ANALYSIS: Cost cuts only bright spot amid weaker Q3 EU steel earnings

Efficiency programmes helped only a few of Europe’s steelmakers buck the general negative trend in their third-quarter 2015 earnings amid growing imports and falling prices.

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Steel First has taken a look at listed EU carbon, stainless, and tube & pipe steelmaker earnings before interest, taxes, depreciation and amortisation (Ebitda) for the July-September period.

Carbon steel

Germany’s ThyssenKruppArcelorMittal Europe and Austria’s Voestalpine’s steel division achieved year-on-year increased earnings in the third quarter, all thanks to lower costs and efficiency improvements. 

Yet all the steelmakers have implemented cost-reduction programmes to deal with the downturn in the European steel industry, prompted by the global financial crisis in 2008-09.

Further cost cuts are still necessary if European steelmakers to maintain profitability, given the limited permanent capacity closures, Moody’s vp and senior analyst, Hubert Allemani, told Steel First in late October. 

Falling steel prices amid increased competition, particularly from China- and CIS-origin imports, pushed down the earnings potential among European carbon steelmakers in the third quarter of 2015.

Tata Steel Europe’s UK business was particularly affected, as high costs and weak demand, combined with a strong sterling attracting imports, turned the company’s third quarter Ebitda into a loss

In addition to pressure from prices and imports, relining and modernisation work at blast furnaces also affected the July-September results of Germany’s Salzgitter and Sweden’s SSAB, the latter also suffering from negative currency effects. 

The net year-on-year effect of third-quarter Ebitda among the six steelmakers examined amounted to a loss of $88 million, using exchange rates on Thursday November 19.

Stainless steel

Major European stainless steel producers reeled under the effects of a decline in nickel prices in the third quarter of 2015.

The three-month daily official nickel price on the London Metal Exchange (LME) averaged $10,606 per tonne in the July-September period this year, compared with $18,662 per tonne a year earlier.

Finland’s Outokumpu, Luxembourg’s Aperam, Spain’s Acerinox and Switzerland’s Schmolz + Bickenbach all blamed falling alloy surcharges – the mechanism through which raw materials costs are passed on to customers – for the weaker year-on-year third-quarter results. 
When alloy surcharges fall, buyers generally tend to stay on the sidelines awaiting further drops in purchasing prices. 

High imports also kept base prices low and made the market environment more difficult for European stainless steel producers.

While the EU imposed definitive anti-dumping duties on cold rolled (CR) stainless flat imports from China and Taiwan in August, the material was largely replaced with imports from South Korea and India, among others. 

Among the four companies, a total of $261.7 million of Ebitda was wiped out in third quarter of 2015 compared with a year earlier.

Tube & pipe

Low oil and gas prices weighed on activity in the end-user segment of tube and pipe producers in the third quarter of 2015.

France’s Vallourec fell into loss in the tough market, citing lower sales volumes and prices in the USA, destocking in Saudi Arabia, reduced drilling activity in Brazil and the postponement of projects by international oil companies in Europe, Africa, the Middle East and Asia. 

Low sales volumes and continued pressure on hydrocarbon prices also nearly halved third quarter earnings at Spanish tubemaker Tubacex.   

Sector earnings fell by $262.4 million year-on-year given the two companies’ weakened results.