the balance of the conversion cost increase, we do anticipate a degree of recovery in the second half, assuming that we experience less disruptions to operations and supply chains relative to the first half. The moderately negative volume impact is largely due to the magnified effect of high absolute spreads on slightly lower volumes at North Star. On the left-hand side, with 1H 2022 performance compared to 1H 2021, we see similar themes with strong spreads and demand across our major markets.
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 we mentioned at the FY 2021 results and during the investor days in September 2021, for a period of time, we'll be operating outside of our target capital structure 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. Turning to ROIC, the group delivered a record return on invested capital of just under 44% in the half, which is up significantly on FY 2021. We saw an extremely strong performance at North Star and a fantastic performance at Australian Steel Products, New Zealand and Pacific Islands, and from the Building Products segment. Compressed margins on high steel feed costs impacted the Buildings North America segment, offset by a solid contribution from the BlueScope Properties Group.
Turning to cash flow. Whilst record spreads and volumes assisted the group in generating record earnings, the cash flow of AUD 688 million for one half 2022 was reduced by the acquisition of the scrap recycling business of MetalX, the North Star Expansion project, and the material build in working capital, which we foreshadowed in our October and November releases. This AUD 1.1 billion build in working capital was particularly pronounced in inventory, driven by a combination of high steel prices, strong activity levels, and pandemic-related impacts, including supply chain constraints across the footprint. Focusing specifically on inventory, the ASP and Building Products segments saw the largest increases. The rate increases are all in line with higher prices and will naturally fall as and when prices fall.
In terms of volume, in ASP, the volume impact reflects a variety of factors, including sustained high levels of domestic demand, which naturally necessitate higher levels of inventory, together with greater supply chain complexity, including the impact of logistics and labor constraints. Given the high level of activity currently being experienced by ASP, it may take longer than the current half for volumes to normalize as we prioritize the needs of our customers. At Building Products, the pandemic impacts to demand and supply chains have also contributed to higher volumes. These volumes are largely expected to normalize across the half. At North Star, the volume component reflects both a combination of relatively low inventories at the start of the half and the impact of logistics constraints and seasonality at the end of the half.
More broadly, the important message to take away on working capital is that we do expect the build to progressively release in line with declines in steel and raw material prices and as efficiency in supply chains recover. Turning to our capital structure. The balance sheet remains strong with AUD 696 million net cash. We have ample liquidity of over AUD 3 billion and have maintained our investment-grade credit ratings from Moody's and S&P. As flagged in August, we are 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, sustaining asset spend was broadly in line with our normal range, with growth capital focused on the North Star Expansion project and the acquisition of the MetalX ferrous business. On the North Star Expansion project, we anticipate approximately AUD 150 million CapEx to be incurred in the second half, with the balance in FY 2023. More detailed information on the project capital commitments and cash flows can be found up the back of the pack. This page sets out our very high-level estimates around the indicative AUD 1.9 billion of investment projects we're contemplating, all of which have previously been flagged. It's an exciting pipeline of work with all of the projects at different states of analysis and progression, and we'll keep you informed as we progress through the program of work.
Turning to shareholder returns. Our approach here is to seek to distribute at least 50% of free cash flow to shareholders in the form of consistent dividends and on-market buybacks. 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. Naturally, the board reserves the right to change this approach. In alignment with this approach, the board today approved a AUD 0.25 per share unfranked interim dividend. The Australian tax losses of approximately AUD 135 million are expected to be exhausted early in 2H 2022. Thereafter, once we resume cash tax payments, it should allow us to apply a level of franking to dividends.
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. To that end, the board has today approved lifting the available buyback capacity to up to AUD 700 million. This buyback is intended to be conducted over the next 12 months and will continue to take a nuanced approach to execution. I'll run through the outlook across the individual segments before handing back to Mark. For North Star, we expect a result less than half of 1H 2022, with benchmark Midwest hot-rolled coil steel spreads contracting back from record highs, partially offset by favorable realized pricing. For ASP, we expect a lower result compared to 1H 2022, with softer realized spreads driven by weaker lagged benchmark spreads, partially offset by improved realized sale prices.
We expect similar domestic dispatches on ongoing robust demand and decreased export coke earnings on lower margins. For the Building Products segment, we expect a significantly lower result than one half 2022. At North America, cyclical margin compression is being driven by rapidly falling U.S. steel prices, which is expected to lead to a small EBIT contribution from this business. Across Southeast Asia, we expect a lower result on ongoing pandemic impacts on demand and supply chains. In China, we expect a lower result on typical unfavorable seasonality, and we expect a similar result in our Indian joint venture. For New Zealand, we expect a significantly better performance with favorable pricing in a strong demand environment. Sales volumes are expected to improve following pandemic-related disruptions in one half 2022.
For Buildings North America, we expect a significantly higher result than 1H 2022, with the core Engineered Building Solutions business benefiting from expanded margins on lower steel feed costs, with demand and order books remaining strong. For the BlueScope Properties Group, we expect a negligible contribution on project timing.
With that, I'll hand back to Mark.
Thanks, Tania. Turning to the group outlook. We presently expect underlying EBIT in the second half of FY 2022 to be in the range of AUD 1.2 billion-AUD 1.35 billion, which would be our second-highest EBIT only to our last half when looking back over BlueScope's 20-year listed history. Of course, these expectations are subject to spread, foreign exchange, and market conditions. I'd also note that there are elevated risks, particularly from pandemic impacts on operations, supply chains and demand, volatility in steel prices and spreads, and the current geopolitical environment. To conclude, BlueScope is a very different type of steel company. It's uniquely positioned to grow and deliver across our major markets. We're optimistic about the future.
The benefits we are seeing today with a record half-year result and an average ROIC exceeding 20% over the past four and a half 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 14,000-strong BlueScope team and our robust balance sheet and financial disciplines, we're completely 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 towards lower density and regional housing, and the need for e-commerce, logistics, and green energy infrastructure.
We're particularly excited about our multifaceted growth program in the U.S., with the imminent commissioning of the North Star expansion and the deep bottlenecking project thereafter, our exploration of coil painting options in the eastern part of the country, and the medium-term expansion of the Properties group. We're also highly focused on the task of transitioning our business to a low-carbon future, as demonstrated by the plans and commitments we've laid out during the last half and the collaboration and concept studies we're now progressing. 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 Lee Power with UBS. Please go ahead.
Morning, Mark. Morning, Tania. A couple of questions. Just on realized spreads in the U.S., are you seeing anything around cancellations that kinda maybe has some of those lags not play out as we might have seen previously?
I'll say something quickly Lee, and then Tania can give some more detail. You know, we're watching the buildings business, particularly as prices have risen up and contract terms out for some time. We're watching that. Quite frankly, there's a backlog in the buildings business and in the industry more broadly here. I think if someone was to cancel out, they'd be waiting a year or more for their project. We're watching that closely. Of course, in the Hot Rolled Coil space again, the North Star business deals with its customers on the basis that if they take advantage, we take some advantage on the way up. They take some advantage on the way back down. Most of our customers honor their commitments to us at North Star.
We are watching it closely. There's nothing material that I've seen or I'm aware of in terms of that sort of risk at the moment.
Excellent. Good to hear. Maybe, Tania, just for you on the AUD 536 million inventory impact from volume. Is it possible to kinda split out, if you can, what you think supply chain disruptions were as a proportion of that? Maybe, I know you said second half is probably too early for some of that to revert. Like how, you know, how do we think about the trends that you're seeing in supply chain and trying to manage the business? Is it getting better? Is it getting worse?
Thanks, Lee. It's an interesting one. It's a little bit difficult to split out. I mean, clearly what we've got is we've obviously got volume and rate. Rate is what it is, it will naturally decline. With the volume, the largest part is obviously sitting in ASP. What we're very conscious of is the very strong domestic market that we currently have, and really the need to get product to our customers. We have been dealing with quite a number of logistics constraints, including early in this half. I'm sure everyone's aware of the flooding and rail outages which occurred earlier in the half. That just puts more pressure on the logistics constraints. The comments that I've provided are really directional. What I would say is the primary focus is on the customers.
We are very conscious of the volume levels that we're holding. We do expect them to unwind, but not necessarily fully in this half. It's a directional comment that I would give you. That's specifically on ASP. New Zealand is very similar to ASP. I think in terms of the Building Products Asia and North America, we would expect those volumes to largely unwind. North Star was really timing, and it should largely unwind. However, you do need to factor in, of course, any kind of build that we would need to do as part of the ramp up. That's some directional comments that I would provide.
Excellent. Thank you. Appreciate it. Thanks.
Thank you. Your next question comes from Jack Gabb with Bank of America. Please go ahead.
Thanks. Morning, Mark and Tania. Just following up on the inventory question then. Can you give us a little bit more detail around just the actual volume that you build up, particularly in Australia? Have we seen those volumes peak yet? Sorry, I'm still a little bit unclear, I guess, as to, you know, obviously some of it's pricing. If we just look at the absolute volumes, is this driven by logistic challenges? I would have thought that would ease by now. Is it a case of you just overproducing and maybe demand's not been as quite as strong as you had thought? Just some more clarity would be great. Thanks.
Would you like me to start there, Mark?
Yeah, why don't you, Tania?
The demand is very strong. It's not a case of overproducing. It's more, probably an issue around constraints on logistics capacity. I mean, the system itself is running absolutely drum tight. I'm not sure that you would necessarily see a higher increase in the level of volumes. It's more around the fact that there's a lot of effort going on to get that volumes to customers. The system is running very, very tight, and we have had some, I guess, loss of capacity early in the half, specifically in Australia here I'm talking. Yes, we would expect it to unwind from where we are, but again, not necessarily all occurring in this half.
Jack, I'll just give you an example. I spoke to John Nowlan last week at ASP. The East West rail linkage has been out for a month, and we have more stock at Western Port than we can poke a stick at waiting to go to WA. We've tried shipping. We had a ship turn back before Christmas because a crew member had COVID. They're the sorts of constraints and issues that the team have been dealing with. It's not an indication that there's a build here because demand is not there. That's not the case at all. There's really some still quite problematic supply chain issues around Australia particularly.
That's great. I really appreciate the color. One quick question on North Star. Have you spent much time more looking at the potential demo-- debottlenecking post the expansion? You know, I guess it may be indicative CapEx. I know you've talked a little bit in the past. I appreciate it's still very early stage but as you're getting very close to completing the expansion, albeit with ramping up, just curious how the next stage of that debottlenecking is gonna look like. Thanks.
Yeah. The team's working really hard on the ramp-up plan now. I was up there just last week. The scale and complexity of the project, I've gotta say, is a little mind-boggling. You don't really appreciate it from so far away, but having spent the last couple of weeks climbing all over it's just quite staggering really what the team have been able to do. We're now planning there in great detail about what the ramp-up phase looks like. We will then, of course, as soon as we get through this component, get the commissioning done, start on the ramp-up plan in terms of producing tons. We will then turn our attention to the debottlenecking.
There's not a lot of detail at this stage I can give you or not much more than the indicative capital numbers that we've laid out already.
Okay. No problem. I really appreciate it. Thanks, Mark. Thanks, Tania. I'll leave it there.
Thanks.
Thank you. Your next question comes from Paul Young with Goldman Sachs. Please go ahead.
Good morning, Mark and Tania. Our first question's on the value add coated steel part of the business. Record sales demand's really strong, and I think it was a COLORBOND price increase that flowed through in February. We're seeing a fair bit of cost inflation across paint and zinc and ali at the moment. I'm just, can I ask, you know, what the scope is for further price increases to push through to customers over the course of this year? Then another question, Mark, around the U.S. painted paint line potential installation in the U.S. What capacity are you looking at on that under that study?
Okay. Let me maybe start with the paint line first. I mean, what you typically get with a paint line is somewhere between 150,000 and 200,000 tons. They tend to come in units. That's the sort of sizing that we're looking at, Paul. Quite a lot of work going into that and we'll, you know, update you guys as we make progress, but that's the typical sizing that we would look at. We are seeing some inflationary pressures, there's no doubt, we are also recouping that where we can. The COLORBOND price increase that's just taken effect, we signaled it about a year ago. In fact, we signaled it a year before that, pulled it with COVID and all those other issues we're dealing with, bushfires.
The range of the COLORBOND increase is sort of 6%-8% and are now more commoditized products. Obviously, we've been running pricing off the import parity pricing model, so that tends to be the base. They change more readily. The COLORBOND increase was in the 6%-8% range.
Okay. Thanks, Mark. Then switching to the U.S., and in particular, the scrap acquisition strategy or what the strategy there is. This is, you know, this is fascinating. Obviously, you know, a complete change, I guess, of approach there on sourcing scrap. What is the end game here? I mean, you said you're looking at other acquisitions, but is it, you know, potentially to take that business to 100% self-sufficiency on the scrap component?
Yeah, that's something we're putting a bit of thinking into. I'm not sure that you need to be 100% covered. The facility, Paul, is directly opposite North Star. I think it was largely built there on the basis that at some stage it would become a part of the supply chain of North Star. It's the most modern and clean and efficient scrapyard I've ever seen. It's quite remarkable. The gentleman who built it and who we bought it from is a career scrap guy. He knows all about the industry, so they've done a fine job in terms of setting it up. As I said, the location is literally across the road. We have a rail spur that we share between the two facilities.
With the change in ownership and the structural changes we're seeing in North America, we just felt it was the right decision for us to take. We're looking at what else we might do, primarily, initially, on increasing the throughput of the facility itself. We think there's an opportunity to grow that by at least another 200,000 tons, and we're working on the processing technologies which allow us to utilize more obsolete scrap rather than prime scrap. Literally, additional sorting technologies and processes that gets more copper out of the product that we can sell to or put into North Star, which reduces our reliance on prime. Look, it's early days. We've only had our feet under the door since the 17th of December, but we like what we see.
It's a nice little business. I think I'd like to have a bit more of a hedge in terms of coverage, direct coverage for North Star. I'm not particularly interested in, in structural hedges. I think if I want a hedge from a scrap point of view, I'd much rather it's, a physical hedge and that we can put the raw material into North Star. We're, we're continuing to think about what that might mean and as I said, on a couple of fronts, internally and externally.
Very good, Mark. good detail. Thank you for that. I'll pass it on.
Thanks, Paul.
Thank you. Your next question comes from Lyndon Fagan with J.P. Morgan. Please go ahead.
Thanks for that. Just continuing on MetalX, is it possible to quantify the operating cost savings going forward from that acquisition?
The way to think about it, Lyndon, is that we're obviously targeting a 15% return on the capital that we've invested. You'll see it actually turn up in the, in the analysis that we do, half to half in terms of improved, realized raw materials costs, with a bit of an offset in conversion costs.
Okay. Thanks for that. The next question I had was just in terms of measuring your excess cash. I guess I note free cash flow was AUD 400 million, and the shareholder returns today amount to around AUD 600 million, which is great, but I guess just trying to get a feel on how to model that going forward. You've mentioned before minimum of 50% of free cash flow, but we're sort of 150% today, so just trying to sort of square that away.
Maybe the way more broadly to think about it is, obviously when we think about returns to shareholders, we've got an eye to the balance sheet capacity that we're holding. That's to fund the priority investment projects. We obviously have the financial framework sitting out there. In the longer term, we're targeting AUD 400 million net debt. What we've signaled, I think, a couple of times now, is that we're looking to hold a higher degree of balance sheet capacity for a period of time to make sure that we can very confidently fund those priorities. We're not gonna put a specific number on it because it'll move around a little bit depending on what the macro environment looks like, where we're up to, with particular projects at any given point in time.
We're not looking to build a giant cash box on the balance sheet. The way we think about shareholder returns is, yes, we do target more broadly to have greater than 50% of cash flows going back to shareholders. The base level return is in the dividend, so that's AUD 0.25 per share per half, unfranked at the moment, but clearly we do have a line of sight to franking. The buyback provides the flex. Obviously the board will be making a call on that again in August.
Thanks. Just a final question. With regards to the hydrogen hub in the Illawarra, I'm just interested to unpack that a bit more. Like, what's the end game here? Is it to ultimately convert Port Kembla to a hydrogen-based DRI plant? Obviously not this decade, but is that the intent perhaps over the very long term?
Yeah, Lyndon, I think the way to think about it is we're trying to keep as much optionality as we can in this technology space. A 10 MW electrolyzer is nowhere near what we could potentially use. Having said that, and I'll be wrong here, I'm sure, but the last time I talked to Chris Page, I think the largest electrolyzer that's installed anywhere in Australia is only just a bit more than 1 MW. The one we're putting in is a reasonable size unit. You then add units to it as you need, as you need them.
Hydrogen is still obviously very expensive, but the decision we've taken here, particularly to work with Shell on this, is to obviously tap into their massive expertise in this space relative to us to start and think about how we can use hydrogen in the region. It's broader than just necessarily in the steel business. Part of the hydrogen hub concept and working with other partners is, can it be used in mobility? Can it be used by other manufacturers in the region? Can we use it in mobility around the plant? Can we trial it and test it in the blast furnace? It's quite a comprehensive plan at this stage, albeit it's at a very early stage and at very high level.
It's something that we think is an appropriate thing for us to do, to start and play with hydrogen and think about what the benefits or opportunities might be in terms of our business. Not betting the farm yet because we still don't have a hydrogen supply chain. Costs are still very, very high. We think it's an appropriate thing for us to do in terms of building our knowledge around the emerging technologies, and it may well lead to DRI or some sort of hydrogen injection in blast furnace steelmaking, or other technologies as they emerge down the path.
Very early days, Lyndon, something that we think is an important thing for us to do.
Great. Thanks for that color. I'll turn it over.
Thank you.
Thank you. Your next question comes from Simon Thackray with Jefferies. Please go ahead.
You on mute, Simon?
Pardon me, Simon. Your line is now live.
My apologies. Here I am. Sorry, Mark. Sorry, Tania. I was talking to myself then quite confidently for a couple of minutes, I think.
You get the right answer?
Nothing unusual there. Yeah, I got the right answer. Yeah, exactly. Exactly. Apologies for that. I actually just wanted to follow on Paul's earlier line of questioning on pricing on Aussie pricing in the downstream. I got your comment on 6%-8% for COLORBOND, which was, you know, flagged well and truly in advance. You know, the performance of TRU-SPEC and TRUECORE you've called out as a record as well. What sort of pricing benefit was seen, if any at all, in the first half? What's the expectation for the second half? I'll start with that.
Yeah.
Sorry, Mark...
You go, you go, Tania.
Maybe I'll start, Mark, and then you pick it up, and I'll just put some directional comments on it. There was a little bit of outperformance, I guess, on the pricing, because of course, a lot of the products are priced on an IPP basis. Of course, COLORBOND, which is priced on more of an intermaterial basis. There was a little bit of outperformance in pricing in both domestic and export markets. That probably just broadly reflects that strength of demand. We would expect that to continue into the next half. I'll hand it over to Mark.
All I'd add to that, Simon, is, we said this to you guys right from the start. We actually put some pricing structures in place, particularly around TRUECORE when we got into this space, because that industry, as you know, likes pricing stability and advance notice of increases. As some of those unwound, there were some, fairly significant increases in prices, but we had to work with our customers to work those through. It's not quite an exact science yet with something like TRUECORE, but it's something that, again, we're really encouraged by where we see it going and the opportunity for us to continue to grow share in that space.
Terrific. Thank you for both for that. While we're just talking on price markets, it's your commentary about having to give some back on the way down in North America for North Star against benchmark. As the benchmark's been obviously, you know, gapping down every day. You didn't get it on all the way up, so you realized price versus benchmark was-- Your discount was probably wider on the way up. Is there any reason why it shouldn't be, that discount should be narrower on the way down because there's normally a bit of a lag or? Is that what you're assuming in your guidance or how do we think about it against benchmark?
Maybe, do you want me to start, Mark, yep, and then I'll hand over to you. It, just in terms of the half that's just gone, one half 2022, in terms of the gap to the pure benchmark, there's probably a few factors that come into play here. Again, the majority of the book is on that one-month lag, but there are other arrangements in there which are quarterly lagged or other, different again.
And a point I'm making here is is that if you apply that simple one-month lag to everything in terms of price stability, that'll give you broadly the right answer. Of course, at times of rapid price movements, it won't. There's a portion of the book in the half that's just gone, where you have a bit of a timing difference on, say, the quarterlies.
You'll also get a portion of the book that is permanent. That particularly plays out, where you've got, if I add on to that, where you've got very high prices. The index is an indicator of the market price, but is not necessarily representative of those longer-term customer relationships. Yes, the discounts do widen, and that is a permanent difference.
When we look at the next half, and the outlook that we have out there, what we do also see is perhaps a little bit of a subtle shift in the overall book towards more shorter-term arrangements. That just simply reflects the current market dynamics with shorter lead times and destocking activity. As prices fall off, we will get a little bit of a lag benefit from, say, some of those quarterly arrangements. Again, it's a mix of permanent and timing differences.
I've got nothing to add to that, Simon.
That's in your assumptions.
I think Tania summed that up beautifully. It's all I'd say is in volatile times like this with prices flying up and then coming off as they are-- it is a little, a little less structured obviously from a pricing perspective. Yeah, look, North Star's in a very good position. Yes, we've seen prices come off dramatically, but they're still historically at pretty darn good levels.
No, 100%. I was just trying to understand the sort of, you know, the glide path. You don't hit the peaks in the benchmark and nobody expects you to, but nor should you necessarily be giving it up at the same rate that the benchmark's coming off is what my sort of experience has been and thinking has been. That's still correct. That's still a correct assertion and assumption to make.
Correct. Correct.
Great. Fantastic. Thank you both.
Thank you.
Thanks, Simon.
Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.
Thanks. Good morning. Can I just follow up that question on pricing in ASP? Tania, you mentioned, I guess generally that there's been some outperformance versus pricing. My question is, how do you unwind that in coming years? Do you have to unwind it? You know, how much is just due to, you know, the extraordinary demand amid constrained supply chains? How do you unwind that outperformance, if at all?
Maybe just to clarify my earlier comments, Pete. When you're in a rising price environment, the reality is you don't actually follow the benchmark. The benchmark, again, is just an indicator of pricing. There is a whole series of different pricing arrangements, different products, different channels, different customers, et cetera, different segments, end use applications. There's a whole series of different pricing arrangements. Generally what can happen is when you're in that rising price environment, it can take a little bit of time to come through, and when it flows through, you get a bit of outperformance.
Over time, as prices come down, it might then reverse out the other way. It's just-- Sometimes it's just a little bit of the longer lag, depending on the speed and rate at which you go up and then the speed and rate at which you go down.
Mark, would you like to add any comments there?
No, I think that's good. Sorry, the choreography's a little clunky this morning, guys. You got Tania in Melbourne and me in Kansas City, so that's the reason for the some of the delays. Apologies.
Okay, thanks. On, on conversion costs, Tania, so you said half is variable related to employee profit share. I guess in total, what are you assuming in terms of conversion costs in the second half? Then of the 50% that's not employee profit share, you said that you also expect some of that to come back. Is that in the second half? What are the, you know, items in terms of cost inflation that you think will prove to be transitory?
It's a bit of a mix in there. These are directional comments only. We're obviously not giving specific numbers there. Of that escalation that we have seen, roughly half does relate to those employee profit share programs, so they'll just wind up and down in line with, you know, profitability. The areas of inflation that we have seen, a lot of it around freight, is probably one of the key ones, a bit of wages inflation as well. Freight, I'd like to think that we get a degree of recovery. Certainly right across the group, we had quite a bit of disruption, et cetera, in our logistics activity, you would expect a degree of recovery.
Having said that, there will be a portion of those cost increases which will stick with us. This is where it goes to that relentless focus that we have on costs and how we think about productivity and leveraging technologies in order to continue to drive the productivity in the cost base.
Mark, would you like to add anything there?
I think you've covered that. I mean, clearly freight, and I touched on the example in Australia, but clearly freight here and some labor. We have vacancies in many of our businesses, Peter, in terms of trying to get people inside the organization, and they have lots of choices. I'm not sure if it's yet the great resignation, but people choosing not to work more so here in U.S. than we're seeing in other parts of the portfolio. Yeah, there's no doubt it's having some impact on labor as well.
Okay, got it. That's all for me. Thank you.
Thanks, Pete.
Thank you. Your next question comes from Daniel Kang with CLSA. Please go ahead.
Hi. Good morning, Mark and Tania. First question, I just wanted to keep the focus on the U.S. Clearly we're seeing prices and spreads continue to retrace. Buyers clearly on strike here. Interested in how your customers, how they're positioned in terms of inventories. We're seeing, Tania, you mentioned that lead times are normalized now. Imports no longer as attractive. Just wondering if we're seeing some, you know, tentative signs that customers are coming back.
Second part on that question is, I guess, Mark, you talked about the improved structural changes in the U.S. steel industry. Any signs of some behavioral change, like production cuts or rationalization or project deferrals that may start to come about as, you know, prices and spreads retrace?
Okay. Thanks, Dan. Look, a couple of things. Continue to see announcements here around EAF capacity expansion, and the two most recent obviously were U.S. Steel and Nucor. You know, the way I think about that is I think this continues the trend that we've seen here for a couple of decades now in North America of steel production moving away from blast furnace to EAF. I think that is clearly something that's occurring from a structural perspective. The other structural change here, of course, has been the consolidation of the ownership. There's been a couple of announcements about some outages just in recent times. U.S. Steel have announced some outages, and Cleveland-Cliffs have announced a 100-day outage as well.
I think companies are taking advantage of perhaps some slowing in activity to get maintenance work done that they need to get done. You know, I think just Economics 101 might, the fewer owners, the structural outcome for the industry is often a little more rational. I think we're starting to see evidence of that. Buyers strike. Look, there's no doubt we saw buyers back off. I think, and Mark Scicluna will nod at me here. I think the last inventory number I saw was 2.5 months or 2.4 months.
That's correct.
It's back, it's back around the monthly average or the historical monthly average. I gotta tell you, if you wanna hire a car in this country or you wanna buy a car, there's still no hire cars on the hire car lots or no cars in the car lots. It's quite remarkable. The car companies are charging a fortune for rental cars. There's a bit of pent-up demand there as well that I would expect to see come back. I think we're starting to see the anecdotal evidence that we get out of North Star, is that the people are tentatively stepping back into the market, and you've seen that with some of the pricing indications over the last, over the last couple of three weeks as well.
I think also that the fact that the futures curve has started to level out as well, it's obviously a bit of one of the indicators as to where pricing is gonna go. Yes, you're quite correct. The inventories and the lead times have pretty much gone back to historical norms.
Many thanks for that. Just then, second question is just from a broader market context. Obviously, interest rate hikes in the U.S. and Australia market is clearly expecting to accelerate hikes through the course of this year. In New Zealand, we've already seen a few hikes with very minimal to zero impact to demand that you're forecasting in the near term. Just at what point do you expect rate hikes to start to become an issue? How do you see it playing out in your business?
Let me. I'll have a crack at that. I mean, clearly, Dan, if there's a succession of interest rate hikes, it's gonna have an impact. I mean, if you think about. Most businesses are in better financial shape than they have been for a long time in the sorts of segments we're in. De-levered, had some of the tailwinds that we've had and had pretty good results. I mean, I know there's whole sectors of the economy that have been unfortunately the losers of the pandemic, but in the sort of industries that we're dealing with, still really strong levels of demand. Home building, again, still backlogs that we would expect are gonna take another 6 or 12 months to unfold.
Of course if there's multiple rate rises, then that's gonna have an impact on the economy more broadly. I think that's what the central banks and the powers that be are really getting their heads around. What is the right amount of interest rate increases or level of interest rate increases before we dampen the economy too much? Look, I don't see anything in the near term, certainly the next six months. It's not something that I'm particularly concerned about. Clearly we spend a lot of time making sure that we keep control on our costs, and inflationary pressures are an item, an issue that we're dealing with in our businesses. I don't see any material change, Daniel, in the next six months, certainly.
Thanks for that, Mark.
All right. Thank you.
Thank you. Your next question comes from Paul Young with Goldman Sachs. Please go ahead.
Hi again, Mark and Tania. Mark, first question's or follow-up I should say, is on the Aussie business and looking at imports and exports. Your exports were pretty flat, half on half. Your externally sourced steel was up a little bit. What happens when, you know, domestic demand keeps on climbing? You know, Port Kembla's maxed out. What is your strategy on exports and imports, and what that means for margin?
We're clearly, Paul, selling as many domestic tons as we can. Exports has always been the sprint volume that we've had. I've got to say, you know, with domestic demand where it is, we're only sending export material off to customers that it doesn't satisfy, that we can't use domestically or that we have a longer term strategic relationship, and we've got some customers offshore that are like that. The broader question about steel make, where, I mean, the beauty of steel makers is every day they go to work, they're trying to work out another way to make another ton or another half a ton. That's just part of the routine that we go through. It's part of their DNA in the organization.
We're always looking to get as many tons through the facility as we can. We're adding as much scrap pretty much as we can. If the market continued to grow, Paul, and we didn't have the raw steel make capacity, then it really becomes an issue of what then do you start and service domestically? How do you try and service segments that might not be as profitable in other methods? Importing product, for example. We've done a bit of that. We've been bringing product in from other parts of the portfolio to meet local demand. It's one of the nice things about having a footprint like we do. We have some flexibility in that space.
Ultimately, if you got pushed into a position where you just couldn't make any more steel than you're currently making, then you have to start and make next best alternative choices. I would never envisage that the market in Australia would get to a position where a contemplation about running two blast furnaces ever came back on the agenda. You know, I've been pretty clear about that in the past because that's a step up immediately to another 2.5 million or 3 million tons of steel. That's a lot of steel to move. There's no thinking or no logic from our perspective about ever running two blast furnaces again.
Clearly, the boys and girls at Port Kembla are doing all they can to make every single ton they can. You know, it's a nice way to run the business, quite frankly. It's much better doing it that way than trying to pull it back. There is obviously a natural constraint at a certain point in time.
Great. Thanks, Mark. A question on the reline. you know, CapEx has gone up, you know, AUD 200 million to AUD 300 million. A part of that's scope change, you know, additional decarbon efficiency design modifications, etc. you know, I guess the question is around that billion-dollar capital number. I mean, how'd you come up with that? I know you've got an internal team. It's mostly the ex Hatch set up from BHP days, you know, doing everything internally. I've never seen a, you know, a PFS CapEx number come in below a scoping and a feasibility come in below a PFS number. I guess the question is that billion-dollar number, you know, how confident are you about that? How'd you come up with them?
What sort of contingency have you sort of built into that?
Well, we're as confident as we can be at pre-feasibility stage, which is why we're now moving into feasibility stage. We'll continue to refine that number. I mean, clearly the movement from our very first indication to where we are now, there's no doubt, and I'm sure it's a question that you're all thinking about, there's obviously some inflationary impact on that, just given levels of demand. It is a significant scope creep as well as we looked at the equipment, thought about the repairs we had to make. There's things like a Top Recovery Unit that is on No. 5, which was just never built into No. 6 when it was first commissioned.
There's some equipment that we need to add to No. 6 that actually exists on No. 5 to give us at least the same sort of performance that we're currently getting out of the No. 5 Blast Furnace. There's some inflationary impact. There's quite a bit of scope creep, and in terms of surety of that number, we'll continue to refine that as we go through the feasibility. It'll move up and down but, and as you observed, often they're more up than they are down. At this stage we've got the level of confidence that you would expect us to have, having done pre-fees and moving into fees.
Okay, great. Thanks again, Mark.
Thank you.
Thank you. Your next question comes from Peter Steyn with Macquarie. Please go ahead.
Hi, Mark and Tania. Thanks for the time. Just wanted to ask you a little bit about sales mix and your expectations and I guess assumptions. In North Star with auto demand, autos particularly being quite an important value segment, what is your expectations of a recovery in your sales mix into that space? Perhaps over the course of the year 'cause I can appreciate that it's not going to be a snapback, but how that mix alteration could occur.
maybe, Pete, the way to think about it is I don't know that we've actually seen a huge decline in our own auto demand, because we are generally viewed as a preferred supplier. We operate through the service centers. It's more about the broader, lower auto demand and the impact that that's had more broadly therefore on prices.
Yeah. What are you saying to me, Tania, that there would be a little bit of an improvement as auto demand generally improves as a second order effect?
Yeah. Our sales mix, I don't really see it fundamentally changing if auto picks up more broadly. I'm not sure that our sales mix itself will change all that much because it hasn't been overly negatively impacted in terms of the volumes that we have going to auto. It's more around how the broader lack of demand. Out of auto has impacted the overall supply-demand dynamic and therefore goes to the broader pricing, the index pricing, et cetera.
Yeah. There's been no structural change in our mix that I would expect to see, Peter. As I said, I think there's some pent-up demand there as the semiconductor supply chain improves. I think you'll see a buildback of auto and we might see it spike a little because there's no doubt there's a backlog here of inventory that's required and autos that are needed in the country. I wouldn't expect or we're not planning for any sort of fundamental shift in our mix with auto. It'll run dependent on the absolute vehicle sales levels. We don't think there's gonna be any sort of fundamental shift in that mix at this stage.
Thanks. Thanks, Tania. Thanks, Mark. Then just on ASP, a similar question essentially. A lot more higher value products obviously going out the door, and with falling prices. That business gets more profitable. How are you thinking about the EBIT contribution from coated and painted as proportion of ASP over the foreseeable future also increasing reasonably substantially?
Well, we continue, Pete, to try and put every value-added ton that we can into the market. Whether it's TRUECORE, whether it's TRU-SPEC, the COLORBOND, we've got quite a bit happening with COLORBOND this year. There'll be a refresh of the palette of colors. There's quite a bit of activity going on in the sales and marketing teams in Australia and ASP at the moment. You know, our focus is wherever we can push tons out of the lower value segments into the higher value segments, we'll continue to do so. A lot of work going on inside the organization from an innovation perspective, so the next generation of coatings. We continue to work on that, so a bunch of work going on in that space as well.
Not surprising. It's something we've been trying to do for a long time, and we'll continue to push into that space. Absolutely.
Maybe the way to think about it is the products which are more IPP priced, it's really about where the value is captured in the, in the full value chain. Certain times you pick it up in the steel part and other times you pick it up obviously in the more of the downstream coating and painting space. Obviously COLORBOND is where you get a, because it's priced differently obviously on an intermaterial basis. That's where you might get the margin expansion.
Certainly at this point. Yeah, understood. That's fine. I just wanted to pick up on Building Products North America. Quite surprised by the comment about a small EBIT in the second half. I suppose it all comes down to the inventory position in that business and just how high, highly or where your costs ultimately per ton would sit. Could you just step us through that very briefly and give us an understanding of what happens in that second half?
Yeah, sure, Pete. I'll start on this one, and I'll hand over to Mark. The Building Products North America business is a little bit different to the other businesses in that it relies heavily on an import supply chain. It's got a long supply chain. What happens is when prices, sales prices are going up, in the market, it gets this double benefit of improved pricing, but also it's got relatively, I guess, older and lower cost inventories feeding through. Of course, when prices go down, you have the reverse effect.
What it means is it- - It's difficult to look at that performance in any one particular period. You really do need to look at it across a longer period, say for example a year, so that you can get a better understanding of the ebbs and flows of that longer supply chain. It's not necessarily more inventory on the ground, it's about the inventory which is in the supply chain on the water, et cetera.
Thanks, Tania. That makes, that makes sense. I suppose probably didn't appreciate just how long that supply chain was. There's no tenure in your pricing to match some of that, clearly?
Oh, that's always the challenge. It is difficult. I mean, you're just driven by the, the market dynamics in which you're operating in. Yes, we do our best on that, but it is always the challenge.
Perfect. Thanks. I'll leave it there. Appreciate it.
Thanks, Pete.
Thanks, Pete.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Vassella for closing remarks.
Thank you very much. Thanks all for dialing in. We appreciate it. It's a very busy time, but thank you for taking the time to listen to us this morning, and I'm sure we'll touch base again and talk to you over the next week or so. Thanks for your support.