Letter of the Management Board

After the boom years of reconstruction after the Second World War, it has now been around 25 years since the European steel industry was rocked by an existential crisis. Politically dominated ownership structures, the belief in limitless growth, and obliviousness to the fundamental principles of a free market economy in favor of political intervention, characterized increasingly by protectionism and subsidies, ultimately led to the outcome that more and more countries could not afford “their” steel industry that was suffering from enormous overcapacity. What subsequently followed were plant closures that went hand in hand with demonstrations, strikes, and wild disputes between politicians and political parties, unions, workers, and company management and finally, the inevitable consequence of a fundamental paradigm shift—privatization and consolidation. Industry that was dominated by state ownership became exchange-listed or privately managed corporations; of the approximately 30 major steel companies that still existed in the early 1990s, today less than ten more or less large corporate groups remain in the European Union.

One would be tempted to call this an exemplary development—straight out of a business administration textbook: the European steel industry and the political establishment have proven that they are capable of learning from the mistakes made in the past. Far from it! What did actually happen? After the structural adjustments of the 1990s, which were ultimately quite modest, and shortly after the events of 9/11, a worldwide economic upturn, driven mainly by the economic awakening of China, began with a momentum never seen before in recent economic history, continuing until the events surrounding the Lehman collapse in September 2008 put an abrupt end to this cycle. For years, the global boom in demand, which comprised all of the major industrial sectors, covered up the still existing, serious structural weaknesses of the European steel industry; in fact, it even intensified them insofar as many companies succumbed to the temptation of the prospect of making a quick profit by expanding their capacity in the mass market steel segment, thus contributing to the additional escalation of their capacity problems.

The financial and economic crisis and the sovereign debt crisis, which have now been ongoing for almost five years and which have ravaged Europe more severely than any other global economic region, have given the steel industry more than just an unhappy déjà-vu of the 1980s and 90s: not only that state interventionism, labor struggles, protectionism, and talk of subsidies are all heating up the current discussion, but the industry, which is largely suffering from increasing erosion of financial assets, is less and less able to afford the necessary investments in quality and future-oriented technologies that it needs to make in order to be able to maintain its global competitiveness. Against this backdrop, the European steel industry is in the midst of losing the technological supremacy it has maintained for hundreds of years.

In the course of events, it is an undeniable fact that each product, each process has a life cycle—shorter for some, longer for others—and at some point in time this life cycle reaches its end. This also applies to steel products, steel production processes, and steel plants. When products, processes, and plants, no matter in which industry sector, are not updated on a regular basis—and due to increasingly tough competition and consequently ever scarcer financial means, this is bumping up against limits—they too are subject to an expiration date. And the more competitive an industry is, the more limited the demand is, the more clearly one can see this date.

Today, there are some social and political groups that want to override this economic cycle—sometimes as a reaction to developments in recent decades that were oriented only toward the ultimate monetary gain. In other words, keeping production sites going, which are no longer competitive, no matter what—whether by way of political pressure on owners and management, subsidies, protectionist measures, or ultimately, nationalization. And this means nothing less than invalidating the fundamental laws of supply and demand. The experience of the first such attempt in the 1980s teaches us that this does not work, not least because in the end, this inevitably results in a race for subsidies that governments cannot afford in the long term. At the end of the day, this would only result in overdue structural reforms, but on an even larger scale, with even more painful social hardships, and even higher costs, as the longer unprofitable companies are artificially maintained, the more still healthy companies are threatened in their existence. For the people involved, this is anything but a fair method because they are being kept in a state of false illusion that their jobs are safe. It is fairer and more humane—and at the same time more economically expedient—to disclose the facts openly and enable them to upgrade their skills or start a new career path as long as there are still sufficient funds to assist them. But such action would require courage and honesty—qualities that many decisionmakers cannot claim to possess. Postponing problems, trying to explain or argue them away, or sitting them out no longer works in a globalized and extremely dynamic business world. Anyone trying to sit problems out, will be overrolled by the competition—and this is just what is threatening the European steel industry.

In this context, we can only reiterate that it has proven to have been a wise decision to develop our company away from the classic steel company to a steel-based technology and capital goods group that is oriented toward the high-end sector as an alternative to much of the industry that still thinks in millions of tons. And we will pursue this path with relentless consistency—that is something you can rely on. Jointly with our Supervisory Board, we have created the basis for this course of action in the form of our “Strategy 2020”—for the next ten years and beyond.

Linz, May 27, 2013

The Management Board