Steel Division

Market environment and business development

Following two years of good developments in the European steel industry, demand has gradually dampened in the course of the calendar year 2019 to date. Exorbitant increases in prematerials prices in tandem with decreases in steel prices have aggravated the tensions in steelmakers’ environment. Add to that continued high imports of steel into the EU’s Single Market. In July 2019, iron ore prices climbed to a level not seen since 2013 owing to both temporary production shutdowns and unexpectedly strong demand for raw materials from China. The “Safeguard Measures” initiated by the European Union were unable by and large to contain the pressure generated by flat steel imports. In turn, this lowered European steelmakers’ production of crude steel by about 3% in the first eight months of 2019 compared with the same period of the previous year.

The Steel Division, too, was exposed to these conditions in the first half of the business year 2019/20. Thanks to long-standing customer relationships, however, it succeeded nonetheless in delinking itself to some extent from price developments in spot markets. But the increases in the price of iron ore had substantially negative effects on costs. The great importance of the German automotive industry to the Steel Division caused order levels to decline because the industry’s production levels dropped to an extent even greater than that revealed by the sales figures. Yet the export-oriented mechanical engineering industry also had to contend with declining momentum, as did the white goods and consumer goods industry. Solely the construction industry remained robust during the first half of the business year 2019/20.

The energy sector, which is the most important customer segment of the Heavy Plate business segment, experienced overall declines. Project activities in this sector, especially in the demanding deep sea pipeline segment, were as restrained as before. Only the niche segment of high-quality clad plates for the downstream activities of the oil and natural gas sector exceeded expectations. There were no major shutdowns at the direct reduction plant in Corpus Christi, Texas, USA, during the business year to date, and production proceeded as planned. Nonetheless, both the rise in iron ore prices and the decline in scrap prices over the summer had adverse effects on the facility’s performance.

Financial key performance indicators

Year over year, the Steel Division’s revenue fell by 3.9%, from EUR 2,415.6 million in the first half of 2018/19 to EUR 2,321.1 million in the first half of the reporting period due to slightly weaker deliveries and somewhat lower prices. Although the previous year’s comparative figure for deliveries was about 10% lower than that for the first half of the business year 2017/18 owing to the general overhaul of Blast Furnace A, sales for the first six months of the current business year declined a little bit yet again due to macroeconomic factors. Prices fell, particularly in the short-term contract business, but remained largely stable for the time being in connection with annual contracts. The dampened economic sentiment that has gripped the European steel industry is reflected chiefly on the earnings side. Given the continual increase in raw materials prices that stem from sharp increases in iron ore prices, lower prices have had an additional negative effect on earnings growth. Accordingly, in the first half of the business year 2019/20 EBITDA dropped year over year by 23.9%, from EUR 342.4 million (margin of 14.2%) to EUR 260.5 million (margin of 11.2%).

The quarter-on-quarter (QoQ) comparison of the first and second quarters of the 2019/20 business year shows the fallout from the increasingly difficult economic environment in addition to customary seasonal shortfalls. Against this backdrop, revenue fell by 3.6%, from EUR 1,182.1 million in the first quarter of the business year 2019/20 to EUR 1,139.0 million in the second quarter. While the percentage decline in volumes corresponds to the generally expected shortfall in the summer quarter, the increases in the cost of iron ore did not lead to higher steel prices as it did in the past; on the contrary, they triggered further price declines in the short-term contract business. As a result, the quarter-on-quarter decline in earnings exceeded the fall in revenue many times over due to the price/cost pressures. Consequently, EBITDA dropped by 27.0%, from EUR 150.6 million in the first quarter of the business year 2019/20 to EUR 109.9 million in the second quarter; the EBITDA margin fell accordingly from 12.7% to 9.6%.