1.1. Pace of the global economy slowed
substantially in the second half of 2011
The global economy was not able to link in to the fast-paced growth in the previous year. Accord- ing to information from the International Monetary Fund (IMF), the economy grew by 3.8% world wide, after having lifted by 5.0% in 2010. In 2010 there were catch-up effects from the economic and financial crisis in 2009. In addition, the massive sovereign debt in key industrial nations, in particular in the eurozone, led to a significant cool down in the global economy in the second half of the year. Forecasts by economic exports had to be corrected down accordingly at the end of the year. The countries in the European Union suffered increasingly from the financial and structural crisis, which heightened from the middle of the year. The economic growth of 1.6% in this region, identified by the IMF, is primarily based on the export-driven growth in individual countries such as Germany (+3.0%) whereas other EU countries already slipped into recession at the end of 2011. The USA fared only marginally better, with economic output up just 1.8% compared to 2010. Japan’s economy even fell by 0.9% as a result of the earthquake and tsunami catastrophe in March 2011. Global economic growth in 2011 was driven once again by the high pace of growth in emerging nations. According to information from the IMF and driven by strong growth in China of 9.1% according to figures from that country’s government, the economies in emerging nations grew by 6.2%. In contrast, growth in industrialized nations was up by just 1.6%.
In order to minimize the risks for the real economy, central banks have cut lead rates around the world to historic low levels. Exchange rates were volatile in 2011 as a result of the economic uncer- tainties. For example, the exchange rate on the balance sheet date changed from USD 1.34 (2010) to USD 1.29 (2011) to the Euro. The average exchange rate increased from USD 1.33 (2010) to 1.39 (2011) and underwent substantial fluctuations during the course of the year. Inflation in industrial- ized nations was relatively moderate, and totaled 7.25% in emerging nations. The growth in raw material prices also reflected the cool down in the global economy in 2011 - in particular in the second half of the year. Listings for the majority of commodities fell over the course of the year - in particular industrial metals underwent a significant correction. The downturn in prices also affected agricultural commodities, which clearly slumped despite a continued rapid increase in the global population. In contrast, oil was in a special position in 2011, up by 16% due to the expectations for a long-term robust economy in China and other emerging nations.
Generally positive
development of the economy, albeit uncertainties due to sovereign debt crisis
1.2. Another record-breaking year for steel production
In 2011, the SKW Metallurgie Group again recorded around 90% of its consolidated revenues with customers in the steel industry. The company’s operating growth depends on the quantity of steel produced and not the steel price.1 As steel producers generally only have low quantities of the SKW Metallurgie Group’s products in store, the development of steel production allows direct conclusions to be drawn regarding demand for the company’s products. In geographic terms, the steel production figures for “world without China” are particularly relevant for the SKW Metallurgie Group, as steel production in China is still undergoing a process of transformation. Without China, 831.4 million tons (previous year: 786.9 million tons) of raw steel were produced world wide in the year under review. As soon as the transformation process in China has progressed further, the Chinese market will also become increasingly important for the SKW Metallurgie Group. In terms of steel types, sales of the SKW Metallurgie Group’s high-quality products focus on producing high and higher quality steel, for which more and more complex products from the SKW Metallurgie Group are required than for simple steels.
Global steel production in 2011 mirrored economic growth in the year under review: 2011 was a new record-breaking year for steel producers around the world - and it was driven by high demand from emerging nations, which are enjoying dynamic growth. According to information from the World Steel Association, global steel production increased by 6.8% to 1,526.9 million tons (previous year: 1,413.6 million tons).2 The weakening in the underlying economic conditions at the end of the year was also reflected in slower growth in the steel sector. As a result, production quantities only grew by 2.5% in the fourth quarter.
With the exception of Japan, all of the major steel producing countries were able to enjoy what was, in some cases, substantial growth over the year as a whole. Asia’s increasing importance for global trade was reflected in the fact that the production volume was up 7.9%. China was able to further expand its position as the world’s largest steel nation - it accounted for 45.5% of global production (up from 44.7% in the previous year). The robust economic growth in the USA could be seen in 2011 in the fact that the quantity of steel produced was up 7.1% year-on-year, while this figure only increased slightly by 2.8% in the European Union as a result of the initial impact of the Euro crisis on the real economy. Despite the weaker pace of the economy in the year under review, steel production in Brazil, a further key sales market for the SKW Metallurgie Group, was up 6.8% year-on-year. In total, the proportion of global steel production accounted for by BRIC countries (Brazil, Russia, India and China) has increased since 2006 from 45.8% to 57.1% in 2011.
Steel production in the key geographic markets for the SKW Metallurgie Group grew at a slightly faster pace in the first half of 2011 than in the second half of the year (EU and Brazil); however, growth in the second half of 2011 in the USA was higher.
Without emerging nations, steel production in absolute figures in 2011 was also lower than the previ- ous highs recorded in 2006 to 2008. These figures confirm the expectations by many steel experts that steel production in Western Europe and North America will not grow significantly higher than the level prior to the economic and financial crisis in 2009 for the foreseeable future.
1. The indirect impact of the steel price, e.g. from the price elasticity of demand, is also minor. “Steel production” and “steel demand” are used synonymously in this report, as the differences (e.g., changes in manufacturers’ warehouse quantities) are comparatively unimport- ant.
2. Steel production figures for 2011, which are stated in our management report, are based on figures published by the World Steel Association on January 23, 2012. The association notes that these are, in some cases, provi- sional figures/estimates. In addition, in general the association only covers 64 countries, however their steel produc- tion is put at more than 98% of global production.
SKW Metallurgie Group records about 90% of its revenues with the steel industry
World steel production – a significant indicator for demand for SKW Metallurgie products – increased significantly
Outside the steel sector, the SKW Metallurgie Group aims to develop additional customer groups by offering special applications. These customer groups’ product requirements are related to those in the steel industry. Examples include cored wire for the copper and foundry industries, calcium carbide products for the gas industry and special magnesium for aviation.
In addition, the Quab subsidiary also supplies producers of industrial starches (a pre-product for paper production), hygiene products and also the shale gas industry. The growth of this customer industry followed the general economic trends in the year under review.
1.3. Markets for SKW Metallurgie’s products follow customer industries
Revenues for all of the SKW Metallurgie Group’s key products, in both the “Powder and Granules” segment and also in the “Cored Wire” segment, were higher than in the previous year – driven by the growth described in steel production.
The group’s sales quantity developed mostly in line with the volume of production for steel produc- ers in the geographic markets that the group serves. In addition, in the “Powder and Granules” segment, there was a positive impact from the customers acquired in connection with the take-over of a calcium carbide furnace in Sweden. Revenues from this furnace were consolidated in the SKW Metallurgie Group for 11/12 of the year.
Prices for the group’s key products were similar to the previous year on average in 2011. As a rule, the growth in sales prices also reflects the development in purchasing prices for key raw materials that are used in SKW Metallurgie’s production. As a rule, fluctuations in these prices are passed on to customers in good time. One example of raw materials for which price fluctuations are passed on to customers is cores for cored wire, all of which have been bought in from third parties to date. The start of production of calcium silicon (the most important core for cored wire in terms of quantity) at the new facility in Bhutan means that part of this external procurement will be replaced by the group’s own production.
In addition to effects relating to prices and quantities, the group’s revenues, which are reported in euros, are subject to exchange rate fluctuations, in particular the USD/EUR exchange rate. Currency sensitivities for the SKW Metallurgie Group (not the single entity SKW Stahl-Metallurgie Holding AG) are presented in Note D39 to the consolidated financial statements.
In terms of margins, in 2011 start-up costs were incurred for the new plants and there were also some non-operating extraordinary factors. These are discussed in detail in Section 6 (“The SKW Metallur- gie Group’s financial position and results of operations”).
Further information: Consolidated Notes, Note D39