performance, strengthen our market position and
examine further growth options in the coming months
by selective measures.
With a share of about 27%, China is the largest single market for copper worldwide. Although reduced demand has also been registered there, the country clearly stands out from the subdued trend in demand of Western countries. Investment in raw material-intensive infrastructure is continuing, boosted by the largest economic stimulus programme in the country’s history.
The economic package is supported by relaxed monetary poli- cies and export benefi ts, inter alia for copper products. The national State Reserve Bureau (SRB), which manages China’s strategic raw material reserve, also plans copper purchases to support domestic industry. China’s copper demand should therefore increase again considerably in 2009 and reach a correspondingly high level.
The output of refi ned copper was marked by comparably low capacity utilisation in 2008, due to strikes, technical and economic problems or maintenance-related standstills. These impacts will also inhibit copper production in 2009. This will also be exacerbated by the announced production cutbacks in the Chinese and Japanese smelter industry.
Although these probable production restrictions are currently attracting little attention, they could again cause the supply to become tighter, so that the surplus expected in 2009 may decline or even disappear. On this basis, a signifi cant recovery of the copper price from the current level, which is too low, cannot be ruled out.
Copper Production: continuation of growth curve and perfor- mance enhancement
To improve our competitive situation, we are pursuing a policy in Copper Production that is aimed at internal and external growth. Cost optimisation as a result of increased productivity and effi ciency still enjoys top priority.
Since the acquisition of Cumerio, we have been working inten- sively on its integration and the development and achievement of synergies in the copper production sector. An extensive know- how transfer has led to substantial synergy effects at all loca- tions. Further measures will considerably improve the compe- titiveness of our copper production over the next two years.
In addition, we are maintaining our long-term growth policy in concentrate processing. A concept has been developed for Hamburg to increase the processing capacity from 1.1 million tonnes to 1.25 million tonnes per annum by 2010. Planning has also begun to increase the annual concentrate processing capacity in Pirdop from about 1 million tonnes to more than 1.3 million tonnes by 2012.
m a n a g e m e n t group management report c o n s o l i d at e d f i n a n c i a l s tat e m e n t s f u r t h e r i n f o r m at i o n Forecast report
Recycling: material throughput rises
Increasing numbers of countries in Europe and overseas are building up the structures of a closed loop economy regulated by law. This results in particular in the availability of increasing quantities of material for recycling, particularly in the end- of-life sector. At the same time, demands on the processes used for recycling are increasing. We are preparing for this development and are already today able to treat a wide range of metal-bearing recycled materials in state-of-the-art and particularly environmentally friendly facilities.
We will expand the range of feed materials once again in future, especially at our Lunen recycling centre, and further increase the processing of secondary raw materials. In doing so, we will exploit market opportunities and improve the economic safety net for our raw material supply. The KRS Plus project which was presented to the public on 7 October 2008 covers the main measures to be taken. With a capital expen- diture volume of € 62.5 million, it is aimed at expanding the existing KRS recycling plant by adding a second furnace by 2011, and a resultant modifi cation of the process. Once the project has been completed, we will be able to double the input of complex recycled materials.
Copper processing: focusing on high-value products and strengthening customer relationships
The central strategy of the Copper Processing Segment is growth through the production and sale of top quality copper products. Following the successes of the past years and the acquisition of Cumerio, we will further enhance our perfor- mance, strengthen our market position and examine further growth options in the coming months by selective measures.
The improvement in the output of the Hamburg rod plant has not only increased the overall capacity, but has also improved our fl exibility and productivity. Further capital expenditure and programmes are concentrating on the continuous improvement of the quality of our products and services and their develop- ment in collaboration with our customers.
In the product sectors of wire rod, continuous cast shapes and pre-rolled strip with the highest conductivity and other prop- erties oriented to customer specifi cations, our most important core business in quantity terms will also benefi t in future from the tremendous need for investment in infrastructure and logistics. We believe that this market sector will be affected to a comparatively lesser extent by the current downturn in the economic situation. In the case of standard shapes, demand for which in the past fi scal year was affected by the economic downturn and price-related substitutions, much will depend on the unpredictable microeconomic situation in Europe and worldwide, and on exchange rate developments in the export business. The pressure of substitution has, however, declined on account of the sharp fall in the copper price.
CIS solar cell project is continuing
On account of the shortage of natural energy raw material resources, the future prospects of our CIS solar project are excellent. The forecasts on the further development of the photovoltaic market expect stable growth of about 30% per annum. In this environment, the CIS thin-fi lm solar cells developed by us could be well placed as a result of their environmental compatibility and cost-effective production. We intend to build a production plant with a capacity of 30 MWp for our market launch. Our project partner has extensive marketing expertise.
Despite intensive work in our solar cell pilot line, we still do not have all the data, results and experience that are neces- sary as the technical basis for a production plant. For this reason, we will not take further decisions on the project time- table until 2009, when we have a reliable technical basis.
Expected future results of operations
In assessing the results of operations in the next two years, the price trend on the metal markets must above all be taken into account. Following the price falls in past weeks, we expect higher prices again for the metals processed and produced by us in 2009. Positive price effects from the reduction of low- valued metal inventories and the backwardation prevailing in fi scal year 2007/ 08 would not be achieved at all, or only to a signifi cantly reduced extent, in the future in the event of sustained low copper prices and a contango situation on the copper market. Increased effi ciency in the production of metals would likewise only be achieved to a lesser extent for price- related reasons. Since Cumerio’s copper inventories were taken over as at 1 March 2008 at the high copper prices governing at the time, they were already written down as at 30 Septem- ber 2008 on account of the lower copper prices. Since the
prices have fallen further since then, a renewed negative effect on earnings can initially be expected resulting from the write- down of inventories. An increase in copper prices would then have a commensurate positive impact on earnings. Overall, impacts on earnings will vary in future with volatile copper prices. We expect a somewhat fi rmer U.S. dollar against the euro than in fi scal year 2007/ 08 and consequently a positive contribution to earnings.
Copper raw materials with varying profi t contributions
The most important raw material for copper production in the group is copper concentrate. Since we ensure the supply of concentrate under our strategic supply policy largely through long-term supply agreements, we were able to a great extent to disengage ourselves from the poor state of the concentrate market.
Other repercussions of the fi nancial and credit crisis for the copper industry are not predictable in every detail. We however expect the concentrate market to recover on account of capacity expansions at existing mines, the opening up of new deposits and the demand behaviour of the smelters, and that treatment and refi ning charges will consequently increase again. If the current signs of improvement in the spot business do not turn out to be sustained, we will also have to expect lower treatment and refi ning charges for new future settlements.
m a n a g e m e n t group management report c o n s o l i d at e d f i n a n c i a l s tat e m e n t s f u r t h e r i n f o r m at i o n Forecast report
Supplies on the recycling markets, in particular of copper scrap, will also fl uctuate signifi cantly in future, with an impact on material availability and refi ning charges. The uncertain devel- opment of the economy, volatility and the copper price, also have a great infl uence in this connection. The situation on the other non-ferrous metal and steel scrap markets also has an impact on the availability of copper scrap supplies. In addition, distortions in competition result from the trade policy of certain countries with a high demand for raw materials.
We are, however, optimistic that our strategy of technological leadership in material processing and environmental protec- tion, as well as the very wide range of feed materials, will miti- gate the repercussions of negative market developments and have a positive impact on the results of operations. The very satisfactory profi t contribution in the year under review will however be diffi cult to repeat in the new fi scal year.
Copper products: stable earnings despite possible decline in unit sales
The tense and very volatile global economic situation will have an unfavourable impact on the growth of European demand for copper products. We therefore expect business in the Copper Processing Segment to be subdued in quantity terms.
A series of factors will however limit the possible sales declines. The burden of borrowing costs along the value added chain will fall in line with the lower copper price. At the same time, the substitution effects will be reduced. The copper stocks at our customers are currently so low that they can scarcely be reduced any further. In addition, a tendency towards a stronger U.S. dollar will offer our customers and us better opportunities for exporting to America and Asia again.
The most important copper applications by far for NA in quantity terms are in energy generation, conversion and dis- tribution and the electronics industry, which we believe are affected to a relatively limited extent by the current crisis. We expect demand to largely remain stable, also in the future. It will, however, be diffi cult to repeat the high growth rates of the past fi scal year. Our wire rod sales will therefore probably be lower than the record level of the year under review. We expect development in the white goods and automotive sectors to be subdued, which will initially dampen our sales in this sector. We expect only limited momentum from the con- struction industry in the short term. A possible decline in the sales volume of preliminary products for this sector will not have a signifi cant impact on business, since we have already considerably reduced our activities here.
Sales of our continuous cast shapes will remain stable in the high-conductive copper product sector. We even expect fur- ther growth in the specialty product sector. The business with standard shapes is, however, much more dependent on the general economic trend, which, despite all the state support packages, cannot be properly assessed. It is therefore currently impossible to make a fi rm sales forecast for standard shapes.
Expected future fi nancial position
Cash fl ows reached record levels in the last year on account of the very positive economic climate for NA and positive one- off effects. We expect the cash fl ow from operating activities to decline due to the signifi cant deterioration in the conditions, but will be able to compensate this to some degree by taking corrective measures, in particular as regards investing activities and also in the working capital.
We regard the future fi nancial position as secure in view of the solid balance sheet structure and, from today’s viewpoint, more than suffi cient credit lines for the ongoing business.