Market environment

Thus far, the austerity measures taken across almost all of Europe have led to initial successes in consolidating budgets, but they have not resulted in a revitalization of the economy. Southern Europe overall has remained in a recession, and, in the course of the business year 2012/13, the negative mood has spread to individual countries in Central and Western Europe (France, Slovenia). This development has affected almost all of the customer sectors that are important for voestalpine AG, although the picture is quite a bit more differentiated at the individual customer level. Customers with global operations who have the opportunity to offset the weaknesses in Europe through exports are in a considerably more positive situation than companies that are focused only on European markets.

This applies basically to all industries, it is, however, particularly visible in the European automobile industry, the most important customer segment by far of the voestalpine Group. While the German automobile industry has been able to largely compensate declining sales figures in Europe by way of exports—particularly to the USA and Asia—those manufacturers who are focused on the European home market have been dramatically impacted by declines in new car registrations and must now adjust their production capacity to a saturated and shrinking market, a factor that additionally weakens the development of the economy overall in their respective home markets. The truck, bus, and mechanical engineering industries are fundamentally following the same principle. With its primarily regionally oriented markets, the construction industry has remained the weakest industry segment because, on one hand, public infrastructure investments in almost all the European countries are expected to remain at a low level for years due to depleted state finances and, on the other, the private construction sector is characterized by financing restrictions and general cautiousness. The situation in the energy sector is similar, as there is a broad-based uncertainty in Europe about the long-term direction of the basic supply structures. Private consumption, however, has remained comparatively solid therefore the consumer goods and white goods sectors have shown relatively robust demand during the business year 2012/13.

As opposed to Europe, the United States are mainly moving in the direction of a policy emphasizing economic stimulus. For the time being, the economic development has been proving this strategy right, as the U.S. growth rates during the past business year in most business segments were substantially more positive than in Europe. In addition to a stabilization in the construction sector, it was especially the U.S. automobile industry that experienced an impressive rebound. Private consumption, a cornerstone of the American economic model, also showed a robust development over long stretches of the previous business year, although toward the end of the year a slowdown of the growth rates became noticeable. Despite all of the problems that have cropped up in connection with Boeing’s Dreamliner, the U.S. aviation industry has continued its successful performance.

Short-term economic setbacks in conjunction with reaching the debt ceiling, which is restricted by federal law, have more recently lost some of their intensity, although this challenges the sustainability of U.S. fiscal policies time and again. In any case, the problem of the country’s enormous sovereign debt remains unresolved.

In the business year 2012/13, the development of the economy in Brazil, the most important South American economic region for the voestalpine Group, could not match the momentum of the past years. The trend regarding capital goods was cautious, while private consumer behavior remained at a solid level. Toward the end of the business year, announcements from the political scene regarding additional economic stimulus programs resulted in a more optimistic mood with regard to the overall economic trend.

In the course of the business year 2012/13, the Chinese economy lost momentum. Especially in the fall of 2012, economic activity leveled off, due—among other factors—to the transfer of political power. Toward the end of the business year, the economic development overall gained some momentum, although there are growing doubts that this uptrend will be sustainable in the sense of a “real” recovery.

Toward the end of the business year 2012/13, Japan, which has been locked in a phase of stagnation for two decades, reacted to the cautious global developments with a massively expansive monetary policy. This unexpected about-face in its strategy by the Bank of Japan had a direct impact on the rates of exchange; since then, these measures have put additional wind in the sails of the traditionally very export-oriented Japanese industry as far as global competitiveness is concerned. Especially in the energy industry, these developments resulted in a direct improvement in its position vis-à-vis European competitors in global projects.

Apart from the specific development in the major economic regions that have been described above, the trends in the globally interconnected industry segments that are important for the voestalpine Group can be summarized as follows:

Pipeline projects, a central segment in the energy sector, showed a declining trend in practically all of the global economic regions. While exploration activities remained at a good level—primarily driven by the USA—major pipeline projects were postponed practically worldwide. In the segment of energy conversion—the construction of power plants—demand, which had been restrained for quite some time, remained at a low level worldwide throughout the business year 2012/13. In contrast, global demand in the railway infrastructure sector showed a widely different picture. With the exception of Europe, almost all other regions worldwide are investing heavily in railway infrastructure. Demand in North America, most countries in Asia, and practically all mining regions worldwide remains strong, and there has been additional momentum from the Middle East and South Africa.

The aviation industry, as well as the agricultural machinery and vehicle sector, defied the faltering global economic trend. Demand in both segments throughout the entire business year 2012/13 was very stable.

The divisions of the voestalpine Group were impacted differently by these developments, depending on in which regions and which industries their focus lay. While the Metal Engineering Division performed quite satisfactorily in practically all of its business segments, the other divisions were—to a greater or lesser degree—impacted by the declining overall economic situation. None of the divisions, however, experienced major problems with regard to either capacity utilization or the earning situation. Due to its global presence, the Special Steel Division was able to mostly compensate the declines in Europe and in other parts of the world. The internationalization strategy of the Metal Forming Division, which performed extremely well compared to industry competitors, has proven itself based on its figures. The Steel Division faced the greatest challenges because around 85% of its activities are focused on Europe, and the European steel industry was in a difficult situation. However, it once again proved itself to be a benchmark of the industry in the European Union.

In the 2012 calendar year, worldwide production of crude steel showed very moderate growth of only 1.2% to a total of 1,518 million tons. This increase is largely due to the comparatively more favorable situation in the first half of the year.

Europe did not contribute to global growth, as production on the Continent declined noticeably by –4.7% compared to the previous year. This development clearly reflects the overall economic situation on the Continent, whereby “cyclical” industries, such as the steel industry, are impacted disproportionately by recessive trends. The lower production volume illustrates yet again the structural capacity utilization problems confronting European crude steel producers. Continuing competition for volume, which is being increasingly fought via prices, results unavoidably in ever lower profitability for the entire sector. The European steel industry has been responding to this situation for quite some time with more and more cost-cutting programs across the board. This makes the industry as a whole more productive, but it also creates the concrete risk that companies will lose effectiveness as far as global competitiveness is concerned because they are lacking the funds to make investments and to undertake research and development, which are absolutely indispensable in order to meet the challenges that steel will face in the future (key word: alternative materials).

Viewed globally, the considerably more positive development in North America and Asia—especially in China—was able to more than compensate for the decline in Europe. Concretely, the main contributors to global production growth were North America with an increase of 2.5% and Asia with an overall gain of 2.7% (China +3.1%). However, it is striking that with a plus of 3.1% in 2012, China had a conspicuously lower growth rate than in previous years (+9.3% in 2010 and +8.9% in 2011).

The development of the European steel industry demonstrates yet again how spot-on the strategy of voestalpine AG has been of concentrating only on the most sophisticated product segments in the classic steel sector and driving the Group’s development in the direction of a technology and capital goods group that is focused on future-oriented product solutions.