a financial analysis of the european steel industry, in the context of the global recession kevin...
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A financial analysis of the European steel industry, in the context of the global recession
Kevin Fowkes
Prague, 21st September 2009
Integer Research – who we are and what we do
• Founded in 2002
• London-based research, strategy consulting and publishing company,staff of 27 people
• Leading provider of financial analysis of global steel industry
• Quarterly “Steel Financial Bulletin” and “Steel Financial Insight” reports sold to wide client base in the steel sector
• Research also in wire & cable, fertilisers, automotive, environment & emissions sectors
The Central & Eastern European steel industry:
Does it make sense to look at it in isolation?
Ownership of Eastern European steel industry –now 80% is controlled by steel multinationals
Ownership of steel industry in the 12 countries that have joined the EU since 2004(weighted by volume of crude steel production in 2008):
Data: Integer Research
49%
18%
13%
21%
Major West European- based producers:
ArcelorMittalCelsaSidenor
Major North American-based producers:
US SteelCommercial Metals
Major CIS-based producers
SeverstalMechel
TMKInd Union of Donbass
Ind Metallurgical Holding
Still locally / independently owned
Ownership of Eastern European steel industry –now 80% controlled by steel multinationals
• Over the past decade, the Eastern European steel sector has become an integral part of the EU / Western European steel industry, with major assets acquired by ArcelorMittal and other significant players. The Eastern European steel industry no longer really exists as a separate entity
• It therefore makes most sense to analyse the financial performance of the European steel sector as a whole, rather than try to separate into East and West
• Acquisitions in the region by US, Russian and Ukrainian producers have even more closely linked the Eastern European steel sector to the financial performance of the global steel industry
The structure and financial performance of the European steel industry
Whether a company is publicly traded, and where it is listed/based, largely determine the scope and availability of financial information
• Publicly-traded companies have much stricter reporting requirements than privately owned companies
• Most publicly-traded companies report quarterly financials
• Most private companies report only annually, often with a long time lag
• Reporting requirements vary considerably between countries, especially for private companies
• For multinational companies, it can be difficult to analyse operations in a particular country or region in isolation from the rest of the business
Ownership structure of the European steel industry
(weighted by volume of crude steel production in 2008):
Data: Integer Research
49%
17%
34%
Major European-listed producers:
ArcelorMittal
ThyssenKrupp
Salzgitter
voestalpine
SSAB
Rautaruukki
Vallourec
Acerinox
Sidenor
Outokumpu
Major foreign-listed producers:
Tata (Corus)
US Steel (Kosice)
Severstal (Lucchini)
Mechel
TMK
Other producers(mostly privately owned):
Celsa
Riva
Saarstahl
Duferco
Moravia
Cogne Acciai
Quarterly vs annual financial statements
• Many publicly-traded companies report quarterly financials
• Monitoring quarterly financials are the best way of maintaining an up-to-date view of the financial performance of an industry – especially when the economic / market circumstances suddenly change
• For detailed financial analysis at the company level, annual accounts are the most appropriate source. They are usually more detailed, and the most accurate, as audit adjustments are generally not made to all quarterly financials
How to measure financial performance –definitions of profitability
Various accounting measures of profitability: Usefulness:
Gross Profit
Trading Profit (EBITDA)
Operating Profit (EBIT)
Profit Before Tax
Net Profit (after tax)
Declining level of profit
Indicates production efficiency of business
Indicates profit before any capital expenditure (depreciation)
Indicates total profit for existing assets and structure, as if financed by no debt
Indicates total profit including finance charges but before taxation
EBIT margin is profitability relative to sales= EBIT ÷ Revenue
Profitability of the European steel industry before the recession took hold
Mech
el
Saarst
ahl
Valloure
c
Seve
rstal
SSAB
Rautaruukk
i
US Steel
Tata
voesta
lpineTM
K
ArcelorM
ittal
Salzg
itter
Duferco Riva
ThyssenKru
pp
Sidenor
Commercial M
etals
Acerin
ox0%
5%
10%
15%
20%
25%
30%Privately-owned producers
Foreign-listed producers
European-listed producers
Data: Integer Research, company filings
Operating profit (EBIT) margin for major steel companies producing in Europe, 2008:
• All major producers made operating profits in the boom
• In general, the foreign-listed producers performed slightly better than the European-listed producers
• In general, private companies performed less well than listed companies
Caveats:
• Non-European assets included in financials
• Recession impacted financials at different times depending on the company
Most European steelmakers have made an operating loss since Q4-2008, and their financial performance has not improved so far in 2009
Data: Integer Research, company filings
-6
-4
-2
0
2
4
6
8
10
12
2005
-Q2
2005
-Q3
2005
-Q4
2006
-Q1
2006
-Q2
2006
-Q3
2006
-Q4
2007
-Q1
2007
-Q2
2007
-Q3
2007
-Q4
2008
-Q1
2008
-Q2
2008
-Q3
2008
-Q4
2009
-Q1
2009
-Q2
billi
on U
S$
voestalpine
Vallourec
ThyssenKrupp
SSAB
Salzgitter
Rautaruukki
ArcelorMittal
Acerinox
TOTAL
Operating profit (EBIT) for European-listed steel producers: • There was an instant
disappearance of profitability in Q4-2008, with most producers reporting an operating loss
• Losses have not been reduced so far in 2009
• Very similar picture for CIS / US listed companies
• Likely that smaller / privately owned producers have fared even worse
The global picture
Producers listed elsewhere have experienced a similar development to those in Europe. Chinese producers are the only major exception to this
Average operating profit (EBIT) margins for public steel companies by region of main listing:
Data: Integer Research, company filings
-30%
-20%
-10%
0%
10%
20%
30%
40%
Europe
China
N.America
Japan
CIS
The Chinese steel industry, following a disastrous Q4-2008, has bounced back quickly to a break-even financial position
Operating profit (EBIT) for major Chinese-listed steel producers:
Data: Integer Research, company filings
-8
-6
-4
-2
0
2
4
6
billi
on U
S$
Xinjiang Ba Yi
Wuhan
Tangshan
Panzhihua
Nanjing
Maanshan
Laigang
Jigang
IM Baotou
Hunan Valin
Handan
Gansu Jiu
Chongqing
Chengde Xinxin
Bengang
Beijing Shougang
Baosteel
Anyang
Angang
TOTAL
Why have Chinese producers recovered first, and when will Europe follow?
• It’s the demand, stupid-China alone has seen growth in steel demand in 2009, thanks to a massive government economic stimulus
• Consequently, Chinese producers have not had to shoulder as much cost as a result of idling capacity / layoffs
• Arguably, Chinese producers have been less locked in to raw material supply contracts so have taken quicker advantage of falling input prices
• Recovery of demand in Europe will be crucial, as will the supply response
• Raw material pricing for 2010 will also be key
• A less export-focused China should be of long-term benefit to Europe
Structurally, the big steel companies remain lacklustre financial performers compared to the mining giants
Data: Integer Research, company filings
Operating profit (EBIT) margins for top-3 world steel companies versus two iron ore mining multinationals:
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2005
-Q2
2005
-Q3
2005
-Q4
2006
-Q1
2006
-Q2
2006
-Q3
2006
-Q4
2007
-Q1
2007
-Q2
2007
-Q3
2007
-Q4
2008
-Q1
2008
-Q2
2008
-Q3
2008
-Q4
2009
-Q1
2009
-Q2
ArcelorMittal
Nippon Steel
Baosteel
BHP Billiton
Vale
• The major suppliers of iron ore have remained comfortably profitable through the recession
• Steel companies big and small have all suffered losses
• Leading steel companies have not realised the improvement in profitability through consolidation that the mining giants have. Is this an argument for more consolidation or less?
• The mining giants remain in a powerful position regarding raw material prices, and will be a key determinant of the recovery of steel industry profitability in 2010
• If underlying profitability does not improve, developments such as emissions trading pose a threat to industry viability
Thank you for your attention
For more information please contact
Kevin FowkesBusiness Manager, SteelInteger Research Limited55 Farringdon RoadLondonEC1M 3JBUnited Kingdom
Tel: +44 207 503 1265Fax: +44 207 503 1266
www.integer-research.com