- General economic conditions
- Economic conditions in the sectors
- Thyssenkrupp held up well
- Sales markets and marketing
- Capital expenditures
- Procurement: Further increase in volumes
- Energy: Prices at an all-time high
- Summarized assessment by the Executive Board of business performance and target achievement
Group review
ThyssenKrupp had a successful year in fiscal 2007/2008. In a more difficult market environment, our performance matched and in part exceeded our expectations. Orders and sales were up from the previous year. At €3.1 billion, earnings before taxes were higher than forecast. ThyssenKrupp once again earned more than its cost of capital and with ROCE of 18.3% generated positive EVA.
General economic conditions
The economic environment deteriorated perceptibly in the past fiscal year. The international financial crisis that originated in the US mortgage market increasingly impacted the markets for goods and services. Sharp rises in energy and raw material prices and growing inflation rates also had a negative effect. According to current estimates, world GDP increased by 3.7% in 2008 – less than expected a year ago – compared with 5% in 2007.
Economic downturn in the industrialized nations
The economic slowdown was particularly noticeable in the industrialized countries, some of which moved close to a recession. In the USA, the continuing crisis on the housing market, a decline in business spending and weak private consumption meant that domestic demand was virtually stagnant. However, exports increased significantly on the back of the weak US dollar.
In the euro zone, the economic situation also clouded. After a strong start to 2008, economic growth slowed in the further course of the year to just 1.2% overall. The German economy performed slightly better. Higher inflation dampened private consumption, while business spending and exports rose modestly.
The emerging markets of Asia, Latin America and Central and Eastern Europe again recorded strong growth in 2008, though the pace of expansion slowed from the prior year. China and India continued to report high growth rates thanks to robust domestic demand. The Brazilian economy also expanded even though conditions for exports were more difficult for exchange-rate reasons. Russia profited in particular from dynamic growth in consumer and capital spending, and most other countries of Central and Eastern Europe remained on growth track.
Gross domestic product 2008* Real change versus previous year in %
Economic conditions in the sectors
There was a mixed picture in our important customer markets. Demand for carbon steel flat products remained relatively high and prices rose. Demand for stainless steel in the core European markets slowed significantly from the middle of the 2nd calendar quarter, putting increasing pressure on prices. Activity in the automotive and construction sectors varied by region – growth in the emerging markets, stagnation in the industrialized countries. The mechanical engineering sector continued to expand, albeit at a slower place.
Sustained strong demand for flat-rolled carbon steel
Despite the weakening of the world economy, the situation on the international steel markets was characterized by continuing growth. Global demand was particularly strong in the first half of the calendar year, with supply scarce in part due to raw material shortages. Steel prices increased, driven by unusually drastic rises in raw material and energy costs. Demand eased slightly in the further course of the year.
According to provisional estimates, global crude steel output increased by around 4% in 2008 to reach a new record level of 1.4 billion metric tons. China, which expanded its share of world steel production to 37%, made a major contribution to this with production growth of 6%, which was however lower than in prior years. Most other regions also recorded production increases, while output in the EU fell just short of the high year-earlier volume. German steel production was lower at 47.5 million tons.
Demand on the European flat-rolled carbon steel market was high in the first half of 2008 for economic and inventory cycle reasons. With third-country imports perceptibly lower than a year earlier, European suppliers were able to expand their EU sales, regain market share and push through the price increases made necessary by rising raw material costs. Orders declined in the summer months due to the increasing clouding of the economic picture, seasonal effects and high inventories at end users and distributors. Although import supply increased again, this has so far had no impact on European steel prices.
On the North American steel market, demand from the automotive and construction sectors fell sharply. Despite this American steel producers reported higher sales volumes and price increases in the first half of 2008, as imports remained low and the previous heavy destocking came to an end. From mid-year, however, prices came under pressure and began to fall.
The emerging Asian countries once again reported above-average growth in demand and supply in 2008. Here too, however, the pace of demand slowed considerably from mid-2008, leading to significant price reductions above all in China. Against this background, Chinese steel producers stepped up their exports again. In the first half of the year, exports had decreased due to strong growth in domestic demand and export controls introduced by the Chinese administration.
Sales by customer group 2007/2008 in %
Stainless steel: Strong demand, prices under pressure
Worldwide demand for stainless steel flat products remained high. According to provisional estimates, global consumption increased by around 4.5% in 2008, driven mainly by China, whereas growth in Western Europe and the NAFTA region was no higher than 1.5% to 2%.
On the European market, demand was initially stable in 2008. After orders and deliveries dropped to a very low level in the prior year due to massive imports from Asia, high inventories at stock-holding distributors and sharp fluctuations in the price of the alloying element nickel, the situation improved perceptibly in the 4th calendar quarter 2007, only to deteriorate again significantly from the middle of the 2nd calendar quarter 2008. This was mainly due to the recovery in demand from distributors, gradually rebuilding the inventories they had run down due to the declining nickel price. European producers succeeded in raising base prices again through to the 2nd calendar quarter 2008. After that, however, the traditionally weak summer months and the clouding of the economic outlook resulted in a renewed sharp decline in base prices, and order intake decreased significantly.
On average, third-country imports were lower than a year earlier, mainly due to a decrease in imports from Asia, particularly China, Taiwan and Korea. However, imports from these countries started to rise again continuously from the beginning of the 2nd quarter 2008, gaining momentum later as a result of the increasing underutilization of Chinese production capacities.
Alloy prices again significantly affected customer behavior. Having reached an all-time high in mid-2007, the nickel price declined sharply and by mid-March 2008 had stabilized at a relatively low level of 27,000 – 33,000 US dollars per ton, which initially had a positive impact on demand. A renewed downward trend from early May caused stainless customers to once again adopt a wait-and-see approach. By contrast, chromium prices climbed substantially due to the scarcity of global supply. Whereas for chromium-nickel steels (austenitics) this increase was offset by the lower nickel price, the rising price of both chromium and steel scrap had a noticeable impact on chromium steels (ferritics). The alloy surcharge for these grades increased by more than 100% in the reporting year.
In the NAFTA region, the general weakness of the economy subdued demand for stainless steel, leading to a decline in volumes and base prices. In China and other Asian markets, demand for stainless steel products remained high, but high inventories and overcapacities at producers prevented an improvement in prices, which were down from the prior year.
In the market for nickel alloys, the initial rise in alloy prices and the strength of the euro against the US dollar negatively impacted the competitiveness of European producers. In addition, competitors with production facilities in the US dollar zone increasingly forced their way onto the European markets.
Automobile production only higher in emerging markets
The global auto market hardly grew at all in 2008. According to provisional estimates, production rose by less than 1% to just under 74 million cars and trucks. While output in Western Europe and North America was in part significantly lower, the majority of the emerging markets in Central and Eastern Europe and Asia reported strong growth. In these regions, vehicle production increased by an average of 10%, with the highest rates recorded in India, China and Russia.
The North American markets showed the largest declines. Increasing financing problems and at times sharply rising gasoline prices caused sales to slump. High-fuel-consuming light trucks such as sport utility vehicles and pick-up trucks were hit particularly hard. According to initial estimates, output was down by 13% to 13.1 million vehicles. The automobile market in Brazil remained encouragingly positive; production rose by 10% to 3.2 million vehicles in 2008.
In Western Europe, the auto market declined slightly, with output down 3% to 17.3 million units. At 6.1 million vehicles, German manufacturers fell just short of the prior-year level. Domestic demand was stable, while passenger car exports softened slightly. Truck production matched the high prior-year level.
German engineering sector still strong
The clouding of the economic outlook and the decline in capital spending also impacted growth in the global mechanical engineering industry, above all in the USA. In China, the pace of expansion slowed, but growth rates still remained high.
In Western Europe, activity in the mechanical engineering sector cooled. In Germany, orders in 2008 fell short of the high prior-year level, but thanks to strong orders in hand output rose by 6%. The German plant engineering sector once again reported strong demand.
Growth in construction industry in Eastern Europe and Asia
Growth in the global construction sector continued to be driven by the emerging markets of Asia and Central and Eastern Europe. India and China reported double-digit growth rates. In the USA output declined in 2008 as a result of the real estate crisis. In some Western European countries, the construction boom also came to an end.
Output in the German construction industry was only slightly higher in 2008 than a year earlier. The 1% increase in production was mainly due to higher demand from the commercial building segment.
Thyssenkrupp held up well
| 2006/2007 | 2007/2008 | |||||
|---|---|---|---|---|---|---|
| Order intake | million € | 54,605 | 55,205 | |||
| Sales | million € | 51,723 | 53,426 | |||
| EBITDA | million € | 5,254 | 4,976 | |||
| Earnings before taxes (EBT) | million € | 3,330 | 3,128 | |||
| Employees (Sept. 30) | 191,350 | 199,374 |
ThyssenKrupp held up well in a more difficult market environment. Our high-quality, high-tech, custom-tailored products and services formed the basis for an overall successful fiscal year 2007/2008. Earnings before taxes were higher than expected a year ago. The Executive Board and Supervisory Board will propose the payment of a dividend of €1.30 per share to the Annual General Meeting in January 2009.
Orders and sales higher
Although the economic slowdown was more severe than predicted, order intake in 2007/2008 was in line with our expectations and at €55.2 billion was 1% higher than a year earlier. The Steel, Elevator and Services segments recorded higher orders, while there were decreases at Technologies and Stainless.
Group sales rose by 3% to €53.4 billion and were thus higher than expected. Only Stainless recorded lower sales due to declining stainless steel prices. By contrast, Steel achieved better prices and higher sales. At Technologies, the continuing good project situation in plant construction more than offset the negative impact of disposals and exchange rate trends. Elevator also expanded its business, more than compensating for negative exchange rate effects. Services profited above all from the strong materials market in the reporting year.
| 2006/2007 | 2007/2008 | |||
|---|---|---|---|---|
| Steel | 13,209 | 14,358 | ||
| Stainless | 8,748 | 7,420 | ||
| Technologies | 11,523 | 12,412 | ||
| Elevator | 4,712 | 4,930 | ||
| Services | 16,711 | 17,336 | ||
| Corporate | 288 | 124 | ||
| Segment sales | 55,191 | 56,580 | ||
| Inter-segment sales | (3,468) | (3,154) | ||
| Group sales | 51,723 | 53,426 |
Earnings above expectations
In the year under review, ThyssenKrupp generated earnings before taxes and nonrecurring items, including pre-operating expense for the steel mills in Brazil and the USA, of €3.5 billion, thus exceeding the earnings forecast which we raised most recently in August 2008. As expected, this fell short of the prior-year figure, which was boosted by exceptionally high demand for carbon steel flat products and very high base prices for stainless steel. The impact on earnings of falling prices for certain raw materials, in particular nickel, and declining selling prices for stainless steel products was cushioned in the reporting period by the use of hedging instruments.
Despite returning a lower profit, the Steel segment once again made the biggest contribution to earnings. Shipments were virtually unchanged, but the significant rises in raw material costs could not be passed on in full in our prices to customers. Earnings were also impacted by the pre-operating costs of the new steel plants in Brazil and the USA as well as restructuring charges at Metal Forming. Following record earnings in the prior year, income in the Stainless segment was down sharply. Key factors in this were a decline in orders and shipments in the course of the year as well as significantly lower base prices. Technologies reported record profits, thanks in particular to strong business in plant engineering and components for the construction and automotive industries. Elevator achieved an improvement in its operating earnings. Against the background of a strong materials market, Services exceeded the prior year's record earnings.
| 2006/2007 | 2007/2008 | |||
|---|---|---|---|---|
| Steel | 1,662 | 1,540 | ||
| Stainless | 777 | 126 | ||
| Technologies | 544 | 741 | ||
| Elevator | (113) | 434 | ||
| Services | 704 | 750 | ||
| Corporate | (205) | (417) | ||
| Consolidation | (39) | (46) | ||
| Earnings before taxes (EBT) | 3,330 | 3,128 |
Components of earnings
At €53.4 billion, sales in the reporting period were €1.7 billion or 3% higher than a year earlier. By comparison, the cost of sales rose disproportionately by €1.9 billion or 4% to €44.2 billion. The greater part of this increase (€1.5 billion) was due to higher materials expenditure as a result of rising raw material and energy costs; in addition, the personnel expense included in the cost of sales was up €172 million or roughly 3%. Overall, gross margin decreased from 18% to 17%.
Despite our business expansion, selling expenses in 2007/2008 were level with the prior year. The €245 million increase in general administrative expenses was largely attributable to project expense for the construction of the steel plants in Brazil and the USA. The €295 million decrease in other operating income was mainly due to lower insurance recoveries (€154 million) and lower proceeds from disposals of property, plant and equipment and investment property (€115 million). The €351 million decrease in other operating expense was due to the fact that the prior-year figure contained the €480 million EU antitrust fine on ThyssenKrupp Elevator and €60 million in goodwill impairment charges. Running counter to this was a €94 million increase in provisions for restructurings, mainly relating to Metal Forming in the Steel segment, as well as higher research and development costs (€23 million) and increased losses from the disposal of property, plant and equipment (€19 million). The €64 million rise in proceeds from disposals of consolidated companies was largely attributable to the sale of the precision forging operations and Nobiskrug in the Technologies segment during the reporting period.
Financial income improved by €101 million, due mainly (in the amount of €80 million) to the increased capitalization of interest cost during the construction of the new steel mill in Brazil. In addition, the €49 million improvement in income from investments accounted for by the equity method as a result of the positive business performance was set against a €46 million decline in interest income, particularly as a result of the increase in net financial debt.
Income taxes were €288 million lower, in connection with a reduction of the tax rate from 34% to 27%. The decrease in the tax rate was attributable to the reduction in German tax rates and an improvement in the tax situation outside Germany. After deducting tax expenses, net income was €86 million higher at €2,276 million. Deducting the minority interest in net income of €81 million, earnings per share rose by around 7% from €4.30 to €4.59, the highest level since the merger of Thyssen and Krupp in 1999.
Income of ThyssenKrupp AG
The net income of ThyssenKrupp AG in the reporting year according to HGB (German GAAP) amounted to €1,175 million, compared with €309 million the year before.
Income from investments increased by €1,196 million to €1,862 million. Income from profit transfer agreements was higher than a year earlier. The Steel, Technologies and Services segments returned significant profits, with Steel once again delivering the biggest earnings contribution. Loss transfers were lower in 2007/2008 as the prior-year figure included the antitrust fine imposed by the EU Commission on ThyssenKrupp Elevator. Income from investments was €412 million, compared with €173 million in the prior year.
The €143 million reduction in other operating income was mainly the result of the €196 million decrease in intercompany tax allocations in connection with the transfer of income from subsidiaries, a €60 million reduction in the disposal of property, plant and equipment, and €46 million less from the reversal of the special item with reserve elements. Running counter to this was a €134 million increase in the carrying value of an investment and the charging on of license fees in the amount of €14 million.
The treasury shares included in operating assets on September 30, 2008 were valued at the stock market price on the balance-sheet date. As a result, a €505 million writedown was recognized in the item "Writedowns on financial assets and securities classed as operating assets".
Administrative costs changed only slightly compared with the prior year. Lower personnel expense was offset by increased expenditure for services and promotional measures.
The interest expense of €381 million reported in the year under review reflects payments into the additional paid-in capital of affiliated companies and interest rate changes on the money and capital markets.
After the aforementioned effects, income from ordinary activities was €1,364 million, compared with €695 million a year earlier.
The decrease in tax expense compared with the prior year was mainly due to the necessary writedown of the purchase costs for treasury stock to the market value on the balance-sheet date, which is also valid for tax purposes.
After income tax, net income amounted to €1,175 million. Taking into account transfers to reserves for treasury shares of €532 million, transfers to retained earnings of €8 million and the income carried forward from the previous year of €34 million, unappropriated net income was €669 million. Subject to the approval of the Annual General Meeting, this amount is to be used to distribute a dividend of €603 million. The balance of €66 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 also €669 million). It comprises the HGB net income of ThyssenKrupp AG in the amount of €1,175 million (prior year €309 million) less transfers to retained earnings of €8 million (prior year transfer from retained earnings of €334 million) and to reserves for treasury stock of €532 million plus the income carried forward from the prior year of €34 million.
The Executive Board and Supervisory Board will propose to the Annual General Meeting the payment of a dividend in the amount of €1.30 (prior year €1.30) per share and the carryforward of the balance of €66 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 €603 million will be used to pay a dividend on the 463,473,492 shares eligible for dividend payments at September 30, 2008.
The financial statements of ThyssenKrupp AG are presented in abbreviated form in the following table:
| Sept. 30, 2007 | Sept. 30, 2008 | |||
|---|---|---|---|---|
| Intangible assets | 50 | 47 | ||
| Property, plant and equipment | 103 | 123 | ||
| Financial assets | 16,453 | 16,037 | ||
| Fixed assets | 16,606 | 16,207 | ||
| Receivables from non-consolidated subsidiaries | 9,625 | 8,842 | ||
| Other receivables and other assets | 312 | 321 | ||
| Securities | 698 | 1,073 | ||
| Cash and cash equivalents | 2,481 | 1,202 | ||
| Operating assets | 13,116 | 11,438 | ||
| Assets | 29,722 | 27,645 | ||
| Stockholders’ equity | 6,175 | 6,715 | ||
| Special items with reserve elements | 91 | 157 | ||
| Accrued liabilities | 526 | 560 | ||
| Bonds | 1,500 | 1,500 | ||
| Liabilities to financial institutes | 298 | 948 | ||
| Liabilities to non-consolidated subsidiaries | 20,853 | 17,513 | ||
| Other liabilities | 279 | 252 | ||
| Liabilities | 22,930 | 20,213 | ||
| Stockholders’ equity and liabilities | 29,722 | 27,645 |
| 2006/2007 | 2007/2008 | |||
|---|---|---|---|---|
| Income from investments | 666 | 1,862 | ||
| Other operating income | 1,006 | 863 | ||
| Other expenses and income | (608) | (980) | ||
| Net interest income/expense | (369) | (381) | ||
| Income from ordinary activities | 695 | 1,364 | ||
| Income taxes | (386) | (189) | ||
| Net income | 309 | 1,175 | ||
| Transfer from retained earnings | 334 | 0 | ||
| Allocation to reserves for treasury shares | 0 | (532) | ||
| Allocation to retained earnings | 0 | (8) | ||
| Carryforward | 26 | 34 | ||
| Unappropriated net income | 669 | 669 |
Portfolio further streamlined
Following on from previous years, ThyssenKrupp continued its active portfolio management strategy in the reporting period. In North America, the Steel segment acquired a majority interest in the tailored blanks operations. Technologies further reduced its automotive activities, including in particular the sale of the precision forging group to an industrial investor. Marine Systems disposed of the Nobiskrug shipyard, which specializes in the construction of medium-size mega yachts. Elevator made numerous minor acquisitions to further strengthen its global market positions in the areas of elevators and accessibility products. The Services segment acquired Apollo Metals and thus significantly expanded its operations in metal distribution and supply chain management for aerospace customers. Several minor acquisitions were also made to strengthen the segment's competitive position.
ThyssenKrupp sold its 25% financial interest in Bertrandt AG. This will have no effect on our successful project-related cooperation with Bertrandt .
In the reporting year we acquired companies with sales of €0.5 billion and disposed of companies with sales of €0.4 billion. Since the merger of Thyssen and Krupp we have therefore sold companies with sales of €9.5 billion and acquired others with sales of €8.7 billion.
Strong rise in employee numbers
The size of the workforce grew significantly. At September 30, 2008 ThyssenKrupp had 199,374 employees worldwide, 8,024 or 4% more than at the end of the prior fiscal year.
The headcount increased in particular at the service-oriented segments Elevator and Services. Steel created additional jobs above all through the construction of new plants in Brazil and – jointly with Stainless – in the USA. Employee numbers were slightly lower at Technologies and unchanged at Stainless.
At 85,097, the headcount in Germany was largely unchanged from the previous year. In the rest of the world, the workforce grew by 7% to 114,277. At the end of September 2008, 12% of employees worked in the USA, 7% in Brazil and 5% in France.
Sales markets and marketing
The EU region was once again the main market for ThyssenKrupp in fiscal 2007/2008: 67% of our products and services were sold to customers in the EU, more than half in Germany. 18% of our sales were generated with customers in America, from Alaska to Tierra del Fuego. The Asia/Pacific region grew in importance for our business, but still accounted for a low sales share of 9%. Thanks to our stable customer structures, the percentage breakdown remained relatively unchanged, although customers outside Germany have become increasingly important in the past five years. As the following table shows, their share of Group sales grew in this period by 38% to €34,265 million.
| 2003/2004 | 2004/2005 | 2005/2006 | 2006/2007 | 2007/2008 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Germany | 12,458 | 14,166 | 15,837 | 18,545 | 19,161 | |||||
| Other EU | 10,731 | 12,106 | 13,293 | 16,198 | 16,677 | |||||
| Americas | 8,621 | 10,002 | 11,609 | 10,218 | 9,706 | |||||
| Asia/Pacific | 3,545 | 4,164 | 4,123 | 4,146 | 4,852 | |||||
| Other countries | 1,948 | 2,489 | 2,263 | 2,616 | 3,030 | |||||
| Total | 37,303 | 42,927 | 47,125 | 51,723 | 53,426 |
Sales by region 2007/2008 in %
ThyssenKrupp companies and their products hold leading positions on numerous international markets. Outstanding technology, cost-efficiency and reliable service have proved convincing arguments for many customers. In many areas we enjoy longstanding customer-supplier relationships. Our technicians also develop specialized solutions for specific customer requirements. In the auto industry, for example, our segments develop numerous new lightweight materials and components to support the objective of reducing vehicle weight.
Combination of effective marketing measures
As a producer and service provider for materials and capital goods, we mainly sell to corporate customers. Only in exceptional cases do private customers buy from us directly, for example elevators or stair lifts for residential buildings. That makes our target groups manageable in terms of numbers but also very demanding in terms of communications. We maintain contacts with them through technical magazines, published several times a year and reporting on successful innovations and new trends in the Group. In addition, product documentation provides all the data required for customers to make an informed decision on using our products. We also attach importance to modern, attractive product designs and apply our corporate design guidelines to all business stationery and advertising. Further sales tools include international trade shows and presentations, country- and customer-related product design, efficient marketing efforts and individual customer advice.
Responsibility for marketing measures lies with the individual Group companies, who operate on the market and are able to respond quickly to changing trends. Given the breadth of our product range, this approach has proved more successful than centralized marketing.
Communications strengthen market presence
Our intensive communications work presents the Group and its brand to all important target groups and strengthens its market presence. Our customers are a key target group, because transparent information and a strong brand have a positive effect on customer loyalty. In the human resources market, our communications work helps attract the best young talents to the Group. Investors are informed about our growth and value-enhancement prospects. At the same time, our employees are given a picture of the Group as a whole, beyond the boundaries of the individual subsidiaries. We also ensure that the ThyssenKrupp is perceived by the general public as a forward-looking industrial and technology group.
The content and design of our communications media are constantly tested and the findings used to optimize the "next generation". The overall impact of our communications work is regularly reviewed by independent market research institutes and has to date been rated highly efficient.
Many of our measures are aimed at a broader audience and address social themes which are of interest to the Group and the general public. Under our initiative "Discovering future technology" we carry out projects with children and young people to give them a better understanding of technology and thus prepare the ground for an interest in technical and scientific professions. At the Ideas Park in Stuttgart in May 2008, more than 280,000 youngsters and adults discovered the fascination of technology and found out about the importance of technical progress. This was a continuation of the concept aimed at different age groups which had already proved successful at previous events in Gelsenkirchen and Hanover. For more information on the Ideas Park, go to Commitment, sustainability and environment protection.
Capital expenditures
In fiscal year 2007/2008 ThyssenKrupp invested €4,282 million, 43% more than a year earlier. €4,018 million was spent on property, plant and equipment and intangible assets, while the remaining €264 million was used for acquisitions. Capital expenditure was €2,900 million higher than depreciation, which amounted to €1,382 million.
| 2006/2007 | 2007/2008 | |||
|---|---|---|---|---|
| Steel | 1,659 | 2,596 | ||
| Stainless | 328 | 387 | ||
| Technologies | 581 | 763 | ||
| Elevator | 122 | 136 | ||
| Services | 282 | 369 | ||
| Corporate | 131 | 66 | ||
| Consolidation | (102) | (35) | ||
| Group | 3,001 | 4,282 |
ThyssenKrupp used the investments to strengthen its position in promising growth areas. The biggest single project is the construction of a new steel mill in Brazil. In addition to our German sites, America was one of our main regions for investment.
Further information can be found in the notes to the consolidated statement of cash flows in the section "Financial position".
Procurement: Further increase in volumes
At €34.5 billion, materials expense amounted to 65% of sales in the reporting period. Compared with the prior year, we spent 4% more on raw materials, other products and services. The increase is mainly attributable to rising raw material prices until just before the end of the fiscal year and outsourced products. In isolated cases, supply bottlenecks caused extensions to planned delivery times; in general, material supplies were secured.
| 2006/2007 | 2007/2008 | |||
|---|---|---|---|---|
| Steel | 7,650 | 8,514 | ||
| Stainless | 6,783 | 6,096 | ||
| Technologies | 7,024 | 7,626 | ||
| Elevator | 1,577 | 1,657 | ||
| Services | 13,223 | 13,645 | ||
| Corporate | 186 | 51 | ||
| Materials expense of segments | 36,443 | 37,589 | ||
| Consolidation | (3,447) | (3,131) | ||
| Group | 32,996 | 34,458 |
Materials expense 2007/2008 in%
High price increases for iron ore
As growth in steel output remained high, demand for iron ore from overseas suppliers increased by a further 48 million metric tons in 2008 to 840 million tons. Expansions to iron ore production were not sufficient to avoid bottlenecks. In this situation, the Brazilian mining company Vale was able to push through price increases of around 66% for fine ores in 2008. On the back of strong demand, the price of pellets rose by as much as 87%. Average ocean shipping rates for ore shipments remained very high in 2008 and fluctuated sharply.
In the reporting period, the Steel segment purchased 16.7 million tons of iron ore, of which almost 10 million tons in Brazil, followed by Canada (3.2 million tons) and Africa (2.4 million tons). Smaller volumes were purchased in Australia and Sweden.
On the very tight market for coking coal, production losses in Australia caused by bad weather at the beginning of 2008 led to a further significant reduction in supply. As a result, coking coal prices tripled for deliveries in contract year 2008/2009 (April – March). There were similar surcharges for PCI coal. High ocean shipping rates further impacted coal shipments.
The price of internationally traded blast furnace coke has risen continuously since the end of 2006. At the end of the reporting period, the price of blast furnace coke from China was around 670 US dollars per ton fob port of loading in China, an increase of 130% in the space of a year. The extreme price rises for supplies from China were partly attributable to strong demand and partly to the raising of local export taxes on coke and other fuels.
Mixed trends for alloying metals
As in previous years, trends on the procurement markets for alloys and metals were extremely mixed. While the price of ferromolybdenum, which had fluctuated sharply in prior years, stabilized at a high level of 80 US dollars per kilogram in 2007/2008, the price of ferrosilicon rose steeply in two stages. A 17% price increase in February was followed by a further climb of 32% in June to €1,630 per ton. These jumps were mainly attributable to anti-dumping measures introduced for Chinese ferrosilicon, which resulted in a shortage on the world market.
The price of zinc, which is traded on the London Metal Exchange (LME), slipped continuously over the course of the fiscal year and in mid-2008 was 40% lower than at the start of the fiscal year. After trading higher earlier, copper and aluminum were slightly above the level at the start of the fiscal year but were trending downward toward the end of the fiscal year.
The LME price of nickel, which is important for the Stainless segment, started the fiscal year at just under 30,000 US dollars per ton, rose to over 33,600 US dollars in mid-November, fell to below 26,000 US dollars at year end, then climbed back to 33,300 US dollars by the beginning of March 2008. Prices then slumped to just under 17,500 US dollars in early August, recovered slightly to 21,100 US dollars and then decreased further to 15,755 US dollars on September 30, 2008. Overall, the price of nickel almost halved in the course of the reporting period.
By contrast, there were massive price increases for chromium, another key alloying metal for stainless producers. Starting from an all-time high at the end of the last fiscal year, there were increases of 21% in the 1st calendar quarter 2008, 59% in the 2nd calendar quarter and a further 7% in the 3rd calendar quarter. Production cutbacks due to energy shortages in South Africa, an important supplier country, and increased demand from China played a major part in this trend.
The strong worldwide steel market resulted in new record prices for steel scrap. In the course of the reporting year, the price of grade 2 scrap in Germany rose by 71% to as high as €426 per ton in June. Steel scrap prices then decreased continuously through to September, falling to €301 per ton. The availability of alloyed scrap was generally good. This is attributable on the one hand to the historically still high nickel price and the high prices of chromium and iron, and on the other hand to subdued demand from stainless producers.
These rising prices for raw materials in the course of the fiscal year also led to higher prices for the products made from them, for example steel sheet, flat-rolled products, tubes and bar steel for forging. There were also supply bottlenecks and delivery delays for some starting products. By contrast, declining raw material prices, e.g. for nickel, resulted in lower starting material prices. Alongside raw material prices, higher energy and labor costs led to higher prices for supplies, spare parts, services and capital goods. Only through early planning were we able to avoid delivery bottlenecks and prevent production losses.
Although competition increased in individual areas (e.g. chemical processing plant and large-scale compressors) due to underutilization of capacities, suppliers still have very good workloads. There were long delivery times in particular for castings and forgings. In part the markets were also very tight for heavy machinery and businesses supplying power plant construction companies. These included manufacturers of electrical equipment, turbines, pumps, boilers and high-pressure equipment. The same was true of air and gas separation systems. In some cases excessive delivery times resulted in the postponement of planned start-ups.
In the services sector, our cross-segment product group management, standardized contract conditions and a focus on preferred suppliers enabled us to reduce prices and simplify the procurement processes.
Purchasing initiative – important value generator in the Group
As part of our value-enhancement program ThyssenKrupp best, the purchasing initiative once again delivered a significant contribution. Part of this came from the projects of the now more than 700 employees in Europe, North America, Brazil and Asia who have been trained in the use of our central methods and tools.
In 2007/2008 our Group companies used the catalog ordering module to handle purchases worth over €100 million, a more than 12% increase over the prior fiscal year. The number of participating companies worldwide increased substantially. They can now purchase around 3.8 million articles online; the lower process costs for online purchasing deliver significant benefits to both us and our suppliers.
In the past fiscal year our global supplier management tool was used to assess over 500 important suppliers. Cumulative purchases of over €1.5 billion have been processed since the tool was introduced. 90 Group companies from Europe, the NAFTA region and Asia use these strategic supplier assessments, made on the basis of standardized methods and criteria. Cross-functional teams assess the suppliers and jointly define development measures. All suppliers and their assessments are saved in a database which can be accessed online by our Group companies.
Surcharges push up freight costs
In parallel with rising material prices, freight costs also increased. The freight price index rose by 4.6% from the 1st calendar quarter 2007 to the 1st quarter 2008. Fuel surcharges, new regulations on driver working hours and a shortage of qualified personnel increased the costs of truck haulage. We kept cost increases for general cargo within limits by consolidating requirements under framework agreements. In the area of rail freight, prices were kept largely stable thanks to long-term agreements, although special cars for steel transportation were in short supply. In some cases – also to counter bottlenecks in road freight – we used a combination of rail and truck transportation.
Ocean freight costs varied depending on the port of destination. Whereas container freights from Asia to Europe were up to 12% more expensive in some cases, costs for container freights to the USA remained unchanged. Prices for some freights from Europe, specifically to the Far East and North America, actually decreased. Bulk carriers such as those used to transport iron ore represent a special market, and prices here increased. There were massive increases for all ship types due to bunker surcharges, but also due to higher costs for customs clearance. Air freight rates were kept constant by consolidating orders under framework agreements. However, prices nonetheless rose due to kerosene surcharges.
Our fleet management system achieved further synergies by integrating suppliers more closely, pooling orders, coordinating processes more efficiently and expanding the international roll-out of the system in the Group. We also automated processes to a greater degree. Interfaces for electronic data transfer and integration of our suppliers into the fleet management system were important elements here. All these optimizations helped counter rising fuel costs.
Energy: Prices at an all-time high
Energy was more expensive than ever in the year under review. Despite this, we succeeded in securing energy supplies to ThyssenKrupp's international plants while keeping cost increases within limits. The synergies available in a major group played an important part in this.
Worldwide the price of oil rose more sharply than in preceding years, in particular from April 2008. On July 15, 2008, a barrel of Brent crude cost a record 145.55 US dollars. At the same time, heavy oil prices in Germany climbed to over €530 per ton. As natural gas prices are generally linked to the oil price, they also increased. After reaching their peak, oil prices stabilized at a high level toward the end of the reporting period. The situation with gas was exacerbated by the fact that there is still a lack of competition on the German market. Although European market liberalization has now opened up the municipal distribution grids in Germany, there are still not enough suppliers offering low-cost alternatives for large industrial users such as our Company.
Gas supply to US plant secured
One reason the Steel and Stainless segments selected Mobile in the US state of Alabama as the site for their new steel mill and processing complex was its proximity to gas supply lines. The site is in the direct vicinity of the intersection of three major pipelines and an important gas storage facility. This unique location secures the long-term uninterrupted supply of gas – even in the event of severe weather such as hurricanes on the Gulf coast. This central location also enabled us to agree favorable gas transportation costs.
Soaring electricity prices
In the course of the past fiscal year, the rise in the price of electricity from wholesalers and on electricity exchanges gathered pace, driven by the sharp increases for crude oil, natural gas and power plant coal. In the case of coal, higher producer prices and transportation costs combined to make electricity more expensive.
The surcharges to subsidize renewable energies increased further in the reporting period and caused high additional costs. In addition, the electricity tax and the subsidization of combined heat and power plants made electricity more expensive. Although the German Federal Network Agency significantly reduced some network charges in the reporting year which lowered network costs substantially, these charges account for only around 10% of ThyssenKrupp's electricity procurement costs, so the effect was limited.
Outside Germany, too, we were able to secure electricity purchases at relatively low cost. Our subsidiaries in the UK and Spain generally concluded pooling agreements which provided synergies for procurement and allowed them to pursue a longer-term strategy to secure prices. In France, our larger companies used the new tariffs introduced by the government with more favorable terms than the wholesale market.
The Steel and Stainless segments have concluded a long-term contract with the local electricity utility for their plant complex in Mobile which guarantees low-cost, reliable supplies. The contract takes into account the power-intensive operation of the electric furnace melt shop. It also contains flexible clauses for long-term cost optimization. This low-cost electricity is essential to allow the profitable production of industrial gases such as oxygen, nitrogen and argon in an air separation plant.
Higher energy costs due to emissions trading
Given the high level of steel production, the CO2 emission allowances allocated to us by the German government for the second EU emissions trading period (2008 - 2012) now underway are inadequate: As a result we will have to purchase emission allowances or comparable certificates. Through Groupwide energy savings, participation in CO2 funds and an efficient procurement strategy, we have been able to limit expense to date. Our expenditure for energy is also increased by the fact that the costs for CO2 emission allowances are fully included in electricity prices. As prices for emission allowances rise in the second trading period, the costs of electricity procurement will increase accordingly.
Summarized assessment by the Executive Board of business performance and target achievement
ThyssenKrupp can look back on a record of success since the merger: In the first year of its existence – 1998/1999 – our Group had 185,000 employees and generated sales of €32 billion and earnings before taxes of €0.6 billion; in 2007/2008 we had almost 200,000 employees, sales of over €53 billion and earnings before taxes of €3.1 billion.
2007/2008 was a good year for the Group. In many areas our performance was better than expected, even though the market environment was increasingly difficult. Earnings before taxes and major nonrecurring items amounted to €3.5 billion, exceeding our raised forecast of August 2008 of over €3.2 billion.
ThyssenKrupp better then expected in 2007/2008
- Order intake: increased as expected to €55.2 billion
- Sales: higher than forecast at €53.4 billion
- Earnings before taxes: better than expected at €3.1 billion
- Workforce: higher than planned at 199,000
- EVA: €304 million higher than budgeted
Planning reviewed
In the uncertain environment of the financial crisis, ThyssenKrupp has reviewed its plans for fiscal year 2008/2009 and its targets. As a result of the economic downturn, we face a significant decline in business in 2008/2009, the extent of which cannot yet be reliably predicted. However, if – as currently forecast – the global economy emerges from the recession and gathers momentum again in 2010, ThyssenKrupp will also return to its long-term growth path.
We are firmly convinced that the growth strategy we initiated in 2005 is right. Adverse effects, such as those caused by the current financial crisis, may create delays, but the long-term success of the Company will remain unaffected. We are pursuing a successful, long-term portfolio optimization program, developing innovative products and processes and positioning ourselves strongly on the world's strategic growth markets. This will secure the future success of the Company.