3 ASX sectors to benefit from local supply chains

The figure of iron ore magnate Lang Hancock loomed large when I was a child in the Pilbara of Western Australia. In the mid-1970s, I had already seen my family and others build 6 towns and open a number of giant mine sites. I was convinced that anything was possible. During that time, Lang and Queensland Premier Joh Bjelke Petersen had a plan. They wanted a cross country rail line that would take iron ore to the east and coal to the west, with blast furnaces on each side. 

Lang’s view was that we were never going to be able to defend the country. So we had to make ourselves invaluable to every one of the nuclear powers. I still believe he was right. Today, this idea of self sufficiency matters more than ever.

Local steel

One look at the size of our iron ore industry and it becomes very clear just how important steel is globally. As post-pandemic stimulus spending starts to take hold, it is going to be even more important. 

BlueScope Steel Limited (ASX: BSL) has been diligently working away in the background of the Australian economy. This was in a period when its only competitor became insolvent and was acquired by foreign investors. 

The company has managed to achieve a cashflow compound annual growth rate (CAGR) of 15.6% over the past 10 years. At the same time, it has averaged a 4 year average return on capital employed (ROCE) of 13%, which is impressive. It is currently selling at an earnings yield of 18.36% (at the time of writing).

In my opinion the company is clearly undervalued and stands to gain if organisations start to source more steel locally.

Local energy

Australians have often wondered why a country that leads the world in LNG production, has 30% of recoverable uranium deposits and the 3rd largest coal deposits on the planet has such high electricity prices. Naturally, the Prime Minister’s Manufacturing Taskforce has quickly arrived at the truism that high energy and electricity costs are a barrier to growth in manufacturing.

Until a recent long term deal, this was a cornerstone of complaints from Tomago Aluminium, owned by CSR Limited (ASX: CSR). If the government acts on its promise to reduce layers of bureaucracy costs, the LNG producers stand to gain. 

This would include industry giant Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG).

Local manufacturing

The true beneficiaries of local supply chains would be those companies already manufacturing at home. Of these I have always liked Reliance Worldwide Corporation Ltd (ASX: RWC). Reliance is involved in the design and manufacture of water flow, control and monitoring products and solutions. A lot of this company’s manufacturing plants are still located in Australia and New Zealand. I am hopeful cost reduction and a “buy Australian first” approach will benefit it too. 

More reading

• ASX 200 Weekly Wrap: ASX rallies on mining highs
• 5 things to watch on the ASX 200 on Monday
• 5 things to watch on the ASX 200 on Friday
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 construction share warns of bleak outlook for the sector

Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Reliance Worldwide Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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