Steel Division*

Market environment and business development

After a phase of enormous price pressure for flat steel products in Europe, especially due to dramatically increased imports at the beginning of the calendar year 2016, the situation on the spot market eased up noticeably during the first half of the year. Due to its focus on the contract business model in the sophisticated quality sector, the Steel Division was not able to profit from this short-term increase of the global steel prices in the first quarter of 2016/17 in contrast to its competitors who are active in the spot market. However, as of the beginning of the second quarter of 2016/17, a significant improvement of net revenue appears to be on the horizon after a number of contracts with a term of three months and longer were renegotiated with higher prices as of July 1, 2016. As far as the market is concerned, the trend in the division’s most important customer segment, the automotive industry, continued to be stable at a high level and demand in the white goods and consumer goods market segments remained solid. Demand in the mechanical engineering sector was positive as well, albeit somewhat more volatile.

A contract concluded for the delivery of several hundred thousand tons of pressure- and sour-gas-resistant heavy plate for the deep-sea portion of the “Nord Stream 2” project from August 2016 until February 2018 ensures solid capacity utilization in the Heavy Plate business segment, which has also acquired additional line pipe projects.

Financial key performance indicators

Due to the long-term nature of its contract business model, which differs from the spot market with its up-to-the-minute pricing, in the first quarter of 2016/17, the Steel Division experienced a significant decline of all key performance indicators in a year-to-year comparison. As a result of the pricing situation, revenue fell by 14.3% from EUR 1,060.9 million in the first quarter of 2015/16 to EUR 909.0 million in the first quarter of 2016/17, even though delivery volumes increased slightly. In terms of earnings, the trend in the first quarter of 2016/17 was the opposite of the same quarter in the previous business year, as previously repeatedly forecast. While in the first quarter of 2015/16, the gross margin rose due to countervailing trends with regard to prices and costs, in the first quarter of 2016/17, there was pressure on margins in the contract business because prices were fixed—in some cases up to the end of the quarter—while concurrently there was a rise in the prices of raw materials (scrap and iron ore). The fact that EBITDA plunged by 35.0% (from EUR 134.2 million to EUR 87.2 million) in a year-over-year comparison and EBIT plummeted by 71.8% (from EUR 74.7 million to EUR 21.1 million) is partly due to start-up losses recorded by the direct reduction plant in Texas (budgeted EBIT 2016/17 EUR –25 million) and to the extensive renovation of blast furnace 5 in the previous year, which operated with reduced performance in the first quarter of 2016/17 because of adjustments that had to be made (fine-tuning of the coal injection system). This adversely affected the operating result in the reporting period by more than EUR 20 million. These non-recurring effects contributed to the reduction of the EBITDA margin from 12.6% to 9.6% and of the EBIT margin from 7.0% to 2.3%.