Economic Environment

The world economic upswing continued in the first half of 2006. The situation on the international energy and raw material markets remained tight, leading to further, in some cases significant, price increases.

Nevertheless, global growth remained largely robust.

The USA recorded strong growth in the first quarter of 2006. Increasing interest rates, signs of weakness in the real estate market and the notable rise in fuel prices impacted private consumption in the subsequent months and led to a smaller increase in economic output. In most countries of Latin America the economic upturn continued thanks to strong domestic demand.

In the euro zone the positive economic trend was bolstered in particular by increasing growth in domestic demand. In Germany the first half began with a rise in gross domestic product due to stronger private consumption and increasing investment. In the countries of Central and Eastern Europe, stable domestic demand and higher exports strengthened the economic upswing.

In Japan the economic situation improved further on the back of increased domestic demand.

Economic growth in the rest of Asia continued unabated. Alongside high exports and investment, private consumption is now also aiding the economic expansion in China.

In the sectors of importance to ThyssenKrupp the picture was as follows:

• The international steel markets remained in stable shape. Global crude steel production increased by 8% in the first half of 2006. This was mainly due to China and India, which increased their production significantly, while output in most other regions showed only moderate growth. In the European Union crude steel output was up 4% against the corresponding prior-year period. In particular the countries of Eastern Europe, where major production cutbacks had been carried out in the previous year, recorded higher output. Demand for carbon steel flat products in both Western Europe and the USA remains high. The Western European suppliers have recorded a significant increase in sales volumes in the course of the year so far. Imports from non-EU countries showed even stronger growth, with the result that the share of imports in market supply increased substantially. On account of the cyclical rise in consumption by steel processors and for inventory cycle reasons, the high supply volumes were absorbed by the market. Steel price increases, which were necessary due to the further rise in raw material and energy costs, were implemented across a broad front in the reporting period.
• The market for stainless steel flat products continued to perform encouragingly in the 2nd calendar quarter 2006. With significant growth in order volumes against the very weak prior-year quarter, the European producers were able to push through several base price increases. Supplies to customers were also considerably higher. However, there was stronger pressure on margins in particular on account of the increase – in some cases extreme – in raw material costs. For example, the nickel price reached a new all-time high in the quarter under review. In North America the demand situation was likewise positive. Here, too, base prices were raised several times. In Asia market supply was at the prior-year level and rising. Stainless steel prices rallied further. However, unlike in Europe and North America, the sharp rise in raw material costs could not be passed onto customers in the same period due to the lack of alloy surcharges. With key customer markets performing well, the strong demand for nickel alloys continued in the 2nd calendar quarter 2006.
• On the international automobile market the main growth impetus came from Asia. In China vehicle production is expected to rise by more than a third in the first half of 2006. By contrast, the automobile market in North America weakened. The market segment for light trucks such as minivans and sport utility vehicles declined due to higher fuel prices. The number of new vehicles purchased in the USA decreased in the first half of 2006, though the Asian and European producers succeeded in expanding their market share. The pace of expansion slowed in Brazil due to a decline in exports. The European vehicle markets recorded slightly higher demand for passenger cars. The German vehicle industry profited in particular from high exports. The German truck sector continued to report encouraging growth.
• The continuing robust growth of the world economy and increasing investment are favoring the mechanical engineering industry. In key producer countries the economic situation of the capital goods industry has improved. The German mechanical engineering sector experienced further unbroken growth. In the first six months of 2006 German machinery manufacturers reported a 15% improvement in order intake. Demand was stronger on the domestic market than abroad. In particular the German engineering construction sector recorded high growth rates. Thanks to the good order backlog, machinery output in Germany increased considerably.
• Growth in the construction sector this year is mainly taking place outside the industrialized countries. In Europe higher growth rates have so far this year only been reported by some Eastern European countries. In Germany the construction industry rallied from a low starting level. Order intake increased appreciably in the first half of 2006. Demand for construction activities in the new federal states also increased again. The output of the German construction sector in the past few months was slightly higher than a year earlier.