Outlook

Economic uncertainties increased

Global growth has slowed. The consequences of the financial market crisis, the subdued economic outlook for the USA and continuing high energy and raw material prices are impacting the general economic situation. World GDP is expected to grow by less than 4% in 2008, compared with 5% in 2007.

The economic outlook for the USA for the rest of the year and the coming year has clouded. Months of falling consumer confidence, the weakness of the labor market and the continuing high cost of gasoline will have a significant impact in particular on private consumption. The planned economic program is also only likely to have occasional positive effects. Current economic indicators also point to a slowing of growth in the euro zone and in Germany in the further course of the year. The fall in purchasing power brought about by higher inflation is impacting consumption, and the strength of the euro against other currencies is limiting export opportunities. In the emerging countries of Asia and Central and Eastern Europe, the pace of growth will stay relatively high despite increasing prices.

We expect the following developments and opportunities for ThyssenKrupp on the major markets:

  • We continue to forecast an increase in global steel consumption by just under 7% for 2008. The growth will continue to be driven by China and other emerging countries, but most other regions should also remain positive. For the current year we expect world crude steel production to increase to 1.43 billion metric tons. In our core European market, which remains surprisingly robust given the increase in global risks in the first few months of 2008, all the signs indicate a further increase in steel consumption, albeit below the high growth rates of the previous two years. Steel prices will continue to be largely determined by high raw material and energy costs, and further adjustments are expected.
  • Demand for stainless steel products remains high. Global consumption of stainless flat products is expected to rise by around 8% in 2008, following a slight decline in 2007. However, a seasonal reduction in demand must be expected in the coming months due to the summer break.
  • Vehicle production will continue to expand worldwide in 2008 due to growth in the emerging countries of Asia and in Central and Eastern Europe. Weak demand in the USA will result in a marked fall in output this year, affecting in particular larger, fuel-inefficient vehicles. In Japan and Western Europe, vehicle production will remain largely stable. German auto manufacturers will produce around 6 million cars and trucks, almost matching their prior-year output.
  • The global economic slowdown is impacting the mechanical engineering sector. Output in the USA will decrease due to lower domestic demand. German engineering companies will continue to achieve growth in 2008 due to high order backlogs; however, the pace of growth will decrease. Continued strong growth is forecast for the Chinese mechanical engineering industry.
  • In the global construction sector, the emerging markets in Asia and Central and Eastern Europe will continue to drive growth. In the USA, falling property prices and lower demand for housing will result in a decrease in construction output. The German construction industry is expected to remain stable, thanks mainly to the positive situation in the commercial construction sector.

Stable outlook

Earnings and sales: For the 2007/2008 fiscal year we forecast earnings before taxes and nonrecurring items, including pre-operating expense for the steel mills in Brazil and the USA, of over €3.2 billion. As things stand at present, we expect sales of altogether €53 billion. Some areas of individual business units in the USA – Mechanical Components, Materials Services North America – are feeling the effects of the economic downturn. At the same time, increased raw material prices are having an impact.

Our earnings expectations take into account the fact that our Steel segment will not be able to pass on the sharp rises in raw material prices - in particular for iron ore and coking coal - in full to customers in the current fiscal year due to our contract structure. Demand for our steel products remains very pleasing, as reflected in continued price increases, fully confirming our expectations of another good steel year.

In the Stainless segment, base prices are improving more slowly than expected. Demand from end customers is stable, while service centers are being cautious in view of the nickel price trend. Due to the weakness of the US dollar there are signs of further imports from the US dollar zone, which could slow prices in the second half of the year. Nevertheless, we expect the segment to deliver a positive earnings contribution.

Technologies continues to profit in particular from infrastructure development and urbanization in the world’s growth regions. Our high order backlog, stretching several years into the future with increasing earnings quality, gives us a high degree of planning certainty.

Thanks to its high service share, our Elevator segment continues to deliver a very stable earnings contribution.

The Services segment is profiting from rising demand for materials in the growth regions. With material prices continuing to rise sharply, we expect very encouraging growth in earnings to continue in the further course of the year.

We expect sales to continue to grow in 2008/2009 provided no unforeseen economic downturns impact our business. Growing sales will also be reflected in earnings.

The mid-term sales target for ThyssenKrupp is €60 billion, while our mid-term goal for sustainable earnings before taxes and nonrecurring items is €4 billion. In the longer term, especially after the startup of the Steel segment’s new slab mill in Brazil, the Steel and Stainless segments’ new steel steelmaking and processing plant in the USA and the investments of the other segments in other regions, we expect to achieve sales of around €65 billion and earnings before taxes and nonrecurring items of €4.5 to 5.0 billion.

Employees: We expect the number of employees to be over 198,000 by the end of the fiscal year. Given the further internationalization of the Group, the growth will take place primarily in our foreign operations, increasing the non-German proportion of our workforce.

Innovations: In the reporting year we expect to spend more than €800 million on innovations for new products, processes and services. To further increase our innovativeness we intend to recruit more scientists and engineers.

Procurement: Iron ore prices have increased, and prices for coking coal, chromium and scrap remain high. Though the prices of a few raw materials, e.g. zinc and nickel, are generally trending downward, this trend is being interrupted – e.g. for nickel – by slight, short-term upturns. Our supplies of products, services and raw materials are secured through contracts and long-term supply relationships. We continue to expect materials expense to amount to more than half of sales in 2007/2008.

Energy: We expect prices for oil, natural gas and electricity to rise further. The cost increases will be cushioned by more efficient use of energy, optimized procurement and the long-term securing of prices.

Source: Interim Report 9 months 2007/2008, p. 26-28