The beleaguered Port Kembla’s survival had been flagged earlier this month after managing director Paul O’Malley said the union vote had effectively saved 4500 regional jobs and that talks with the state government to secure the last remaining concessions to ensure $200m of annual savings were well advanced.

But few were expecting the Melbourne-based steelmaker to launch a debt-fuelled $US720m acquisition to beef up its steel interests, even if it is buying out Cargill, its 50-50 partner in the North Star electric arc furnace steel mill, which uses scrap steel rather than iron ore and coking coal.

The announcements, along with a $50m boost in first-half earnings before interest and tax guidance to about $180m, sent the shares up 43c, or 11 per cent, to a six-week high of $4.50. “The decision to continue steelmaking, -together with the move to full ownership of North Star, delivers on our strategy, which is to deliver cost-competitive steel supply within a sustainable business model,” Mr O’Malley said yesterday. “North Star is the most profitable steel mill in North America; it’s cost-competitive, it’s a high quality asset and its employees are incredibly productive.”

The North Star plant, in Delta, Ohio, sits in the middle of a big US scrap steel production region, has a profit margin of 16.6 per cent (double the US industry average) and has paid BlueScope $1.1 billion of cash dividends in the past 10 years. The acquisition was made after Cargill struck a deal to sell out to an unnamed third party and BlueScope exercised its pre-emptive rights to take the stake. North Star is what BlueScope hopes Port Kembla can be after the Australian Workers Unions agreed to a raft of changes, including a three-year wage freeze, the ability to make workplace restructures quickly and incentive outcomes linked to business performance.

“North Star is probably 15 years ahead of Port Kembla in terms of alignment (between workers and the company) but what we’ve seen in the last eight weeks is you can make progress very very quickly,” Mr O’Malley said.

The board has decided to keep Port Kembla open, subject to ratification of enterprise agreements, after the NSW government agreed yesterday to defer $60m of payroll tax payments over the next three years. With the $40m of benefits from the union vote and $100m of changes the company plans with its new-found worker flexibility, this provides the $200m of cost savings BlueScope in August said would be needed to keep Port Kembla open and avoid 5000 -regional job losses.

“The earnings upgrade today demonstrates that we are both ahead of schedule, and delivering costs more quickly than expected,” Mr O’Malley said. “We have to get more than those $200m of costs out and I -believe we will.”

The earnings upgrade was due to cost savings, currency and improvement in domestic demand.

The company’s biggest shareholder, Perpetual Investments, last week told investors that any Port Kembla solution would probably not be for the long term because Australian mills would eventually be unable to compete with the flood of exports coming out of China.

However, Mr O’Malley said he -expected the steel cycle to eventually turn, noting that 90 per cent of China’s steel capacity was unprofitable at current -prices and that while this could -continue for a long time, it was unlikely to do so forever.

“We are in a cyclical business and at some point we expect the cycle to turn back in our favour,” Mr O’Malley said. “We have to assume -prices are going to be low for a long time and the only way we are going to be around is to be cost competitive.”

Mr O’Malley said it was -unclear whether the pick-up in Australian steel demand, led by the residential market, was -indicative of an improving -market or to do with restocking.

Standard & Poor’s said the North Star acquisition would not affect BlueScope’s BB rating, even though it was debt funded. “In our opinion, the current rating can accommodate higher debt levels, particularly given North Star’s relatively strong and stable cash flow generation.”