While the start of the business year 2018/19 was still marked by the tail end of the past years’ economic boom, the remainder of the year saw an increased dampening of sentiment in the macroeconomic environment—particularly against the backdrop of the escalating trade war between the United States and China as well as other regions, including Europe. In the European Union (EU), economic growth prospects were weighed down additionally by the unproductive nature of Britain’s Brexit negotiations as well as the introduction of a new emissions test (the “Worldwide Harmonized Light Vehicle Test Procedure” – WLTP) in the important automotive industry. It was predictable no later than from the start of the business year’s second half, therefore, that the broad economic expansion in recent years was coming to a close.
While the European economy still remained on a growth track in early 2018, it was unable to maintain the strong momentum that had characterized 2017. The rhetoric of US president Donald Trump regarding changes in the trade relationships of the United States with the rest of the world still did not have much of an effect on the European economy at the start of the business year 2018/19, but the mood clearly started to darken during the summer, and not just in Europe. Particularly the imposition of protectionist (Section 232) tariffs in the name of national security on both steel and aluminum—which were subsequently followed by additional restrictions in other economic sectors—changed not only the global trade flows, but also the political relationships between the world’s major economies.
In addition, the introduction of the new emissions test (WLTP) in September 2018 triggered unexpectedly strong distortions especially in the German automotive industry which, given the size and significance of this sector, accelerated the dampening of economic sentiment in Europe toward the end of the calendar year. Due to the continued escalation of trade policies as the year wore on, primarily between the United States and China, European exports began to decline as well across a widening range of countries and industries. The negotiations regarding Great Britain’s withdrawal from the European Union, which seemed downright unproductive, also had an increasingly negative impact not just on the political mood in the EU, but also on its economic mood.
In this economic environment, which became ever more challenging from one quarter to the next, voestalpine’s performance overall in Europe (its domestic market) was uneven both over time and across industries. While the company’s automotive activities, in particular, continued to boom at the start of the business year 2018/19 and its other market segments largely benefited from solid demand as well, after the summer most sectors experienced a rapid decline in demand. These developments had the greatest impact on the automotive sector not least due to the changes triggered by the WLTP, but the tool steel industry for its part was faced with strong price pressures in Europe especially due to the diversion of international trade flows in the wake of the global tariff wars. In the EU, aerospace and construction were the only industries that escaped the dampening of sentiment in the past business year.
The longest economic expansion in the history of the United States continued unabated in the business year 2018/19 even though the country’s mood was not as euphoric as in previous years due, for one, to the long government shutdown at the end of 2018 and the start of 2019 and, for another, to the slowing down of the global economy—particularly as a result of the trade war between the United States and China. Toward the end of the business year, the normalization of credit conditions together with rising interest rates led, moreover, to an inversion of the interest rate curve and thus to growing fears of a recession in the country. On the whole, however, in the United States the business year 2018/19 was characterized by the continued solidity of the economic environment; the voestalpine Group benefited from this scenario especially in aerospace and storage technology but also increasingly in railway infrastructure. The US automotive industry, by contrast, started to trend laterally, albeit at the same high level as before. Even the US oil and natural gas industry experienced good demand overall during this period despite fluctuating crude oil prices, yet voestalpine was able to benefit from this development only to a limited extent, particularly in margin terms, owing to the imposition of Section 232 protectionist tariffs.
Economic developments in Canada and Mexico during the business year 2018/19 were buffeted especially by the unilateral termination by the United States of the North American Free Trade Agreement (NAFTA) and the resulting onset of tariff discussions. While Canada’s economic environment remained relatively stable nonetheless, enabling voestalpine’s local entities to perform accordingly, at the start of 2019 Mexico saw a change in government that put a damper on the country’s economic momentum. But the Mexican automotive industry, which is important to voestalpine’s local companies, was not affected as much from these developments.
In Brazil, the positive mood at the end of a multi-year recession led to a moderate upswing during the past business year, at least for the time being. Aside from intra-Brazilian factors such as the presidential election campaign (which took almost an entire year), the protectionist policies of the United States—one of the country’s key export markets—put as much of a damper on hopes for a wider upturn as did the darkening of economic sentiment globally. Rising interest rates in the United States as well as the appreciation of the US dollar, moreover, caused the credit conditions facing Brazil to deteriorate further.
In addition, all of South America was adversely affected during the business year 2018/19 by the critical developments that continued unabated in Venezuela, but also in Argentina and Colombia.
In this economic environment which, while positive overall, had not lived up to the company’s high expectations at the start of the business year, the voestalpine Group actually performed better than initially expected in both tool steel and special materials but also in railway infrastructure and special sections.
Asia / China
At the very start of the business year 2018/19, China’s economic development was clouded by uncertainties that became apparent not least when the economy took longer than expected to gather steam again after the traditional Chinese New Year celebrations. Nonetheless, the momentum of the country’s economy accelerated substantially thereafter until the tensions arising from the trade war with the United States escalated during the summer of 2018 and the economic sentiment started to cloud over yet again. China’s central government reacted by lowering interest rates and initiating economic stimulus measures, as before mainly in infrastructure. Even though the mood improved thereafter, increasingly the real economy began to suffer from the trade war with the United States. Aside from the resulting significant downturn in exports, the growing uncertainty among Chinese consumers and their curtailed spending had a corresponding effect on China’s economic momentum.
In this environment, China’s demand for the voestalpine Group’s tool steel declined substantially over the course of the business year, thus reflecting weaker growth not only in the consumer goods industry but especially in the automotive industry also. Having already started the business year on a weak footing, the automotive sector virtually collapsed after the summer. So far, however, the impact of this decline on the automotive components production of the voestalpine Group has been relatively weak, because these units supply primarily European automotive manufacturers in China, which were fairly successful during the past business year in escaping the broad downward trend.
As regards railway infrastructure, voestalpine benefited from the newly launched infrastructure projects, thus succeeding in recording substantially rising order levels as the year wore on.
Business performance of the Divisions
Ambivalent developments affected the performance of the Steel Division in the business year 2018/19. While the division’s young North American direct reduction plant in Corpus Christi, Texas, USA, continued to pursue technical finetuning work in a very attractive environment, an extensive, technically warranted maintenance shutdown prevented full capacity utilization of its main facility in Linz, Austria.
This long-planned, comprehensive overhaul (relining) of the Group’s largest blast furnace—most of which took place during the entire second business quarter and was successfully completed in the early fall of 2018—was the key issue facing the Steel Division in the business year 2018/19. To a considerable degree, the resulting loss of production volume was offset through both pre-production and purchases of semi-finished goods (slabs), albeit at a higher cost than would have been incurred, had self-produced material been used, with the corresponding effect on earnings.
As far as the market is concerned, the division met with excellent demand for high-quality steel products at the start of the business year, a dynamic that seamlessly continued the existent trend from prior periods but cooled off increasingly as the business year wore on. Particularly the distortions in the automotive industry stemming from the new Worldwide Harmonized Light Vehicle Test Procedure (WLTP) emissions test led to volatile order intake at a lower level overall in the business year’s second half. With the exception of the mechanical engineering and construction industry, all other market segments that are key to the Steel Division also experienced declines in demand.
Over the course of the business year 2018/19, the protectionist policies of the United States, which reached an initial high when tariffs were slapped on steel and aluminum on national security grounds (Section 232), led to diversion effects from changes in the global flow of goods, causing an increase in steel imports to Europe. The measures enacted by the European Union in response (import quotas labeled “Safeguard Measures”) fell—and continue to—fall short by far, thus making it impossible to maintain some sort of equilibrium in the European steel market.
In an environment of falling demand and rising imports the price of iron ore, the raw material that is key to the production of steel, sharply increased. This against the backdrop of continued high demand from China coupled with supply- side declines in iron ore volumes on the global market due, in particular, to the massive technical failure of a dam in a Brazilian mining operation.
Toward the close of the business year, this combination of lower demand, high imports, and higher raw materials prices led to increasing pressure on the Steel Division’s results.
Furthermore, the potentially adverse effects on the Group’s net assets, financial position, and results of operations from the pending investigation by the German Federal Cartel Office (Bundeskartellamt) against several steel producers on suspicion of anti-competitive practices made it necessary in the second half of the business year 2018/19 to set up provisions in the Heavy Plate business segment.
High Performance Metals Division
While this division of the voestalpine Group, which has the broadest international footprint, succeeded in benefiting from the ongoing, positive economic developments in both North America and Brazil, at the same time it suffered greatly from changes in the global trade flows—particularly in the wake of the trade war between the United States and China that accelerated during the business year.
Solid demand continued to characterize the global market environment in most of the customer segments of the High Performance Metals Division at the start of the business year 2018/19, but the widespread uncertainty among customers in China owing to the latter’s trade war with the United States increasingly became apparent in the course of the business year’s first half. Subsequently, this uncertainty continued to intensify and led in both the automotive industry and the consumer goods industry to clearly growing restraint with respect to purchasing decisions, especially in tool steel.
The increasingly protectionist trade policies of ever more economies also made itself felt in the European tool steel market. As far as individual quality categories are concerned, this triggered a growing imbalance of supply and demand, thus intensifying price pressures.
However, these developments did not have much of an impact on demand for high-alloyed special materials in the aerospace industry as well as in oil and natural gas exploration, which remained positive at a stable level.
Metal Engineering Division
The performance of the Metal Engineering Division in the business year 2018/19 differed by segment. While demand for turnouts in railway infrastructure was good in most of the world’s regions—especially in China thanks to the rollout of new economic stimulus packages—demand for rails was solid yet not strong enough in terms of its momentum to fully pass on hikes in raw materials prices to the market. The wire technology product segment, which largely serves the automotive industry, was affected by the massive downturn in sales resulting from the switch to the new WLTP emissions testing procedure after the summer of 2018. Having generated excellent results in the first quarter of the business year 2018/19, it was confronted with volatile and substantially lower demand particularly in the business year’s second half.
Demand in the oil and natural gas industry for seamless tubes used in exploration remained relatively stable in spite of volatile crude oil prices, allowing the tubulars product segment to benefit in volume terms. Because of the Section 232 tariffs that the United States imposed on national security grounds, however, this positive, volume-driven market environment is not reflected in the segment’s results for the past business year. Thanks not least to programs aimed at lowering costs and boosting efficiency, the welding consumables product segment delivered solid performance despite continuing challenges in the market environment.
Metal Forming Division
The performance in the business year 2018/19 of the Metal Forming Division’s two smaller business segments, Precision Strip as well as Warehouse & Rack Solutions, was still pleasing, whereas the division’s main revenue generating units (Tubes & Sections as well as Automotive Components) were faced with declining momentum. Particularly the automotive sector, which accounts for almost one half of the division’s revenue, experienced substantial distortions in Europe following the introduction of the new WLTP emissions test in September 2018. Automotive sales in China dropped in the business year’s second half even absent such testing changes, but these developments had little effect on the European premium producers that the Metal Forming Division supplies locally; in fact, they even succeeded to a large extent in boosting their sales yet further. Generally speaking, in the business year 2018/19 the automotive market in North America was stable on a continued high level.
Owing to difficulties in both production and logistics processes, the division’s automotive component plant at its Cartersville, Georgia site (its largest in North America) incurred much higher start-up costs than planned in connection with the commissioning of new facilities. Shifts in orders also made it necessary to set up provisions. These non-recurring effects had a substantially negative effect on the results of the Metal Forming Division in the business year 2018/19.