Considered in global economic terms, all countries pivotal to the voestalpine Group developed along a positive trajectory in the business year 2017/18. Economic growth in Europe, for example, accelerated substantially compared with the previous year and even surpassed that of the United States which, after slightly weaker growth in 2016, also succeeded in gaining new momentum. China, too, continued along its solid growth course despite expectations to the contrary and, after four years of recession, even Brazil turned the corner and returned to expansive economic growth.
This positive picture of economic development, which is rarely so uniform across the globe, was not disturbed until the end of the past business year when politics intruded. The “America First” policy, replete with unusually explicit rhetoric on the part of the current US president, first caused turbulence in the international financial markets due to the fears of an imminent global trade war and then led to a dampening of the economic mood; so far, however, no deterioration in real terms has occurred.
While first signs of an upswing already made themselves felt in the business year 2016/17, which were visibly borne along by private consumption in particular, the positive trend solidified in the business year 2017/18 and gained momentum across the board.
This long-awaited, all-encompassing impetus arose primarily from investment-driven industrial growth in almost all sectors. Against this backdrop, the economic forward momentum in Europe also expanded geographically during the year—from the already prospering Central and Northern European member states of the European Union (EU) to almost all EU countries—and led, in the final analysis, to the unexpectedly homogeneous development of the European Economic Area (EEA) on the whole.
Besides excellent domestic demand, Europe’s positive economic trajectory was also driven by the prospering global economy, giving further impetus to Europe’s export-oriented economy.
Not until the business year’s final quarter did leading economic indicators point to a potential slowdown in growth, which had been accelerating continuously until then. With the exception of initial indications at the start of the 2018 calendar year that the economy was overheating, this turn of events was triggered above all by the increasingly real walling-off trends in the economic policies of the United States which, in turn, led to growing uncertainty about the global economic growth in the future.
Moreover, the negative economic fallout of the Brexit vote in Great Britain clearly made itself felt for the first time in the fourth quarter of the business year 2017/18. Private consumption in particular lost steam, but the construction industry also showed first signs of an economic slowdown since the leave vote.
In a macroeconomic environment that was largely positive nonetheless throughout the business year 2017/18, almost all market segments critical to the voestalpine Group exhibited strong demand growth. The automotive industry succeeded in continuing its upward trend that has been ongoing for several years now, and there was no change in the extremely solid demand from the consumer goods industry. At the same time, the momentum in the mechanical engineering sector accelerated substantially throughout the business year thanks to the increase in industrial investment activities. Demand from the construction industry also began to recover after an extended period of weakness.
Of the sectors in voestalpine’s portfolio, the European railway infrastructure sector was less dynamic due to the substantial decline in investments, which triggered not only declining demand for rails but also substantial reductions in prices.
Power plant construction in Europe remained as weak as before. No turnaround is indicated for this segment in the foreseeable future, with the result that it is no longer part of voestalpine’s strategic core portfolio. The conventional energy sector (i.e. the oil and gas industry), by contrast, showed moderate signs of recovering over the business year, even in Europe.
Following rather restrained growth in the previous year, the US economy developed considerable momentum in the business year 2017/18 that solidified as the year wore on, just as in Europe.
This trend was driven by the increase in investment activities, especially the easing of conditions in the oil and gas sector. Just as in previous years, private consumption remained robust as a result of consistently solid labor market data along with high hopes that the tax reform would have positive effects. Unlike its European counterpart, however, the US Federal Reserve reacted to these positive developments and began to lift interest rates incrementally.
While the unusually powerful hurricane season after the summer as well as an extremely cold winter at the turn of the calendar year led to some volatility, the resulting negative impact on the economy was temporary and easily overcome.
The greatest challenge by far not just for the North American economy but also beyond its borders is the protectionist economic policy of the current US president who, besides demanding that the NAFTA agreements be renegotiated, most recently imposed worldwide import tariffs on steel and aluminum based on the argument that the country’s national security is being threatened, thus casting doubt on free global trade—at least as far as these two product areas are concerned. America’s ire is directed at Europe, Brazil, and Japan, but particularly at China, whose trade surplus with the US is very large.
While this development has not yet led to a dampening of the global economy in real terms, there has been a substantial increase in the resulting risks to continued economic growth as evidenced not least by the partially massive corrections on the international financial markets.
But the voestalpine Group also benefitted from the largely positive environment of the US’s real economy in recent months. Even though the momentum of the country’s automotive industry flattened somewhat in the business year 2017/18, the European automotive manufacturers managed to buck this trend and continued to expand their position, enabling voestalpine as their partner to leverage its automotive body parts factories.
Demand from the US aerospace industry remained solid also and the railway infrastructure sector in North America showed some sign of rebounding, given the recovery of the oil and gas sector during the business year’s second half.
The first year of full operations at the HBI plant in Texas was characterized by a largely positive market environment, for one, and production losses due to hurricane Harvey and the unforeseen onset of winter, for another.
After more than four years of recession that were accompanied by corruption scandals, political instability, and the financial weakness of the public sector, Brazil’s economy finally rebounded in the business year 2017/18. The upward trend solidified during the business year, after merely weak signs of a recovery at the start of the year. At first, it was driven by rising private consumption which, in turn, was fueled not just by labor market reforms but also by tax incentives and a small reduction in interest rates. Exports rose slightly as well in the wake of more favorable foreign exchange rates.
While the trend toward private consumption declined again toward the end of the business year owing to the expiration of tax benefits, there was a slight uptick in investment activities for the first time in years. On the whole, therefore, in the past business year Brazil developed along a substantially positive trajectory even though the starting point was fairly low, as to be expected after several years of recession.
Aside from Venezuela above all, a number of other South American countries experienced a turnaround over the past business year, which was borne along by increasing domestic consumption, for one, and by growing private-sector investment activities, for another.
All of voestalpine’s sites in Brazil responded to the multi-year downward trend by taking drastic steps to reduce costs and boost efficiency, even making product portfolio adjustments. As a result, they weathered the economic crisis of South America’s largest economy and, in the past business year, profited directly from the most recent signs of an economic upturn.
The largely stable growth trend in Asia, which has been ongoing for years, especially in China, continued unabated in the business year 2017/18. Not even announcements of and first steps in the implementation of reforms that are related to the environment but also are aimed at reducing massive excess capacities in a number of industries triggered any noticeable weakening of the economic upward trend overall. Finding its stride again right after the New Year celebrations last February, which usually trigger a slowdown in economic activity, China’s unbroken momentum has so far continued in 2018 as well.
Although the initial reduction in capacities together with the country’s high domestic demand led to a slight decline in the enormous scale of Chinese steel exports and thus an easing of price pressures in the international steel markets, in the past 18 months international economic tensions have intensified at the political level in response to the aggressive export policies China has pursued over many years.
While Europe imposed relatively low and with some time lag anti-dumping duties (after the United States) to protect its own market, subsequently the US went much further and most recently imposed a blanket tariff of 25% on all steel imports to “protect the country’s national security” (Section 232); bilateral negotiations have succeeded in exempting the EU and a few other countries from this duty temporarily for the time being. As against China, the US president has addressed not just the inappropriate scale of steel and aluminum exports to the United States but also the general imbalances in the two countries’ balance of trade as well as the country’s questionable treatment, as he sees it, of foreign intellectual property. Not least the rhetoric chosen to convey these messages generated growing concerns toward the end of the business year that any escalation of this trade conflict would have global repercussions.
The key customer segments for voestalpine in China—automotive industry, railway infrastructure, consumer goods industry as well as oil and gas—developed stably along a good to excellent trajectory throughout the business year 2017/18.
Business performance of the Divisions
The performance of the Steel Division in 2017/18 seamlessly continued the upward trend at the end of the preceding period. voestalpine’s steel segment turned in an outstanding earnings performance throughout the business year based on the continued strong demand for highly sophisticated steel products. Just as in recent years, the continued growth of the European automotive industry was the driving force of this development, which also benefitted from the stable demand on the part of the consumer goods industry. To top it off, the revival of the market in the mechanical engineering sector also gathered steam over the year.
High volatility continued to affect the cost of raw materials in the past business year 2017/18, too, but there were far fewer outliers than a year earlier.
While comprehensive preparations were already being carried out during the past business year at the site in Linz, Austria, regarding the general overhaul of the largest blast furnace (blast furnace A) and large inventories of semi-finished goods (slabs) have been stored to offset the reduced production volume during the summer of 2018, for the direct reduction plant in Corpus Christi, Texas, USA, 2017/18 was the first year of regular operations. Notwithstanding freak weather such as Hurricane Harvey in the summer of 2017 and an extraordinarily hard onset of winter in Texas at the turn of the year, both of which led to several weeks of downtime, this first year of regular operations was defined by optimization measures that are usually carried out at a new plant but it also showed the plant’s high potential in terms of both technology and quality.
High Performance Metals Division
In the business year 2017/18, the High Performance Metals Division succeeded in substantially surpassing its prior year performance. Yet again, the key drivers of this development were both the automotive industry and the consumer goods industry which, compared with the previous year, continued to increase their demand for tool and high-speed steel.
While the aerospace industry’s demand for special steel parts remained as high as in the previous periods, 2017/18 saw demand from the oil and gas sector for the division’s special products rising again for the first time since its extended period of weakness. Both heavy mechanical and energy engineering remained the weakest area, suffering for yet another year from the uncertainty in Europe’s climate policies.
Compared with the previous year, however, the division’s pleasingly positive development overall led to a substantial improvement in the division’s capacity utilization worldwide.
While the Brazilian Villares plant in Sumaré, above all, finally turned the corner in 2017/18 after hard years of recession, in the course of the business year the United States—the plant’s most important export market—announced protectionist tariffs on steel imports. Given the resulting uncertainties, impairment losses of about EUR 10 million on property, plant and equipment were recognized in the Company’s current annual financial statements.
For the rest, market developments in the NAFTA region were very satisfactory, and the same applies to Europe and Asia.
Metal Engineering Division
As far as the market is concerned, in the business year 2017/18 the Metal Engineering Division was confronted with the continued challenging environment in the railway infrastructure segment as well as the oil and gas sector’s recovery from a low level.
While the weakening trend in the rail segment already became apparent in the previous business year, the downward trend accelerated substantially in 2017/18 and hit bottom in the last business quarter. This development was triggered by shrinking demand in Europe, the division’s core market, together with equally weak demand from its traditional export markets. By contrast, the turnout production segment largely succeeded in offsetting the weaker demand in other regions thanks to the outstanding development of the market in Asia.
The oil and gas industry expanded, albeit from a low level, which led to excellent developments in volume terms over the year, but there is still room at the top in pricing terms.
The Welding Consumables segment, which also depends to a significant degree on the business climate in the oil and gas sector, developed along a stable trajectory.
Thanks to the excellent performance of the automotive industry, demand for high-quality wire was very satisfactory, but the division was unable to exploit the market’s potential until the final business quarter because the commissioning of the new wire rod mill caused production shortfalls in the year’s first business quarters. Impairment losses of EUR 15 million on property, plant and equipment were recognized in the first half of 2017/18 in the sub-product segment of ultra high-strength fine wire, which is used particularly in the solar and photovoltaics industry, due to ongoing market challenges; which has a corresponding negative non-recurring effect on earnings.
Metal Forming Division
The environment of the Metal Forming Division in the business year 2017/18 was defined by the continued dynamic development of the market in practically all product areas.
This applies especially to the Automotive Components business segment which, in keeping with its international growth strategy, has been increasingly supplying customers in both North America and China besides its European home market. Given that the start-up of many new plants initially generates expenses by definition, these costs had a temporary and manageable adverse effect on the results of this division.
Last year’s positive trends in the Tubes and Sections segment continued in the past business year. Special sections for the commercial vehicle and agricultural machinery segment were in particularly high demand, just as the passive safety component segment (e.g. precision tubes for automotive seat belt tensioners).
The market environment of the Precision Strip segment, which produces precision strip steel for the sawmill industry, for example, was excellent in the past business year, and the Warehouse and Rack Solutions segment benefited from the continued strength of project-based demand for storage technology.