The business year 2015/16 was characterized by very specific challenges, both relative to economic and geopolitical factors. While at the beginning of the business year, the uncertainty regarding the further development of the Chinese economy with all of its global effects on both the raw materials and the end consumer markets was at the center of attention, subsequently, the focus turned to the political and military situation in the Middle East that resulted in an unexpectedly rapid migration movement to Europe on a scale that had never been seen before. During the course of the year, economic challenges grew globally due to the dramatic deterioration of the oil price, which is also a first in recent history, and negative interest on bank savings in Europe for the first time ever. When the early indicators for manufacturing in North America signalized a downward trend toward the end of the business year, the international capital markets came under increasing pressure.
As a result of these developments, the exchange rates between the major global currencies shifted—in some cases dramatically—with corresponding consequences for global trade flows, which were additionally impacted by the erection of trade barriers (primarily as anti-dumping measures) as a reaction to artificial (state) interference in pricing mechanisms in a number of countries. After decades of globalization and increasingly opening markets, this could mean a certain trend reversal toward isolationism—at least in individual economic areas—with a return to greater regionalization.
Considering all of these developments, the fact that the once promising markets Brazil and Russia slid even further into recession during the business year 2015/16 is merely a side note.
Despite this very challenging environment, by concentrating on the technologically sophisticated market segments, the voestalpine Group was able to enjoy a very stable development overall.
Europe
In Europe, the moderate recovery trend that began last year continued in 2015/16. Despite the resumption of discussions about the situation in Greece in the early part of the business year, which were then displaced in the awareness of the public by the mass flows of people fleeing from the crisis zones in the Middle East, consumer behavior remained largely stable and thus the main driving force behind economic development that was still somewhat positive. The voestalpine Group benefited from this in all segments of the consumer goods and white goods industries and especially from the strong performance of the European automotive industry. The Group units aerospace and railway systems that also belong to the mobility segment, which is a strategic focal point, also showed a quite positive trend in demand throughout the entire business year.
All in all, while Europe saw a service sector that performed solidly in many areas, investment activities remained below average. Besides the fact that, in many countries, the public sector continues to be cautious in contracting new projects, it was particularly the weakness in a significant part of emerging market economies that resulted in exports remaining at a subdued level despite the devaluation of the common EU currency, the euro. The new reduction of interest rates and another acceleration of the bond-purchase program of the European Central Bank toward the end of the business year generated a brief positive reaction on the capital market, however, this did not have a substantial impact on the real economy.
Accordingly, the construction sector remained mostly weak and the mechanical and plant engineering sectors remained more or less subdued throughout the entire year.
Despite the European steel industry’s quite satisfactory situation relative to demand in the first half of the business year, beginning in the fall of 2015, there was a dramatic decline in the steel prices on the spot market, triggered by the surge in imports primarily but not exclusively from China at prices that were, to some degree, not feasible economically. While the voestalpine Steel Division was not directly affected by this development due to its focus on the range of steel industry products that are technologically and qualitatively sophisticated, it could not hold out entirely against this massively negative price sentiment. Nevertheless, it ultimately achieved an improvement in its operating result in a comparison to the same period in the previous year.
USA / North America
The business year saw the first signs of weakening economic momentum in the USA after a continuing upward trend over the course of several years. This was triggered by the drastic decline of the oil price, which had increasingly negative collateral effects on the supply industry and the service segment. Although the effects on the voestalpine Group were not immediate, this has been felt particularly by the Metal Engineering Division (seamless tubes/OCTG) and the Special Steel Division (special materials for oil and natural gas exploration).
Momentum in the private consumption and service sectors largely compensated this weakness so that the economic trend in the USA was ultimately marked by a dynamic pace throughout most of the past business year. This benefited the Special Steel Division in the production of tool steel for the consumer goods industry and the Metal Forming Division in the automotive sector, which maintained its positive trend in North America throughout the past business year. Demand in the railway systems sector was also stable, benefiting from increased investments in the mass transit sector. The aerospace sector has seen its high level of momentum continue, which benefited the Special Steel and Metal Forming Divisions especially.
Toward the end of the business year, disappointing early indicators in manufacturing created broad-based uncertainty with regard to the USA’s economic development, and this immediately generated a negative reaction on the stock markets. This, however, did not impact the private consumption and service sectors, which maintained the economy as a whole on a growth trajectory. Not least due to solid labor market data, the Fed (Federal Reserve) took a first step away from its low-interest-rate policy and increased the interest rate for the first time since 2006 by a quarter of one percent from 0.25 to 0.50 percent. This step, which had been discussed extensively and put off many times is viewed mainly as a signal that the US economy is finally “out of intensive care” and is back on the road to normal conditions.
Except for the USA, which dominates the NAFTA region, the economic development in North America has been largely unspectacular. In the past business year, Mexico has been characterized by a continuing upward economic trend, while Canada’s economy remained subdued.
Brazil / South America
Contrary to original expectations, which had been based more on hope than facts, Brazil, the most important South American economic region, was not able to stabilize its economy in the past business year, but instead the country slid even further into recession. Added to its economic problems that have been festering for some time, with massive inflation and corresponding cost implications, as well as a high interest rate and negative economic growth, there are corruption scandals and serious political crises that have peaked, at least temporarily, with the recent impeachment of President Dilma Rousseff.
The general cooling of the global economy, driven by a negative growth trend in most of the emerging markets, China in particular, has been accompanied by falling demand for raw materials, which has had an especially profound impact, as Brazil’s economic output is disproportionately dependent on the exports of these goods. Even the substantial devaluation of the real, the Brazilian currency, had limited effect.
Even though this situation has benefited the voestalpine Group and the export performance of the Special Steel Division, which operates a special steel plant in Brazil that produces high-quality tool steel and special materials, this plant and the other voestalpine sites in the country have kept their operating results stable and positive only by implementing strict cost-cutting and efficiency improvement measures.
The political and economic situation in Venezuela is, however, far more difficult than that of Brazil, while Argentina has undertaken a series of measures recently to shore up its economic stability. Overall, South America—with the exception of Brazil—cannot be viewed as a core market for the voestalpine Group for the foreseeable future.
China / Asia
After a decade of extremely strong growth that was centrally managed by the Chinese government, largely through development of infrastructure and state-sponsored construction, the country saw a significant weakening of growth as it reorients itself toward a free market economy whose structure is increasingly driven by consumerism. This process is accompanied by a broad-based uncertainty, and this was demonstrated by greater volatility on the international, and especially on the Chinese, capital market. The government reacted with extremely unorthodox methods (e.g., circuit-breaker mechanism) that resulted in a short-term easing of the situation, but then subsequently created even greater uncertainty.
In the second half of 2015, a downtrend in the construction industry and particularly, the trend in new car registration statistics led to fears that a broad-based weakening of the Chinese economy could be in the offing. While automobile sales were stimulated in the short term by way of tax benefits, in the course of the year, there were growing indications of a more serious softening of the economy as a whole. The Chinese central bank reacted to this with expansive monetary policies and a devaluation of the currency. While this stabilized the economy for the moment, it nevertheless raised the international level of anxiety regarding the condition of the Chinese economy.
voestalpine’s activities in China were largely unaffected by these developments, as the Group is not involved in the Chinese construction industry with the exception of railway infrastructure, which continues on a course of accelerated expansion. The premium segments of the automotive industry and the manufacturing of consumer goods, segments that have great importance for the Group, have not been significantly affected by the slowdown.
Very significant effects of the development in China became noticeable in Europe during the second half of the calendar year. The decline in infrastructure investment and construction activities in China resulted in a substantial slowdown in demand for commodity steel grades. The Chinese steel manufacturers, which are continuing to expand despite their enormous overcapacity, reacted to this by cutting prices to an extent that cannot be matched by other steel producers as well as massive exports to markets outside of China. As a result, prices for steel commodities deteriorated drastically worldwide, and many economies, such as the USA, Mexico, Brazil, India, and Australia reacted with import restrictions as part of their anti-dumping measures. In Europe, the EU Commission was not able to rouse itself to adopt comparable sanctions so that the borders remained open for Chinese steel being sold at artificially low prices. The effect was that European spot prices fell to a level that was even lower than anything seen at the height of the financial crisis. Therefore, a number of European steel manufacturers ran into serious economic difficulties as a result. The culmination of this development thus far was the announcement by the Indian Tata Group that they planned to sell off their steel business, which is plagued by high deficits.
In China itself, economic sentiment at the beginning of the Chinese New Year was comparatively positive, driven by encouraging remarks by the central government on the subject of economic recovery. Nevertheless, the development of the Chinese steel industry, including the main raw materials, continues to be highly volatile, in other words, without any clear direction. The effects of this environment on the steel business of the voestalpine Group have remained relatively moderate, as the activities of the Steel Division are all on a directly contractual basis with long-term customers and not on the spot market on one hand and on the other, are of a completely different quality than commodity products.
Business performance of the divisions
From voestalpine’s perspective, demand for high-quality steel products remained at a solid level during the course of the year. Steel prices on the European spot market did come under increasing pressure due to the growing import volume of cheaper products, especially from China and Russia, and the decline of raw materials prices. Despite its orientation toward quality across the board and its focus on customer partnerships underpinned by long-term agreements, the Steel Division was not able to remain completely immune to the resulting extremely negative sentiment. Nevertheless, the division increased its earnings somewhat in 2015/16 compared to the previous year, due to the ongoing improvement of the product mix and the positive effects of the continuation of efficiency improvement and cost-cutting projects.
In a year-to-year comparison, the economic environment of the Special Steel Division in the business year 2015/16 lost momentum in some customer segments. Besides the power plant construction segment, which has been weak for years, there was a very considerable softening of demand from the oil and natural gas exploration and production sectors due to the oil price that has remained low. Incoming orders from the mechanical engineering industry were also marked by lower demand. However, there were positive impulses from the automotive and aerospace industries. Viewed regionally, economic momentum in Europe was modest, while business in Asia and North America in the most important customer segments continued at a satisfactory level in contrast to Brazil, where an end to the economic crisis is not foreseeable. Overall, the Special Steel Division reached an earnings level that was slightly below that of the previous year but reflects a very solid performance considering the difficult market environment.
The performance of the Metal Engineering Division in 2015/16 was characterized by outstanding progress in the railway systems sector, continuing momentum as far as demand from the automotive industry is concerned, but very diminished investment activity in the oil and natural gas industries due to the decline of the oil price. The negative trend was countered by comprehensive cost-cutting measures and adjustments in the personnel sector in the Seamless Tubes business segment as well as far-reaching restructuring measures in the Welding Consumables business segment. Due to the very steep drop in the energy sector, the adjusted earnings of the Metal Engineering Division in 2015/16 were somewhat below last year’s figures.
The performance of the Metal Forming Division was very solid, characterized by continuing strong demand from the automotive industry (Automotive Body Parts), both in Europe and in the new locations in the USA, China, and South Africa. Global demand for high-bay and other racking systems (Warehouse & Rack Solutions business segment) was similarly gratifying. The picture for special sections (Tubes & Sections business segment) was somewhat more differentiated. In the past business year, this segment enjoyed moderate momentum in its core European markets and strong tailwinds from the British and North American markets, but the market environment in Russia, Brazil, and China remained challenging. The economic conditions with respect to precision strip (Precision Strip business segment) continued to be satisfactory despite increasing competition from emerging markets. Against this backdrop, the Metal Forming Division significantly surpassed the earnings figures (adjusted for non-recurring effects) in the previous year.
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