SSAB Swedish Steel AB (OMX: SSAB A) capital markets day was held in Stockholm this past Thursday. Recent times have been at least decent for the company, with first half 2012 EBIT of 1.2 billion SEK. At the end of Q2, rolling 12 months operating cash flow printed at 4.8 billion. In Q2 report the company predicted some slowing down in USA but ever deepening downturn in demand from Europe was unforeseen and led to a profit warning couple weeks ago where the steel maker predicted 700 million EBIT loss in Q3 2012 although still positive cash flow. The company typically quickly reports an expected loss upon an incoming lower capacity utilization that will hit profits due to high fixed costs.
Capital markets day focused more on the business model and dealings with customers. The company aims to work together with customers to create stronger, lighter and more durable steel products. Its product offering is wide 0.5 mm to 160 mm thick Quenched and Tempered (Q&T) steel and from very narrow to 3.5 metre wide plates and the company has experience in handling the material through welding, bending etc that it can pass onto customers. SSAB brands include Hardox, Domex, Weldox and Docol. The thinking is that the usability and the ability to utilize SSAB made hard steels in various applications is a differentiating factor. End user needs are always kept in mind in innovation and development and its experts go to help partners and work with partners in such matters. Therefore the company sees itself also as a services firm.
External forecasts that the company uses in internal planning hint that the Euro area is in a very clear recession with growth outlook still rather dull for the next two years, Sweden is doing a little bit better but on low levels and U.S. growth forecasts have been adjusted down although they are still higher than in Europe. According to the main hypothesis, China is slowing down to around 7% annual GDP growth rate. In Japan there seems to finally be a pickup in rebuilding activities whilst India struggles with high inflation. The geographical business areas are EMEA, Americas and APAC. The company uses currency hedges. Despite being a Swedish company, biggest currency effect comes from Euro development vs. U.S. Dollar (buying raw materials in USD and selling in Euros).
The steel market dynamics in North America seem healthy. Latin America is becoming more important for the firm and the company's products are currently not affected by the measures taken by the Brazilian government against steel imports. Structural overcapacity in Europe of 20-50 million tonnes as a result of investments with exports to Asia in mind earlier so further closures and consolidation can be expected. In Russia the industry is very positive regarding the future there. There is also currently an overcapacity in standard steels in China.
SSAB is currently active in Nordic Area with standard strip steel, in North America with standard plate and overall in two niches, Quenched & Tempered and advanced high strength steel. The largest customer segments in the particular units are heavy transport in NE standard strip, energy sector in NA standard plate, yellow goods aka construction machinery in Q&T and automotive in advanced high strength steel.
SSAB plans to defend & expand leading position in Nordic region by further improving logistics and furthering cooperation with Tibnor and OEMs. In North America there is a possibility to de-bottleneck with an ongoing cost-effective investment in Mobile, Alabama coming online in the coming years that should help the firm to maintain leading market position there as well, in both capacity & production cost, with a 140 000 tonnes capacity increase.
As far as the niche segments go, the firm aims to take part in Q&T growth, with market perhaps doubling by 2020, and has added capacity in Sweden, USA and China. Particularly in China there should be massive potential in this segment. Growth in advanced high strength steel sector is likely slower than in QT and competitors are building capacity due to the desirability of taking part in automotive value chain. There might be some upside, for SSAB feels that steel could challenge in many of the uses of aluminium in the sector as its modification becomes more and more advanced, car safety becomes more important and higher strength steel parts come closer to aluminium in weight. The stated goal for both niche areas is to have half of the total market.
Regarding raw material purchases, the company has some advantages since its Swedish pellet supplier LKAB is in very close proximity to the company's blast furnaces. Pellets are the only production option for the company in Sweden, with the use of scrap providing limited flexibility. Globally raw material prices have been coming down and only recently ticked up a little bit due to subsidies from Chinese government to local market that led to higher demand for iron ore. SSAB’s coking coal purchases are from Australia with short term contracts and from the United States with annual contracts. U.S. mills in Alabama and Iowa use scrap and for that price volatility is expected to continue. Overall the input prices have a very big impact on company financials with those now covering almost half of total costs. Iron ore, coal and scrap combined amount to over 80% of the input costs.
Overall company focus will be on flexibility and high performing units with the possibility the adjust capacity as needed. SSAB thinks that the market has permanently become more volatile than it used to be and therefore it is imperative to be able to quickly adjust to changes in economical environment. The North American units are very flexible and the company aims to get breakeven point down to 70% capacity utilization in Swedish strip production (current breakeven is above 80%). Those measures will be hastened due to recent poor development. These are aimed to continue to be an industry leader in profitability with a healthy cash flow. The higher flexibility in North America stems from the fact that electric arc furnaces are more flexible to shut down and bring back online again than coke ovens and blast furnaces used in Sweden.
As stated in the recent profit warning, with capacity utilization in company’s European, Middle East and Africa business area strip business having gone down to as low as 60% or even a little below that on Q3, that business area was clearly loss making. Now the utilization has climbed to slightly better but still poor 70%. SSAB competes with companies like Steel Dynamics (NASDAQ: STLD), Nucor (NYSE: NUE), U.S. Steel (NYSE: X), AK Steel (NYSE: AKS), ArcelorMittal (Euronext: MT, NYSE: MT), ThyssenKrupp (FWB: TKA, LSE: THK), Voestalpine (WBAG: VOE), Salzgitter (FWB: SZG) and Rautaruukki (OMXH: RTRKS)
In the future, production will also be adjusted globally with quarterly variations in production based on projected inventory levels. Raw material contracts are nowadays mostly monthly or quarterly as opposed to annual and SSAB also has shorter term (or obviously order based) contracts with their customers. Maintaining a robust balance sheet is certainly important to be able to stay nimble. The company's liquidity preparedness is around 24% of annual sales and debt duration is over 5 years on average with next major maturities in 2014. The debt portfolio contains no financial covenants. The recent large investments led to a higher gearing that is now coming down. President & CEO Martin Lindqvist sees that the fundamentals for retaining an industry leading position and good future profitability are now in place as long as there isn’t a total economic meltdown.
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