Steel Division*

Market environment and business development

In the first nine months of the 2016 calendar year, demand on the European steel market, especially in the high quality segment, was marked by an upward trend. However; despite the positive market development, production by European steel manufacturers remained under the previous year’s level. The reason behind this is primarily higher steel imports, as overseas competitors are increasingly taking advantage of the improved demand situation in Europe. After the dramatic increase in steel imports during the 2015 calendar year, they have most recently stabilized—albeit at a high level—due to the imposition of permanent import duties by the European Commission for cold-rolled steel strip from China and Russia in August 2016 and temporary import duties for hot-rolled steel strip and heavy plate from China in October 2016.

The raw materials market was characterized by an unusual development in the price of metallurgical coal in recent months. The price of coking coal on the spot market rose sharply within just a few months from slightly over USD 80 to more than USD 200 because of a sudden shortage. Due to existing contracts, the associated cost effects will not be fully felt until the fourth quarter of the business year 2016/17.

Despite the Brexit referendum, the negative effects on the European economy have remained within reasonable limits, However, negative consequences on corporate investment decisions in Great Britain are to be expected in the future.

In the automotive customer segment—the most important one for the Steel Division—the division profited from excellent demand in the first half of 2016/17, due primarily to the continuously rising car sales numbers in Europe and a healthy demand for luxury models, especially from China and the USA. From today’s vantage point, this trend seems robust and a reversal does not appear to be on the horizon.

In other customer segments important for the Steel Division, market momentum also remained solid in the first half of 2016/17. For example, demand from the mechanical engineering and white goods industries was at a very good level. Only the negative market environment of the energy industry—of significant importance for the Heavy Plate business segment—persisted. Because of the low oil price, new pipeline projects are currently rare; however, in the second quarter of the business year 2016/17, production of high quality line pipe plates began for the Nord Stream II pipeline contract, which was awarded at the end of the previous business year.

In July 2016, the scheduled major repair of blast furnace 6 at the Linz, Austria, site was begun; in the previous business year blast furnace 5 was successfully renovated. Concurrently, preparations are already being made for the routine repair of blast furnace A in 2018. As far as investments are concerned, the focus is on projects to further optimize the product portfolio. Technology is being further developed with the construction of a new continuous casting facility (CC8) in Linz; it is set to be put into operation in the fall of 2017. In the Heavy Plate business segment, a facility for very sophisticated products in the energy sector began successful operations in the first half of 2016/17. The “toughcore” technology, which was developed in-house, makes it possible to manufacture heavy plate with hitherto unrivaled product qualities for use under the most extreme conditions.

The most important investment of recent years is the construction of the direct reduction plant in Texas, USA. After the successful run-up phase, the facility was officially opened on October 26, 2016 with a festive ceremony (see Chapter “Direct reduction plant in Texas, USA”). In the first half of 2016/17, the Steel Division undertook investments totaling EUR 229.0 million, 43.0% less than in the same period of the previous year.

Financial key performance indicators

Although the summer quarter of 2016/17 showed a steep upward trajectory, due largely to catch-up effects with regard to prices, the key performance indicators of the first half of 2016/17 lagged behind those of the previous year. The reason for this was that the Steel Division was not yet able to profit from the higher steel prices on the spot market in the first quarter of the business year because it is bound by long-term contractual conditions, while raw materials costs were already rising. Despite a higher delivery volume, revenue fell in a year-over-year comparison by 10.8% from EUR 1,990.8 million in the first half of 2015/16 to EUR 1,776.1 million in the first half of 2016/17. As far as earnings are concerned, the operating result (EBITDA) fell by 8.8% from EUR 253.2 million (margin: 12.7%) to EUR 230.8 million (margin: 13.0%). While the gross margin has decreased, it is offset by a higher delivery volume and cost savings resulting from the ongoing efficiency and cost optimization program. Furthermore, EBITDA was adversely affected in the first half of 2016/17 by the start-up losses recorded by the direct reduction plant in Texas, USA (budgeted EBIT 2016/17: EUR –25 million), and the extensively renovated 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). These effects amounted to more than EUR 30 million. Profit from operations (EBIT) fell even more sharply compared to the previous year by 26.8%, going from EUR 132.7 million (margin: 6.7%) to EUR 97.1 million (margin: 5.5%); one of the reasons for this drop was that depreciation had risen in the second half of the business year 2015/16 due to new facilities that had begun operations.

In a direct comparison of the first and second quarters of 2016/17, revenue dropped off due to seasonal fluctuations, however, profitability rose significantly. Revenue declined by 4.6% from EUR 909.0 million to EUR 867.1 million due to lower delivery volume, while at the same time average prices went up. The operating result (EBITDA) improved during the same period markedly by 64.7% from EUR 87.2 million to EUR 143.6 million so that the EBITDA margin increased from 9.6% to 16.6%. As far as earnings are concerned, profit from operations (EBIT) increased by 260.2% from EUR 21.1 million (margin: 2.3%) to EUR 76.0 million (margin: 8.8%). This is due primarily to higher price levels, while raw materials costs rose only marginally. As far as non-recurring expenses are concerned, the direct reduction plant in Texas reported roughly comparable start-up losses in both quarters, while in the year-over-year comparison, the adverse impact from the reduced performance of blast furnace 5 was only recorded in the first quarter of 2016/17.

At 10,928 as of the end of the first half of 2016/17, the number of employees (FTE) in the Steel Division was 1.1% below the figure in the same period of the past business year (11,054) and 0.3% higher than the figure as of the end of the past business year (10,891).