Voestalpine warns on European steel sector woes

12 November 2015

Voestalpine has become the latest European steelmaker to warn of the effects of the sharp price falls and overcapacity in the sector, despite the Austrian group’s focus on premium metal products generating strong first-half profits growth.

European steel markets have deteriorated dramatically, with sharp drops in global prices exacerbated by a surge in Chinese imports and weakness in the European construction sector.

Last week, India’s Tata Steel wrote down by £860m the value of its struggling business in the UK, where it has cut more than 2,000 jobs this year. Meanwhile the European arm of ArcelorMittal, the world’s biggest steelmaker, swung into a quarterly operating loss.

Mr Eder blamed “ruinous” price cuts on state subsidies for steelmakers around the world. Voestalpine has fared better than its European rivals, however, and on Wednesday said that it had been “only marginally affected” so far by recent trends. “The first six months of the business year have been quite gratifying,” he said.

The emissions scandal surrounding Volkswagen, a big customer, was having “no current impact” on Voestalpine, although future negotiations with the German auto manufacturer could become more difficult, Mr Eder told journalists.

Despite being based in high-cost Austria, Voestalpine’s concentration on better-quality steel and products has made it less vulnerable to price swings or competition from commodity steel imports.

The group has also accelerated its internationalisation by expanding production facilities in China and the US, where it has invested €550m in a Texas plant to provide raw materials for its European operations.

Operating profits in the first half of the 2015-16 financial year were up 29.4 per cent at €575m compared with the same period a year before, or by 12.7 per cent after excluding non-recurring effects.

However, operating profits in the latest three months, at €207m, were 44 per cent lower than the previous three months, and Voestalpine warned its premium products-based strategy would be come “more difficult” in the second half of the financial year.

“Such a negative sentiment that prevails in the steel industry will of course have an impact on high grade steel producers,” Mr Eder warned.

Analysts believe that downward price pressures could permeate into more niche steel product groups as customers demand discounts.

While Voestalpine still expected full-year operating profits, including non-recurring effects and consolidation changes, to be higher than the previous year, “the adjusted figures will be lower than those of the previous year in view of the increasingly challenging market environment”, Mr Eder said.

The cut in guidance was disappointing “but doesn’t surprise,” Seth Rosenfeld, an analyst at Jefferies, wrote in a note. He expected Voestalpine “to overcome current headwinds far better than peers”.