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 /  /  /  / Strip Steel Business Unit

Performance and General Business Conditions of the Business Units

Strip Steel Business Unit

Key data 2016 2015
Order intake kt 4,498 4,578
Order backlog as of 12/31 kt 881 878
Crude steel production kt 4,563 4,221
Rolled steel production kt 3,501 3,373
Shipments kt 4,552 4,465
Segment sales1) € m 2,393.9 2,518.3
Sales to other segments/Group companies € m -579.3 -595.8
External sales2) € m 1,814.6 1,922.5
Earnings before taxes (EBT) € m -2.3 -26.0
EBIT before depreciation and amortization (EBITDA)3) € m 212.5 200.9
Earnings before interest and taxes (EBIT)3) € m 35.0 29.3

The core competences of the Strip Steel Business Unit lie in the production of steel in the fully integrated steelworks of Salzgitter Flachstahl GmbH (SZFG) and in subsequent processing to produce high-grade strip steel products. The affiliated Steel Service Centers of Salzgitter Mannesmann Stahlservice GmbH (SMS) serve the growing prefabrication requirements of our customers. The two processing companies Salzgitter Europlatinen GmbH (SZEP) and Salzgitter Bauelemente GmbH (SZBE) extend the value chain within the business unit with their customized products (tailored blanks as well as roofing and wall elements). The European automotive industry is the most important customer sector.

Market development
Huge overcapacity and the associated pressure on margins continued to dominate the steel markets all over the world. This situation was further exacerbated by the ongoing high inflow of imports from the Asian region, first and foremost from China, but also from other countries such as Turkey, Russia and the Ukraine. Particularly the first half-year saw selling prices in steep downtrend due to imports at dumping prices. They only started to rise again when, in the spring, the EU decided on anti-dumping measures on cold-rolled strip imports and announced them for hot-rolled products in the second half of the year; here provisional anti-dumping duties have meanwhile been introduced. By contrast, the order situation of Europe’s steel industry improved in 2016 supported by the moderately good business of the EU steel processors, with the German automotive industry leading the way. EU rolled steel producers, for instance, reported strong order growth. Compared with 2015, new orders received by the German steel industry also increased over the period under review.

Procurement
Iron ore

The iron ore market was characterized by growing volatility in 2016. Platts IODEX 62 % Fe CFR China, the spot market's benchmark, fluctuated within a range of 40 USD/dmt and 84 USD/dmt. Whereas an average of 52 USD/dmt was reported in the first half year, the market picked up slight momentum in the third quarter, settling at an average of approximately 59 USD/dmt. The fourth quarter, however, proved to be much stronger contrary to many market forecasts, delivering prices averaging around 71 USD/dmt. Daily rates stood at just under 84 USD/dmt in December 2016, marking the highest level since September 2014. This trend resulted from the interplay of several factors: Oan the one hand, fundamental data, especially increasing excess supply, were factors against strong ore prices. The large producers in Australia and Brazil have significantly ramped up their output in recent years to support their long-standing drive to expand, which has exerted considerable pressure on ore prices. Moreover, the increase in Chinese imports that accounted for some 70 % of seaward traded ore fell short of expectations. On the other, the market responded quickly to rising steel prices and production figures from China that exerted a huge influence on pricing, especially in the fourth quarter. Price fluctuations were additionally exacerbated by the growing interest of speculative investors on the market for financial instruments.

In order to cushion the risks resulting from procurement, the prices of iron ore volumes in particular were secured through hedging.

Coking coal
In contrast to the index-determined ore market pricing, the quarterly prices for coking coal with benchmark quality continue to be negotiated between large producers and customers. Compared with the years 2014 and 2015, the first quarter of 2016 brought adverse weather effects in Australia that hampered production. This was compounded by greater demand for coking coal from China; the country’s government closed illegal mining operations and reduced the production times permitted in the other mines, which resulted in a significant increase in the demand for coal imports. Particularly in the second half-year, this upturn in demand coincided with a substantially lower level of supply, due to mine closures and geological production restrictions. As a result, prices increased dramatically, from 81 USD/t FOB Australia in the first three months to 200 USD/t in the fourth quarter. The spot market prices also fluctuated strongly, ranging between 73 USD/t FOB in mid-February and 310 USD/t FOB at the start of November. At year-end, prices declined again, settling at 230 USD/t FOB Australia.

Business development
Order intake of the Strip Steel Business Unit remained virtually stable while shipments rose marginally in a year-on-year comparison. Orders on hand remained at the-earlier level. SZFG produced at the limits of its capacity at 4,563 kt of crude steel, with facilities operating in the downstream process also close to full capacity. Segment and external sales reported a slight price-induced decline.

The Strip Steel Business Unit improved its pre-tax result to € –2.3 million compared with the year 2015 (€ –26.0 million) that was burdened by € –41.9 million from the relining of a blast furnace. The result was significantly impacted by insufficient margins in the first half of the year due to the effect of imports. Spot prices that rose as the year progressed, and were gradually reflected in a better selling price quality, were largely able to compensate for the losses accumulated in the first half of the year.

Investments
In 2016, investment activities were focused on new aggregates as well as on optimizing and extending existing facilities. Progress at SZFG was made above all with the following projects.

The pulverized coal injection plant that was successfully taken into operation back in 2015 enables the substitution of oil and coke sourced externally by pulverized coal. Despite the steep downturn in oil prices in 2016, this resulted in a positive cash flow. Further work on optimizing the plant was carried out.

In order to strengthen its competitiveness, SZFG is investing € 80 million in the construction of a Ruhrstahl-Heraeus plant for the vacuum treatment of crude steel, which extends its capacities in secondary metallurgy. The production of decarburized and desulphurized steels and grades of the highest purity is intended to satisfy steadily growing customer requirements. The solid construction work was concluded in 2016, and work commenced on the steel and plant engineering. Commissioning is scheduled for 2017.

During the blowing process on the converters hot steel gas is generated and captured in a boiler system, cooled, refined and recovered for thermal reuse. The technological conversion of the cooling systems of these converter boilers had been carried out by the start of 2017. This reduces energy requirements by more than 10 % while lowering the procurement of natural gas and thus also of CO2 emissions.

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