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Subsequent events, opportunities and outlook

No reportable events occurred.

After the global economic freefall in the winter half-year, some leading indicators are showing increased signs that the global recession may be bottoming out and the economy could stabilize in the 2nd half of 2009. However, this trend is only gradually being confirmed by hard data. This means that a sustained upswing is not yet in sight, stabilization at a low level is the most that can be expected. In 2010 any growth in the global economy will be small; the risk of an economic setback remains high.

The US economy is expected to consolidate in the further course of the year, partly as a result of the government's economic stimulus programs. However, the financial latitude for private consumption – the most important component of the American economy – will continue to be restricted in particular by the difficult situation on the labor market. In Japan, no radical improvement is expected before the end of the year. This will only happen when Japan's export-oriented economy gains renewed impetus from world trade.

The export market situation is also responsible for the slowdown in many emerging countries. The decline in global trade has impacted exports in China; however, the robust domestic market and investment growth will continue to boost economic output in the further course of the year. In Russia an economic recovery will only be possible with a significant hike in energy prices.

Following the steep slide at the beginning of the year, the economy in the euro zone is also showing signs of bottoming out from the 2nd half of 2009. The economic situation in Germany remains particularly difficult on account of the country's strong dependence on exports. In particular, increasing unemployment will severely impact private consumption. Overall, therefore, sustainable growth is not expected in the foreseeable future.

We anticipate the following developments on the markets of importance for ThyssenKrupp:

  • On the global steel market there are signs of stabilization at a very low level towards mid-year. After a significant fall in demand in the 1st half of 2009, we continue to expect global consumption of rolled steel to shrink by around 15% over the full year. This would correspond to global crude steel production of 1.1 – 1.2 billion tons – the output level of 2005. In the NAFTA region, the EU, the CIS and Japan a disproportionate fall in demand is expected. However, the other countries of Asia, the Middle East and Latin America are also likely to report significant declines in 2009. In particular in Europe, where real steel consumption will drop sharply, demand will be further dampened by still slightly high inventories. Based on the assumption that the crisis has bottomed out, we expect a slight recovery next year, though volumes in most regions are unlikely to return to the level of 2008. In Europe any recovery in volumes will mainly be due to stock building because as things stand at present steel consumption is not expected to grow in 2010.
  • In recent months increasing raw material prices and low inventory levels have buoyed the market for stainless flat products. The downward trend in demand appears to have been broken. Bolstered by the global programs to stabilize the business and financial markets, the economy is expected to level out. In 2010, global demand for stainless flat products is likely to rally slightly. In highperformance materials, we expect to see the start of a recovery in the first half of 2010.
  • Despite various sales-boosting measures in many countries, the international auto market is not expected to bounce back from the global slump in demand for the time being. A 20% drop in global production to around 57 million cars and trucks is forecast for 2009. A particularly dramatic slump in output – by more than 30% – will be reported by the US auto industry, with only a slight recovery expected in 2010. For producers in Western Europe and Germany, an almost 20% fall in output is likely in 2009, with no improvement in sight for 2010. This year the passenger car market in Germany has been artificially inflated by the scrappage scheme. As a result, a fall in new registrations is forecast for next year.
  • The outlook for shipbuilding has dramatically deteriorated. However, in some Asian countries continued growth is expected on the back of government support programs. Based on the slump in orders in the year to date, German shipbuilding output in 2009 and 2010 is likely to be significantly lower than in 2008.
  • The global recession and the resultant weak level of investment have impacted the international machinery sector. Major industrialized countries will see a high double-digit decline in machinery output in 2009. A slight recovery could take place the year after. In Germany, an 18% fall in output is expected due to the lack of orders in hand. The Chinese machinery sector continues to expand, albeit at a much slower rate.
  • The construction industry will cool significantly in most countries in 2009. While growth in China and India is slowing, some industrialized countries are registering sharp declines in construction output. Particularly affected by this are the USA and, in Europe, the United Kingdom and Spain. The German construction industry is also expected to shrink due to the weak level of commercial construction activity; growth in public-sector projects as a result of the government's economic stimulus programs will not kick in until later in the year. In 2010 only a moderate improvement in the global construction markets is expected.

Outlook

We expect a significant drop in order intake and sales for full fiscal year 2008/2009. This will be reflected in earnings. Price and volume declines will be only partly offset by falling input material prices and sustained efforts to enhance efficiency. In addition, targeted steps are being taken to significantly reduce net working capital. We are also carrying out measures to reduce or postpone our investment program and implementing portfolio optimizations.

ThyssenKrupp expects to end the current fiscal year with a loss before taxes and major nonrecurring items – restructuring costs, impairment charges and project costs – in the upper three-digit million euro range.

Earnings before taxes will be considerably impacted by restructuring expense for our cost reduction programs and the reorganization. However, these measures will play a decisive role in significantly strengthening the future earning power of the Group. Impairment charges and project costs for the new steel plants will also have a major impact on earnings before taxes.

With the destocking cycle coming to an end, we are registering a recovery in demand in our materials and services business. Nevertheless, we expect demand to continue to suffer from weak consumption in the 4th fiscal quarter.

  • At Steel we expect further price pressure accompanied by a gradual improvement in volumes and capacity utilization in the 4th quarter compared with the previous quarter. Due to the valuation of inventories according to the average cost method, lower raw material costs will not bring any significant relief until the beginning of the new fiscal year. This may give rise to the need for inventory valuation adjustments.
  • With volumes and prices beginning to stabilize, we anticipate a loss at Stainless in the 4th quarter, though this should be smaller than in the 3rd quarter.
  • At Services a reduction in the volume and price pressure, which will allow our margins to recover, is not expected until the end of the 4th quarter.

We anticipate the following developments for our capital goods activities in the 4th quarter:

  • In the Technologies segment we anticipate continued capacity underutilization in automotive and construction machinery components and civil shipbuilding. The resultant impact on earnings before nonrecurring items is unlikely to be offset by business in plant construction, slewing bearings for the energy sector, and submarine and frigate construction.
  • Earnings in the Elevator segment are expected to remain strong.

Looking ahead to fiscal 2009/2010, in view of the current forecasts for the global economy we expect a moderate stabilization in sales; effects from the restructuring and cost-reduction programs should improve earnings.

Continued success with Group program ThyssenKrupp PLUS

ThyssenKrupp launched the Groupwide program ThyssenKrupp PLUS at the beginning of the fiscal year to respond swiftly and firmly to the global recession and counter its effects. The aims of the program are to achieve positive earnings and liquidity effects in the current fiscal year as well as sustainable performance improvements.

For fiscal 2008/2009 earnings-enhancing measures totaling well over €1 billion have been initiated and implemented on schedule in the first three quarters. These include reducing costs in production and administration, optimizing procurement and sales processes and critically reviewing contracts with external service providers. Well over a third of the earnings-boosting measures are sustainable and will therefore enhance income not only in fiscal 2008/2009 but also in the years thereafter.

We aim to improve our cash position by systematically reducing net working capital, for example by significantly reducing inventories and optimizing receivables management in all segments of the Group.

In addition, we have analyzed all our capital investment projects – both the major projects of our Steel and Stainless operations in America and other investments in each of the segments – for possible reductions or postponements, also against the background of the current downgraded economic forecasts.

In all three areas – earnings, net working capital and investment – we achieved the savings targets set for each of the first three quarters of the current fiscal year.

Supervisory Board to decide on reorganization

In its last meeting on May 13, 2009, the Supervisory Board approved the Executive Board's proposal to concentrate the Group's activities into eight new business areas which will be tied directly to ThyssenKrupp AG in the future. These business areas are Steel Europe, Steel Americas, Stainless Global, Materials Services, Elevator Technology, Plant Technology, Components Technology and Marine Systems. In addition, Groupwide administrative services will be combined under a shared services strategy. In this way the Group is adapting to the changed economic environment. ThyssenKrupp will remain an integrated materials and technology group in the new structure.

The reorganization will create greater transparency both internally and externally and permit faster and better decision-making. Administrative expense and capacities will be significantly reduced, which will lead to sustainable cost savings. Strategically ThyssenKrupp will be managed by a strong corporate center, while operating decisions will be made on a decentralized basis even closer to the market.

We are currently working on the details of the new organizational structure. In its next meeting on September 04, the Supervisory Board will discuss the overall plan and decide on its legal and organizational implementation effective October 01, 2009. Following the meeting, the public and the employees will be informed of the outcome.