- General economic conditions
- Economic conditions in the sectors
- Thyssenkrupp with record year
- Expectations exceeded
- Key sales markets and competitive situation
- Income and dividend
- Capital expenditures
- Procurement: Raw material prices trending upward
- Environmental protection
- Summarized assessment of the fiscal year
Group review
ThyssenKrupp continued its profitable growth in fiscal year 2006/2007. We made good progress at both operating and strategic level and performed successfully in a favorable market environment. This is reflected in our performance indicators: sales rose by 10% to €51.7 billion, while earnings before taxes were up 27% to €3.3 billion.
General economic conditions
The economic environment was generally friendly in the reporting year. The strong global growth of the previous year continued in 2007. According to current estimates, world gdp increased by 5.2%, slightly more than expected a year ago. Despite rising prices on the international energy and raw material markets, global growth remained robust. However, the US real estate crisis impacted the world economy towards the end of the period.
Economic growth in the USA slower
In the euro zone the positive economic trend continued in 2007. The 2.6% growth in gdp was in line with expectations. Particularly pleasing was the upswing in Germany which was driven mainly by exports but also by lively investment activity. The rise in the value of the euro has not significantly hampered export growth so far.
By contrast, the rate of expansion in the USA slowed. The weak housing market brought about by the mortgage crisis has had a noticeable impact on the economy. Japan remained on a moderate growth track thanks to sustained robust demand from abroad despite a temporary slowdown in investment.
The developing countries of Asia, Latin America and Central and Eastern Europe continued to report strong economic growth in 2007. The high rate of expansion in China and India was sustained. In Latin America, the Brazilian economy continued its recovery, aided mainly by strong domestic demand. Russia and the majority of the Central and Eastern European economies also achieved extremely strong growth rates.
Economic conditions in the sectors
The situation was generally encouraging in all important customer sectors. Demand for flat-rolled carbon steel remained at a relatively high level overall. Stainless steel was also in demand despite strong price fluctuations. Activity in the automotive, mechanical engineering and construction sectors picked up on the whole – with some regional differences. Our globally aligned segments were able to benefit from this trend.
Strong demand for carbon steel in Europe
Driven by the global economic boom, the trend on the international steel markets was mostly positive. World crude steel output is expected to increase by 6% to a new all-time high of 1.33 billion metric tons in 2007. China once again proved to be the biggest growth driver. With production growing by 18% to almost 500 million tons, China's share in world steel supply increased to 37%. As growth in domestic demand failed to keep pace, a significant share of surplus production was exported. Since steel imports also slowed, China reinforced its position as the biggest net exporter of steel.
Steel output in the NAFTA region was slightly lower than the year before, with high inventories dampening demand through to mid-year. The European Union reported moderate expansion overall. According to provisional estimates, crude steel production in Germany reached 48.6 million tons, up 3% from 2006. The mills had a virtually full workload up to mid-year; in the 2nd half output was reduced slightly in response to the fall in demand for seasonal and inventory-cycle reasons.
In our key European market, most steel-using industries strongly increased their output again in 2007. This secured high sales volumes and stable to rising prices for producers of carbon steel flat products. However, it also led to a further drastic increase in imports from third countries. Alongside China, now the biggest third-country supplier on the EU steel market, Russia, Turkey, India and Brazil also significantly stepped up their deliveries to the EU in 2007. This resulted in a supply surplus in some areas in the summer months and to temporary price pressure in southern Europe. Inventory surpluses at end consumers and above all distributors caused steel demand to settle at a slightly more moderate level. However, the general economic trend in the steel-using sectors remained robust.
The steel market in North America performed less favorably. In response to weaker demand and excessive inventories at steel users, steel suppliers reduced their output from the second half of 2006. Imports, too, remained lower than the year before. Prices slipped. However, towards the end of the 3rd quarter 2007 there were signs of stabilization, with demand for steel picking up again following the reduction of the inventory surpluses. The dynamic growth of the flat carbon steel market in Asia continued. However, the increase in new capacities – especially in China – accelerated the growth in exports. Measures introduced by the Chinese administration to slow steel exports have so far had no effect.
Strong fluctuations in the stainless market due to nickel prices
In the market for stainless steel flat products, demand from industrial end users in Europe remained high. However, the volume of orders dropped significantly. The reason for this initially was the strong increase in inventory levels at distributors and service centers that took place in the course of 2006 and 2007 in particular as a result of a sharp rise in imports. This led to a distinct drop in ordering activity which was further exacerbated by the nickel price situation.
From the end of 2005 to May 2007, the price of nickel increased by almost 350% to an all-time high of over 50,000 US dollars per ton. As a result, the market price of nickel-bearing stainless steels – which account for around two thirds of the stainless market – almost trebled in this period, causing uncertainty among consumers. In response to the high prices, some customers began to replace chrome-nickel steels with less expensive low-nickel grades. In parallel with the nickel price development, a second factor came into play: third-country imports to Europe, mainly from Asia and in particular China, grew rapidly from the end of 2006. The reason for this was that new capacities built in China caused supply and demand to drift apart.
The reversal in the nickel price trend, which began in early June and saw the nickel price drop temporarily below 30,000 US dollars per ton by September 2007, prompted distributors to reduce the mainly import-related inventory surpluses as quickly as possible. This triggered a slump in prices and a further reduction in orders. As a result, most European producers significantly cut back production in particular in the 3rd quarter 2007.
The situation on the North American stainless market was similar – though less pronounced. Here, too, order intake was down from the previous year. In Asia, especially China, the market situation continued to be characterized by major overcapacity. The raw material price situation also had a negative impact on the ordering behavior of distributors.
Growth in automobile production
The international auto industry continued to grow in 2007. According to estimates, world output increased by 4% to over 72 million cars and trucks. The main growth impetus again came from the emerging markets. China, now the world's third largest auto manufacturer, India and the countries of Central and Eastern Europe reported double-digit growth rates. One in five cars is now produced in one of these three growth regions.
By contrast, production in North America was 3% lower than the year before at 15.5 million vehicles. Sharply increased gasoline prices impacted sales of cars and light trucks. Vehicle output in Brazil rose by 6% in 2007 to 2.8 million units.
The auto market in Western Europe was in good shape, with output in 2007 up by 2% to more than 17.5 million vehicles. German automakers reported above-average growth of 4% to over 6 million vehicles. This is attributable to high exports of cars and continued strong demand for trucks. However, new car registrations were significantly lower, partly as a result of the VAT increase.
Strong growth in engineering
The global mechanical engineering industry remained on growth track thanks to the robust world economy and increased capital spending. In particular in China, but also in many European countries, production of machinery and equipment increased.
German manufacturers in particular profited from high capital spending in numerous countries. As a result of strong domestic and foreign orders, production of machinery and equipment is expected to increase by 11% in 2007. The positive trend also continued in the German plant engineering sector.
German construction industry increases output
The growth in worldwide construction output continued to be driven by Asia and the countries of Central and Eastern Europe in 2007. In the USA a slight downturn was recorded as a result of the weaker housing market.
The upswing in the German construction industry continued in 2007. The main impetus came from commercial construction, thanks to continuing high investment. Overall production growth of 3.5% is expected in 2007.
Thyssenkrupp with record year
| 2005/2006 | 2006/2007 | ||||
|---|---|---|---|---|---|
| Order intake | million € | 50,782 | 54,605 | ||
| Sales | million € | 47,125 | 51,723 | ||
| EBITDA | million € | 4,700 | 5,254 | ||
| Earnings before taxes (EBT) | million € | 2,623 | 3,330 | ||
| Employees (Sept. 30) | 187,586 | 191,350 |
ThyssenKrupp continued to operate successfully in fiscal 2006/2007. The key indicators above show that in a generally favorable economic environment we further improved our performance. Through organic growth, strategic acquisitions and an increased focus on services, we achieved record sales and earnings.
Strong growth in order intake, sales and earnings
Order intake and sales showed a greater improvement in 2006/2007 than we expected a year ago. Order intake climbed to €54.6 billion, 8% higher than a year earlier. All segments reported higher orders, with Technologies, Elevator and Services achieving the highest growth.
Group sales rose by 10% to €51.7 billion. Higher prices for carbon and stainless steel products increased sales at Steel and Stainless. At Technologies sales were higher than the year before despite business disposals and the weak US dollar. Elevator likewise remained on growth track in both new installations and service activities. The Services segment profited from the continued strong performance of the materials markets. While sales at Technologies and Elevator were in line with expectations, Steel, Stainless and Services exceeded their targets.
| 2005/2006 | 2006/2007 | |||
|---|---|---|---|---|
| Steel | 12,087 | 13,209 | ||
| Stainless | 6,437 | 8,748 | ||
| Technologies | 11,366 | 11,523 | ||
| Elevator | 4,298 | 4,712 | ||
| Services | 14,204 | 16,711 | ||
| Corporate | 1,469 | 288 | ||
| Segment sales | 49,861 | 55,191 | ||
| Inter-segment sales | (2,736) | (3,468) | ||
| Group sales | 47,125 | 51,723 |
ThyssenKrupp achieved earnings before taxes of €3,330 million in the year under review - €707 million or 27% higher than the record income of the previous year.
Portfolio further optimized
ThyssenKrupp continued its portfolio optimization process in 2006/2007. Key measures included the streamlining of the Automotive activities, which were integrated into the Technologies segment at October 1, 2006. A central element of this was the sale of all our body and chassis operations in North America, which took place in the 1st quarter of the fiscal year. In addition, Technologies conducted several transactions to streamline its portfolio and expand its core business. Elevator strengthened its global market position with numerous smaller acquisitions. At Services, external growth focused on the foreign markets, in particular in the NAFTA region and Eastern Europe.
ThyssenKrupp also sold a portfolio of 25 commercial real estate assets, including office buildings and other commercially used properties, to a consortium of buyers. In connection with the planned move of ThyssenKrupp AG to the new Quarter in Essen, the real estate package also included the "Dreischeibenhaus" building in Düsseldorf, the current headquarters of ThyssenKrupp until the move to Essen.
Up to the end of the reporting year, we acquired companies with sales of €0.3 billion and disposed of companies with sales of €0.2 billion. Since the merger of Thyssen and Krupp we have therefore sold companies with sales of €9.1 billion and acquired others with sales of €8.2 billion.
Increased number of employees
On September 30, 2007, ThyssenKrupp had a total of 191,350 employees worldwide, 3,764 or 2% more than a year earlier. Overall the services-oriented segments Services and Elevator recorded the largest workforce increases. The number of employees in Germany rose slightly – by 1% - to 84,999. This means that 44% of employees were based in Germany. The number of employees outside Germany increased by just under 3% to 106,351. The expansion of our activities abroad more than offset the loss of employees in connection with the business disposals in North and South America. At the end of September 2007, 24% of employees worked in European countries outside Germany and 16% in the NAFTA region.
Expectations exceeded
Our business performance in 2006/2007 exceeded the expectations we had at the time of writing last year's annual report in mid-November 2006. Sales were 10% higher than our original €47 billion target. Sustainable earnings before taxes also exceeded our planned figure of €2.5 billion by a considerable 33%. Alongside the good steel market, successful product developments played a key role in this. International demand for our products and services was stronger than expected. Our Steel and Stainless segments delivered an excellent performance on the global markets; prices for stainless steel only began to fall late in the year and therefore did not impact earnings until the final quarter. Technologies significantly exceeded its income target. Elevator's earnings – before the EU fine – were steady, and Services was exceptionally strong in all business activities. Another reason for our higher-than-planned earnings was that numerous further measures unlocked unforeseen profitability reserves on the expense and income side and increased the value of the Company. As soon as we were able to identify these positive developments with sufficient certainty in the course of the year, we raised our targets accordingly and communicated our higher expectations in the interim reports.
Key sales markets and competitive situation
The EU region was the main market for products and services of ThyssenKrupp, accounting for 67% of sales, around half of these in Germany. 17% of our sales were generated with customers in the NAFTA region. Sales in Asia (including the Middle East) and South America still account for relatively low shares of 7% and 3% respectively. The chart below provides more details.
Many of our products occupy world leading positions on their markets thanks to their advanced technology, cost-efficiency and full product lifecycle support. In the past fiscal year we again put everything into maintaining and where possible expanding these market positions.
Marketing close to customers
We use the full range of sales tools for the international marketing of our products and services. As well as optimizing product design to meet the needs of specific countries and customers, we offer competitive prices, an efficient sales organization and individual advice to customers. Other measures employed to advertise our capabilities include product-related communications and advertising, international trade shows and presentations.
While complying with the Group's standard corporate design principles, the individual companies in the segments operate independently on the markets and so can respond swiftly and flexibly to market changes and customer requirements. Because we see it as a key feature of our marketing activities, we foster this closeness to customers through intensive communications, systematic quality improvements and an ongoing innovation process.
Income and dividend
Record earnings of €3.3 billion
In fiscal 2006/2007 ThyssenKrupp achieved record earnings of €3,330 million. Compared with the previous year, pre-tax profit increased by €707 million or 27%. The biggest contribution to earnings came from the Steel segment. With a high level of shipments, cost-related steel price increases and efficiency improvements, the segment further improved its profits. Stainless almost doubled its income, mainly as a result of higher prices for stainless steel and high-performance materials. Technologies likewise achieved significantly higher profits, thanks in particular to an encouraging performance in mechanical components and industrial equipment. Due to the fine imposed by the EU Commission for alleged anticompetitive behavior at national level in the Benelux countries and Germany on the market for elevators and escalators, Elevator reported a loss. Excluding this effect, Elevator almost equaled its prior-year profit. Against the background of continued strong demand and a successful business expansion, Services returned a record profit.
| 2005/2006 | 2006/2007 | |||
|---|---|---|---|---|
| Steel | 1,406 | 1,662 | ||
| Stainless | 423 | 777 | ||
| Technologies | 410 | 544 | ||
| Elevator | 391 | (113) | ||
| Services | 482 | 704 | ||
| Corporate | (446) | (205) | ||
| Consolidation | (43) | (39) | ||
| Earnings before taxes (EBT) | 2,623 | 3,330 |
While sales were 10% higher, the cost of sales rose by only 8%; as a result gross margin improved from 17% to 18%. Administrative and selling expenses increased more slowly than sales, rising by 4% in each case.
Other operating income decreased by €72 million. The main reason for this was that the prior-year figure contained the €153 million break fee from the terminated acquisition of Dofasco, while this year's figure only includes income from the sale of various real estate assets as part of the concentration of ThyssenKrupp's administrative sites in Germany in the amount of €119 million. In addition, income from insurance recoveries decreased by €18 million. Of the €490 million increase in other operating expense, €480 million was due to the antitrust fine imposed by the EU on ThyssenKrupp Elevator.
Despite the rise in interest rates on the markets relevant to us and an increase in funds employed during the fiscal year, net interest expense improved by €23 million. This is mainly because most of the Group's gross debt is subject to fixed interest rates, the repayment of old credits bearing relatively high interest was recognized in income, and the income effect of lower cash deposits compared with the previous year was largely eliminated by rising interest rates.
Compared with the previous year, income tax expenses increased by €221 million to €1,140 million. The tax rate changed only slightly from 35% to 34%. This is partly due to the fact that the tax-reducing effects of the corporate tax reform in Germany were largely offset by the non-deductibility of the EU fine.
Net income amounted to €2,190 million, compared with €1,704 million in the prior year. This represents an increase of around 28%.
Minority interest in net income increased to €88 million from €61 million a year earlier. This was due to the improved earnings situation at companies with non-Group minority interests. After deducting minority interest, earnings per share rose from €3.24 in the prior year to €4.30 in the reporting year. Throughout the year under review the number of shares outstanding was 488,764,592. In the previous year the weighted average number of shares outstanding was 507,731,743. This included both the increase from the sale of treasury stock in November 2005 and the decrease from the repurchase of treasury stock in July and August 2006.
Income of ThyssenKrupp AG
The net income of ThyssenKrupp AG in the reporting year according to HGB (German GAAP) amounted to €309 million, compared with €1,118 million the year before.
Income from investments decreased by €465 million to €666 million. Income from profit transfer agreements matched the prior-year level. The Steel segment made a particularly significant contribution to earnings on account of its extremely positive performance. However, the increased loss transfer as a result of the fine imposed by the EU Commission on ThyssenKrupp Elevator reduced earnings. Lower profit distributions by the German subsidiaries was a key factor in the reduction of income from investments.
The rise in other operating income resulted in the amount of €257 million from higher intercompany tax allocations in connection with the transfer of income from subsidiaries; on top of this came the sale of the headquarters building in Düsseldorf.
Administrative costs showed no significant change from the previous year, while an allocation to the special item with reserve elements posted under other expenses was €70 million higher than the year before.
The €207 million increase in interest expense reflects payments into the additional paid-in capital of affiliated companies and interest rate changes on the money and capital mark
After these effects, income from ordinary activities amounts to €695 million, compared with €1,179 million the year before.
In the previous year, extraordinary income mainly included the break fee of €153 million from the terminated takeover of Dofasco. In 2006/2007 no extraordinary items were reported.
Income tax expense amounted to €386 million and is influenced by corporate and trade tax for 2006/2007. The trade tax loss carryforward still existing from the previous year and increased tax refunds for previous years are included in this figure.
After income tax, net income amounted to €309 million. Taking into account transfers from retained earnings totaling €334 million and the income carried forward from the previous year of €26 million, unappropriated net income is €669 million. Subject to the approval of the Annual General Meeting, this amount is to be used to distribute a dividend of €635 million. The balance of €34 million is to be carried forward.
€1.30 dividend per share
The legal basis for the dividend payment is the HGB unappropriated net income of ThyssenKrupp AG in the amount of €669 million (prior year €548 million). It comprises the HGB net income of ThyssenKrupp AG in the amount of €309 million (prior year €1,118 million) plus the €334 million taken from retained earnings (prior year: €570 million transferred to retained earnings) and the income carried forward from the previous year of €26 million.
The Executive Board and Supervisory Board will propose to the Annual General Meeting the payment of a dividend of €1.30 per share (prior year €1.00 per share) and the carryforward of the balance of €34 million. Should the number of shares eligible for dividend distribution change before the date of the Annual General Meeting, the proposed dividend distribution will be adjusted accordingly. Therefore, of the €669 million unappropriated net income, a total of €635 million is to be used to pay a dividend on the 488,764,592 shares eligible for dividend payment as of September 30, 2007.
The financial statements of ThyssenKrupp AG are presented in abbreviated form in the following table:
| Sept. 30, 2006 | Sept. 30, 2007 | |||
|---|---|---|---|---|
| Intangible assets | 29 | 50 | ||
| Property, plant and equipment | 149 | 103 | ||
| Financial assets | 11,120 | 16,453 | ||
| Fixed assets | 11,298 | 16,606 | ||
| Receivables from non-consolidated subsidiaries | 6,943 | 9,625 | ||
| Other receivables and other assets | 103 | 312 | ||
| Securities | 684 | 698 | ||
| Cash and cash equivalents | 3,377 | 2,481 | ||
| Operating assets | 11,107 | 13,116 | ||
| Assets | 22,405 | 29,722 | ||
| Stockholders’ equity | 6,355 | 6,175 | ||
| Special item with reserve elements | 58 | 91 | ||
| Accrued liabilities | 436 | 526 | ||
| Bonds | 1,500 | 1,500 | ||
| Liabilities to financial institutions | 502 | 298 | ||
| Liabilities to non-consolidated subsidiaries | 13,261 | 20,853 | ||
| Other liabilities | 293 | 279 | ||
| Liabilities | 15,556 | 22,930 | ||
| Stockholders’ equity and liabilities | 22,405 | 29,722 |
| 2005/2006 | 2006/2007 | |||
|---|---|---|---|---|
| Income from investments | 1,131 | 666 | ||
| Other operating income | 649 | 1,006 | ||
| Other expenses and income | (439) | (608) | ||
| Net interest income/expense | (162) | (369) | ||
| Income from ordinary activities | 1,179 | 695 | ||
| Extraordinary income/loss | 113 | 0 | ||
| Income taxes | (174) | (386) | ||
| Net income | 1,118 | 309 | ||
| Transfer from retained earnings | 0 | 334 | ||
| Allocation to retained earnings | (570) | 0 | ||
| Carryforward | 0 | 26 | ||
| Unappropriated net income | 548 | 669 |
Capital expenditures
In 2006/2007 ThyssenKrupp increased its capital expenditures by 44% to €3,001 million. €2,873 million was spent on property, plant and equipment and intangible assets, while the remaining €128 million was used for acquisitions. Capital expenditure was €1,646 million higher than depreciation (€1,355 million).
| 2005/2006 | 2006/2007 | |||
|---|---|---|---|---|
| Steel | 603 | 1,659 | ||
| Stainless | 230 | 328 | ||
| Technologies | 600 | 581 | ||
| Elevator | 164 | 122 | ||
| Services | 393 | 282 | ||
| Corporate | 88 | 131 | ||
| Consolidation | (1) | (102) | ||
| Group | 2,077 | 3,001 |
The investments support our strategic target of sustainable and profitable growth. Around two thirds of the funds went into the expansion of our production capacities worldwide. Worthy of special mention in this context are the investments made in 2006/2007 in the construction of the new steel mill in Brazil. In addition, all segments invested substantial amounts in the modernization of existing facilities and plants.
Further information can be found in the notes to the consolidated statement of cash flows in the section "Financial position".
Procurement: Raw material prices trending upward
At €33.0 billion, materials expense amounted to 64% of sales in the reporting period. Compared with the year before, we spent 11% more on raw materials, other products and services. The rise is attributable to higher raw material prices and increasing expenses for outsourced products. Although markets were tight in part, material supplies were secured at all times.
| 2005/2006 | 2006/2007 | |||
|---|---|---|---|---|
| Steel | 7,066 | 7,650 | ||
| Stainless | 4,909 | 6,783 | ||
| Technologies | 6,966 | 7,024 | ||
| Elevator | 1,406 | 1,577 | ||
| Services | 11,123 | 13,223 | ||
| Corporate | 909 | 186 | ||
| Materials expense of segments | 32,379 | 36,443 | ||
| Consolidation | (2,701) | (3,447) | ||
| Group | 29,678 | 32,996 |
Brazil – main supplier of iron ore
The situation on the global iron ore market tightened further in 2007 on account of the strong growth in steel production. Demand for seaborne iron ore increased by 10% to around 800 million metric tons, so that despite a number of expansion projects, ore suppliers had difficulty keeping up with demand. Furthermore, some of the planned expansion projects were delayed because plant and equipment suppliers had full workloads and were therefore unable to deliver. Against this background, fine ores were 9.5% more expensive. The price of pellets of the leading Brazilian grade increased by 5.3%. In addition, ocean shipping rates for ore shipments increased.
In the reporting period the Steel segment purchased 16.1 million tons of iron ore, of which almost 10 million tons in Brazil. In second place was Canada (2.6 million tons) followed by Australia (just under 1 million tons). Smaller volumes were purchased in Africa and Sweden.
While iron ore prices increased, coking coal became less expensive thanks to the improved supply situation. We were able to achieve a price reduction of around 16% for high-quality grades on the international market. For PCI coal, however, no price reductions were available – mainly due to the strong demand for coal for power plants. The sharp increase in ocean shipping rates also impacted our input costs for coal.
Internationally traded blast furnace coke has increased in price significantly since the end of 2006. At the end of the fiscal year, the price of Chinese blast furnace coke was 325 US dollars before adding the freight costs to Germany. However, in addition to the high demand, the Chinese export tax on coke and other fuels caused prices to rise.
Sharp price increases for alloying metals
On the procurement markets for alloys and above all for metals, prices fluctuated sharply. Producers increased their prices in some cases by over 50%, claiming continued high demand in Europe and Asia as their reason. This was particularly true of bulk alloys such as ferromanganese. Anti-dumping measures by the EU Commission – e.g. for ferrosilicon – drove prices even higher.
Exchange-listed metals such as zinc, tin and copper and in particular nickel, which is important in stainless production, were likewise subject to large price fluctuations. After the price of nickel had already increased by over 350% in the previous three years to around 30,000 US dollars per ton at the beginning of the fiscal year, in the further course of the year the price for delivery in three months climbed to 51,000 US dollars in mid-May 2007. It then fell within a few weeks to below 28,000 US dollars. From mid-August the price began to rise again and from mid-September was slightly above 30,000 US dollars. The surcharge for immediate delivery was at times up to almost 4,000 US dollars per ton.
Price jumps were also observed for the alloying metal chromium, which is also important for the production of stainless steel. After falling slightly in the 2nd quarter of the reporting year, the price increased significantly in the 3rd quarter to reach an all-time high of 2,200 US dollars per ton in the 4th quarter. A key reason for this was high demand from China. By contrast, prices for ferromolybdenum remained relatively stable within a range of 73 to 77 US dollars per kilogram, following previous years in which the price of this alloying metal had also increased by around 400% to over 90 US dollars per kilogram.
The strong worldwide steel market made scrap a sought-after raw material. On average, the price of grade 2 unalloyed scrap was 17% higher than the year before in Germany. Prices fluctuated between €222 and €253 per ton. While rising nickel prices pushed up the price of alloyed scrap, they were also responsible for significantly improving the availability of scrap. This price trend was subsequently broken when world production of nickel-bearing stainless steels was reduced – alloyed scrap is only used for these steels. When nickel prices fell from June 2007, the scrap price also decreased.
The market for supplies and spare parts was characterized by high workloads at suppliers. Only through early planning were we able to prevent further price increases and supply bottlenecks. In the services sector, too, prices were largely stable. On the construction market we even succeeded in averting price increases despite higher material costs.
Capacity utilization was just as high for suppliers of castings and forgings as for businesses supplying, for example, power plant construction companies. These include manufacturers of turbines, pumps, boilers and high-pressure equipment as well as powertrain and transmission producers. In some cases these product groups were subject to significant price increases and long delivery periods.
The purchasing initiative under our value-enhancement program ThyssenKrupp best was successfully continued in the reporting year. Over 500 employees from Europe, North America, Brazil and Asia have now been trained to use the methodology and tools made available by the Group's headquarters. More information on the projects and significant cost savings achieved as a result of the program can be found in section Business management – Goals and strategy.
Tender volume quintupled
We strongly expanded the ThyssenKrupp procurement platform to support global purchasing in the year under review. The strategic sourcing module accessible via the internet facilitated worldwide requests for quotes and auctions. Online requests for quotes have already been successfully used by Group subsidiaries in Germany, Liechtenstein, France, Italy, the United Kingdom and the USA. The total tender volume quintupled against the previous year, reaching €2.5 billion.
Our second program module – Catalog Ordering – also further established itself internationally. More than 3.3 million items can now be purchased online. This significantly reduces the costs of purchasing transactions for both us and our suppliers.
We also expanded our global strategic supplier management system. More than 70 Group subsidiaries in Europe, the NAFTA region and Asia assessed over 1,000 suppliers on the basis of standardized methods and criteria. The assessments were made jointly by all departments and employees working with the suppliers. All suppliers and their assessments are fed into a supplier database which can be accessed online by our Group subsidiaries.
Higher freight costs
Freight costs are a major factor for international purchasing. Limited ocean shipping capacities pushed prices up considerably. Furthermore, the booming market for freight to the USA and limited handling capacities of the busier ports are slowing shipping times. In the area of air freight, we achieved price reductions by consolidating orders under framework agreements. However, road and rail freight rates increased.
The central fleet management system proved its worth internationally, reducing procurement costs in Germany, France, Switzerland, Austria and Liechtenstein. In addition, by consolidating volumes we also ordered vehicles in Italy via the European agreements with auto manufacturers and leasing companies. As a result we achieved significantly better conditions. We also utilized synergy potential for vehicle discounts and lease conditions in Hungary, Romania and Sweden. In the future a centralized vehicle damage management system will enhance cost transparency and simplify handling in the event of damage to vehicles.
Energy: oil price reached all-time high
The price of oil was very erratic in 2006/2007. Due to the mild winter it initially fell temporarily to an unusually low level. However, over the course of time the price of crude oil reached an all-time high of over 80 US dollars per barrel. As a result, the price of natural gas also increased.
At the beginning of the reporting year, the gas suppliers terminated the existing agreements and at the same time introduced a universal increase in the base price, claiming higher production prices in the Netherlands, Norway and Russia. The separation of gas companies into sales and transmission units now called for by the German Energy Industry Act has not yet led to lower costs for customers of the natural gas transmission grid.
Increasing electricity costs
Electricity costs climbed further even though we staggered our purchases and exploited favorable phases in the market. Our existing long-term supply agreements could not prevent this situation. A key cost-driving factor was the further increase in surcharges to subsidize renewable energies. In addition, the electricity tax and the subsidization of combined heat and power plants contributed to the rising cost of electricity. Only a few major electricity consumers in the Group benefited from the special rules for energy-intensive enterprises.
Environmental protection
Environmental protection: responsibility for climate and resources
Climate protection, sustainability and resource conservation are central to ThyssenKrupp's sense of responsibility for the environment. The Group spent €520 million on operating pollution control equipment in the reporting year. In addition, the segments took numerous measures to reduce their consumption of energy and raw materials and to contribute to climate protection in their own and at their customers' plants. As raw material and energy prices are high, these measures also helped reduce costs.
| 2002/2003 | 2003/2004 | 2004/2005 | 2005/2006 | 2006/2007 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Air pollution control | 101 | 124 | 141 | 141 | 183 | |||||
| Water protection | 161 | 177 | 165 | 168 | 204 | |||||
| Noise control/landscape protection | 13 | 12 | 15 | 16 | 24 | |||||
| Recycling | 60 | 64 | 81 | 87 | 109 | |||||
| Total | 335 | 377 | 402 | 412 | 520 |
The Steel segment developed the unique OxyCup® process which allows pig iron to be recovered from previously unrecyclable iron-containing steel mill waste. This protects raw material resources and saves costs. In extensive research work, the engineers also developed to market maturity a process for producing high-quality building material from shaft furnace slag. Instead of being taken to landfill sites, practically all former waste materials can now be recycled into key products for new customers. With this resource-saving waste disposal concept, steel is an environmentally friendly material right from production.
We prepared the permit applications for the construction of our new production complex in the USA in the record time of just six months and submitted them to the Alabama environmental authorities in good time. After intensive contacts, the main permits had already been granted by fall 2007. The positive response of the local population additionally accelerated the approval process. Four events held to inform the public about the project were attended by over 1,750 interested residents, potential service providers and future employees.
We also use our extensive expertise and innovative products to support our customers in environmental protection. Examples include the modern coking plants from Technologies which are in service throughout the world and reduce otherwise inevitable dust and gas emissions. These modern and environmentally friendly facilities are in demand in particular in China, South Korea and Taiwan. The use of large-capacity coke ovens reduces space requirements and operating costs. With the new PROven® system, the usual emission of pollutants from the oven closures and during the oven charging process is avoided. The modern CSQ (Coke Stabilization Quenching) process with an integrated two-stage particle separator is used for coke cooling. A combination of various processes developed by us also guarantees optimum desulfurization of the coke oven gas and the recovery of high-purity sulfur.
Used as facade elements in steel construction, new solar thermal collectors from the Steel segment also supply environmentally friendly energy. We developed the new solar power system together with various European partners as part of the Solabs® project. Attached to the exterior facade, the solar thermal collectors produce energy without taking up extra space.
Developed by scientists and engineers at Technologies to reduce greenhouse gas emissions, the EnviNOx® process is meeting with increasing interest worldwide. Ten facilities have now been fitted with this technology or are under construction worldwide. The process uses a catalyst to convert ecologically damaging laughing gas and other nitrous oxides occurring in the production of nitric acid into the natural components of air – nitrogen, oxygen and water. These ten facilities alone will provide a reduction in greenhouse gas emissions equivalent to reducing CO2 emissions by 7.5 million tons per year. This is roughly the amount of carbon dioxide produced each year by 2 million cars with an average mileage of 20,000 km.
Summarized assessment of the fiscal year
The past fiscal year was the most successful in the history of our Group. ThyssenKrupp delivered another outstanding performance, with all key performance indicators at a new record high. All five segments improved their global market positions, in part significantly, and expanded their business. The basis for this is the wide range of products and services which have three things in common – they offer high quality and advanced technology and are tailored to customers' requirements. Our internal programs to enhance performance, productivity and efficiency also bore fruit, especially the Groupwide value enhancement program ThyssenKrupp best.
ThyssenKrupp is a focused conglomerate supported by three pillars: Steel, Capital Goods and Services. These three business areas, to which the Group's five segments are allocated, are the basis of our business model; they also stand for the past and future success of our Company.