The market environment in the business year 2016/17 was even more strongly marked by political events than in the previous years. Apart from the military conflicts in the Middle East, and above all the war in Syria and the resulting migration flows and the ISIS terror in Europe, unexpected political developments were also on the rise in established countries, such as the BREXIT vote in the UK, and the election of Donald Trump as president of the Unites States, or the establishment of a presidential system in Turkey. At the economic level, besides the erection of trade barriers associated with increasing protectionist ambitions in more and more countries worldwide, another decisive event was the fiscal policy change by the US Federal Reserve (FED), which gradually moved back toward a normalization of interest rate policy in the past business year.
The global economy grew by about 3% in the calendar year 2016, mainly driven by the Asian market, while the developed economies maintained their rather modest growth trend.
In 2016, Europe experienced a moderate growth trend that accelerated at the beginning of 2017 and thus leaves a rather solid macro-economic environment to be expected for the business year 2017/18.
In 2016/17, the overall economic growth in Europe was predominantly driven by consumer spending and backed throughout the year by low energy prices (oil prices), moderate inflation, and declining unemployment.
In comparison, investment activities contributed significantly less to the overall promising economic growth. On the one hand, many industry sectors still had free capacities in the past year that made investments in new facilities unnecessary; on the other hand, the focus in the industry remains primarily on increasing efficiencies rather than on investing in expansions. This trend is also reflected in the persistently weak credit demand from the industry in the past year. Even the retention of the extremely expansive fiscal policies of the European Central Bank could not provide any investment incentives to stimulate growth.
However, in Europe this low-interest-rate policy enabled several countries to reduce their debt burden which would allow for slightly more expansive fiscal policies on a national level. In fact, public sector spending in the business year 2016/17 affected the growth only marginally.
In this environment, the voestalpine Group benefited from the consistently positive performance of the automotive industry and a stable and robust economic situation in the consumer goods sector. The aerospace industry also continued its positive trend, while the construction sector still reported rather modest tendencies. In the second half of 2016, the railway infrastructure sector was faced with an increasingly weakening demand in Europe, which continued into the beginning of 2017. In comparison, after a longer lean period, the oil and gas industry saw recovery tendencies in the course of the year that continued to strengthen in the last business quarter.
After increasingly strong indications of a slowing economic momentum in North America at the end of the business year 2015/16, the US GDP only grew by a relatively moderate 1.6% in 2016.
In particular, the prolonged low oil price and decreasing raw materials prices until the middle of the business year squeezed the growth rates in that region. This not only resulted in declining exports, but also had collateral effects on investments and the transport industry, particularly the railway infrastructure sector which cooled down significantly at first, but was able to stabilize again in the later part of the business year.
Independent of this development, consumer spending continued to be strong, supported by low unemployment rates, consistently positive labor market data and, with that, a healthy spending power, not least due to low energy prices.
In view of the above, the general mood about the economy certainly remained optimistic and even increased a bit after Donald Trump’s election as president of the United States in November 2016, who had promised an extensive infrastructure package as well as substantial tax reductions in his campaign speeches.
However, insecurities about their extent, timeline, and financial feasibility as well as the surprising, significant increase of the military budget have since led to growing doubts about the feasibility of his plans. As if to confirm the growing uncertainty, US passenger car sales fell in the first calendar quarter of 2017.
In this albeit volatile, but still rather positive economic environment, the voestalpine Group was affected by the weakness of the oil and gas industry throughout most of the business year, but saw clearly positive impulses originating from that sector again in the second half of the business year. In the railway infrastructure segment, declining investment activities were increasingly noticeable during the course of the year, but cost- and efficiency-based countermeasures were able to contain any negative implications. In contrast, the two other business sectors the voestalpine Group focuses on in the US, the aerospace and automotive industries, showed a very dynamic trend in the course of the year, and the same is true for the consumer goods sector where the tool steel segment is of primary interest to voestalpine.
In Canada, the economic growth in the previous business year has been largely unspectacular, although with a slightly improved momentum compared to the previous year. Mexico, also a member of NAFTA, continued to profit from high investments in the automotive and its supply industry, but was subject to increasing insecurities in terms of its future political and economic ties with the US. Overall, however, Mexico reported an economic growth of 2.3%.
At the beginning of the business year 2016/17, the most important market for the voestalpine Group in South America, Brazil, was still caught up in a downward trend that has lasted several years and has been marked by a sluggish domestic demand, falling raw material prices and a related decline in exports which was also impacted by the appreciation of the Brazilian currency. In addition to this already challenging environment, came a massive political crisis that led to the removal of the president from office.
This political new beginning on the one hand and a trend reversal starting around the middle of the business year on the other hand, paired with an easing of the currency situation, noticeably slowed the downward trend, even though by the end of the business year a full turnaround was still questionable. The successful reaction of the voestalpine sites in Brazil to this extremely challenging economic environment included rigorous cost reduction and efficiency improvement measures. Finally, the railway infrastructure sector saw first positive impulses due to a rise in raw material prices which prompted the Brazilian mines to invest in their infrastructure.
In the business year 2015/16, the critical economic development in China led to considerable uncertainties in terms of the country’s future expectations which were still noticeable in the first quarter of the business year 2016/17. But in the course of the summer of 2016, after implementing another recovery package consisting of investments in construction, infrastructure and real estate in conjunction with fiscal measures and an easing of the monetary policy, China returned to its usual growth rates.
Subsequently, the growth expanded and included industrial production which led to increased exports and ultimately to a solid economic growth of 6.7% in the calendar year 2016.
However, in the meantime, these exports in particular have resulted in the establishment of trade restrictions in many parts of the world, a situation that is considered a major risk for China’s further development and demands wide-ranging corrective measures from the country’s political leadership, primarily in the steel industry. Such measures have already been frequently announced and their initiation reported. However, to what extent they have actually been implemented and thus will lead to a better balance of supply and demand remains to be seen.
The voestalpine locations in China focus on the railway infrastructure, automotive industry and consumer goods, all of them industrial sectors that have seen a promising demand situation in the previous business year.
In India, the voestalpine Group is represented in the welding technology segment, in the production of components for the railway infrastructure, and also operates sales offices for tool steel. India is considered one of the most promising future growth markets and saw a considerable economic growth of almost 8% in 2016, which prevailed despite a rather controversial large-scale reform of the monetary system.
Business performance of the divisions
The environment of the voestalpine Steel Division was marked by a very good demand situation in the past business year, but also by the high volatility of the raw materials market, which reached unprecedented proportions particularly for metallurgical coal. Due to the high import volumes at questionably low prices for commodity steel products, anti-dumping duties were introduced even in Europe, primarily against China, after most of the rest of the world had previously taken corresponding defensive measures.
Despite this challenging situation, the voestalpine Steel Division not only managed to sell a new record volume of products, but also established continuous price increases in the course of the year, most particularly in the fourth and thus last business quarter. The background to this was a stable and good demand situation in almost all market segments with the automotive industry being the strongest driver once again. In terms of results, this was a significant success with regard to quarterly earnings in the course of the business year 2016/17 after a slow start. In view of the above and compared to the previous year, the division clearly gained, both in EBITDA as well as in EBIT.
At the beginning of the new business year, the former Special Steel Division was renamed High Performance Metals Division, which describes the activities of this division much more clearly. This traditionally very globally positioned division was confronted with varying regional economic developments in the business year 2016/17. However, the demand situation for tool steel as well as special materials overall remained solid and even gained slightly compared to the previous year. The demand in the market segments automotive, consumer goods and aerospace were solid practically worldwide, while the trend in mechanical engineering varied and the oil and gas industry showed a slight revival after a longer lean period. Viewed regionally, the markets in the mature economies in Europe and North America saw solid growth albeit with a modest momentum overall, while in Asia and particularly in China the demand for tool steel and special alloys accelerated further. In Brazil, the most important market in South America where the division operates a large production facility, a recession could not be circumvented in 2016 and thus led to a low demand situation, despite a slight upward trend toward the end of the year. In terms of results, the High Performance Metals Division clearly exceeded the levels of the previous year.
In the course of the year, the earnings performance of the Metal Engineering Division appears relatively stable due to balanced internal portfolio effects, despite the growth differences in the individual segments. Overall, this division was not able to yield the results of the previous year, because, for one, these were based on positive non-recurring effects due to consolidation changes during the same period of the previous year and secondly, because of the persistently weak trend in the oil and gas industry throughout the first half of the year. In the railway infrastructure segment, the trend in Europe was practically the opposite: Starting from a substantial base, the demand for rails dropped more and more toward the end of the business year. For turnouts, this trend could largely be kept at bay due to the segment’s global positioning and especially the high demand coming from China. After a successful reorganization, the Welding Consumables segment reports significantly improved earnings for 2016/17 in comparison with the previous year, despite the still rather low market momentum. The highlight in the Wire Technology segment was the successful commissioning of the new wire rod mill. In terms of demand, this segment was marked by the consistently positive performance of the automobile industry.
The successful implementation of the Metal Forming Division’s international growth strategy is reflected in a continuous growth in revenue and earnings, thus raising the profits in the business year 2016/17 once again compared to the previous year. This trend was supported by the consistently positive performance of the automotive industry, particularly in Europe and Asia, while the market in North America took a lateral move despite its high level based on the increases over the past years. The Warehouse and Rack Solutions segment was marked by a continuously positive project landscape. Similarly excellent was also the trend in the Precision Strip segment which, besides the strong market growth, also profited from its continuously improving market position. The Tubes and Sections business segment on the other hand reported an inconsistent market trend. Despite the Brexit vote, the demand in the UK remained robust, while the situation in the core European markets was rather average.