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Slowdown in global growth

In the course of 2004 there were already signs that economic growth was slowing in some regions of the world. High prices for energy and raw materials as well as tighter monetary policies in key countries will dampen global growth moderately in 2005. Nevertheless, the world economy is expected to achieve real growth in GDP of around 4%. Growth in world trade is expected to slacken slightly. This continuing positive scenario assumes a gradual decrease in oil prices, no distortions on the currency markets and no serious geopolitical uncertainties.

In North America and Asia, the regions of greatest growth in 2004, overall economic growth is expected to slow slightly in 2005. In the USA, we expect a slowdown of the previously strong economic upswing. The foreseeable policy of moderate interest rate increases will result in a cooling of business spending and private consumption. In Asia, much will depend on developments in China. Although the economic policies of the Chinese government will moderate the pace of investment growth in 2005, the Chinese economy is still expected to expand significantly. Japan's economic growth will be hampered above all by a weakening of exports. In Latin America, the economic situation will remain stable with moderate growth. Higher-than-average growth is expected in the Central and Eastern European countries.

The euro zone economy is not expected to grow significantly in 2005 and will continue to lag behind the rest of the world. Whereas export growth will decrease as a result of the slight global slowdown, internal demand is expected to improve marginally, without it being possible to speak of a self-sustaining recovery. This overall trend also applies to Germany, but there are also signs of a slight weakening of overall economic growth in 2005.

Gross domestic product 2005*

  

Real change compared to previous year in %

As in 2004, the situation on the markets important to ThyssenKrupp will be mixed in 2005. We expect the following developments:

• The boom on the international steel market will continue in 2005. The key factor will remain the high growth in Chinese demand. Even if the upward trend in China is slightly flatter, it is likely that steel, raw materials and logistics capacities will remain in short supply worldwide. Expansion projects will only be able to meet the rising demand to a limited extent. The situation on the raw material markets will therefore remain tight and result in continuing high raw material costs and steel prices. Overall, we anticipate world crude steel production of approximately 1,090 million metric tons in 2005, 5% more than in 2004 (1,040 million tons). In Germany, production is expected to increase to 47 million tons, compared with 46.5 million tons in 2004.
• Future developments on the stainless market will depend to a large extent on capacity expansion, especially in China. However, as growth there is expected to be weaker, stainless steel from Asia will be increasingly sold in the higher-price countries of Western Europe. Production of stainless steel grades is expected to reach a record level of 24.9 million metric tons in 2005. In the nickel-base alloys area, the market recovery discernible since 2004 is expected to continue.
• According to current forecasts, world auto production will rise to almost 67 million vehicles in 2005. The main source of the 4% growth will be China and the other Asian countries. The auto market is also expected to improve in Brazil. In North America, production is expected to rise only slightly, and in Western Europe production volumes will remain virtually unchanged. The German auto industry could expand its production to 5.75 million cars and trucks in 2005.
• The expectations for the German mechanical engineering industry are positive. A 3% production increase appears realistic in 2005. Growth will also continue in the USA, Japan and China, though at a lower slightly lower rate than in 2004 as a result of the economic slowdown. Demand for machine tools is expected to continue to grow strongly.
• The situation for the German construction industry will remain difficult in 2005. A marked weakening is expected in the USA. The prospects for the markets in Central and Eastern Europe and Asia remain more favorable.

Subsequent events

Subsequent events are presented under Note (31) in the Financial Report.

Encouraging performance expected in 2004/2005

If the economic forecasts are accurate, we expect the Group's encouraging performance to continue in 2004/2005. We expect the following developments:

• Sales: According to current plans, we expect sales in the region of over €41 billion in the current fiscal year. This does not include portfolio changes.
  • Steel forecasts a further increase in sales of carbon flat steel due to higher prices; volumes should remain at a good level. Sales of stainless flat steel are expected to rise due to higher shipments and the passing-on of alloy costs.
  • Automotive also expects higher sales. The startup of new plants as well as growth in existing operations will contribute to this.
  • Elevator forecasts a further expansion of business. Sales will grow above all in Asia and Latin America – with moderate increases in the other markets.
  • At Technologies, sales are expected to remain level with the prior year despite the disposal of some operations. On a like-for-like basis, sales are forecast to increase, particularly due to the good order situation in plant technology and rising demand for system components.
  • Services forecasts a decrease in sales, mainly due to the reclassification of steel trading companies to the Steel segment. Continued increases are expected in the Eastern European market.
• Earnings and dividend: Assuming no distortions on the raw material and currency markets, our aim for 2004/2005, despite the signs of a slowdown of the global economy, is to maintain the very good level of pre-tax earnings achieved in 2003/2004. This does not include the effects of disposals. We will continue to pay a dividend based on our earnings performance.
• Employees: The Group's workforce is expected to increase slightly in the current fiscal year. According to current plans we will have 185,000 employees at September 30, 2005. The headcount in Germany is expected to decrease due to portfolio measures, while outside Germany new companies with their workforces will be added. Training young people will remain a high priority: we aim to achieve a high apprentice training rate and provide training beyond our own requirements as in previous years.
• Procurement: We expect material expense of more than €24 billion in 2004/2005. One of the reasons for the increase will be a higher proportion of purchased products and services. Raw materials and steel will continue to be in short supply, depending on market developments in China. However, thanks to our long-term supplier relationships, we do not anticipate any bottlenecks. We will generally buy materials on the spot market in order to take advantage of downward price fluctuations. No bottlenecks are expected in the procurement of operating materials, components and services. We will make greater use of electronic procurement. For example, the new ThyssenKrupp RFQ platform enables us to request quotes from suppliers worldwide and thus benefit from increased competition. Where complex systems are concerned, however, we will place greater emphasis on partnerships and long-term supplier relationships. Purchasing in low-cost countries is to be increased; we also intend to buy more in the regions where we sell our products and services. The successful ThyssenKrupp best purchasing initiative will be continued to further utilize potential for cost reduction.
• Research and development: We will spend approximately €620 million on developing new products and processes including quality assurance in the new fiscal year. This is slightly less than the previous year. Basic research and development projects will account for €170 million, while €450 million has been budgeted for customer-related projects including technical quality assurance. Central to many projects will be the development of new materials in the steel area and optimized components in the Automotive segment. Greater safety, comfort and environmental friendliness are important goals of our development efforts, which will be carried out by approximately 3,000 university-educated engineers, scientists and technicians.
• Environmental protection: Around €400 million will be spent on ongoing environmental protection programs in 2004/2005. Most of it will go towards reducing water and air pollution. In addition there will be numerous expenditures for new environmental protection facilities, particularly in the Steel segment. Waste recycling will be increased in order to preserve natural resources by better utilizing raw materials. Systematic energy saving will also contribute to making our production lines environmentally compatible.
• Capital expenditures and financing: The volume of investment approved by the Supervisory Board is €3.1 billion, roughly the same as the previous year. In 2004/2005, additions to fixed assets are expected to total €2.0 billion, €0.5 billion above depreciation. We also intend to continue to meet our gearing target of 60%.