The business year 2015/16 began with a continuation of the previous year’s trend: a moderate recovery in Europe with intermittent new flare-ups of the crisis in Greece, a continuing strong economy in North America, recession in Brazil and Russia, and increasing uncertainty about the economic development in China. While the situation in Greece settled down over the summer, the escalating military conflicts in the Middle East have sent an unprecedented wave of refugees flooding into Europe. Now Europe is increasingly facing the political and economic consequences of this refugee crisis. For China, it is becoming more and more obvious that after twelve years of continuous economic progress, a certain phase of consolidation has become unavoidable, and the economic situation in Brazil and Russia continues to be precarious.
Europe
Despite uncertainty stemming from the situation in Greece, particularly in the first half of the year, a slight uptrend has continued in Europe as the year progresses, due primarily to private consumption, assisted by low energy prices, low inflation, and low interest rates. This trend is also supported by increased exports, particularly to the USA, as a result of falling exchange rate EUR-USD. A slow but steady improvement in the labor market data across Europe confirms this trend.
In contrast, investments continue to lag, and in the spring of 2015 even declined slightly. The reasons—in addition to the uncertainties regarding the development of the markets in Europe—lie in the uneasiness about economic development in China. While Europe’s exports have continuously risen in the course of the year thus far, it is increasingly doubtful whether this trend will persist into the near future.
In this European environment, the voestalpine Group has profited from strong demand from the automobile sector and solid development in the white goods and consumer goods industries. Demand has also been flourishing from the aviation industry and the railway infrastructure sector, where—after a phase of consolidation of government budgets in many countries—the market has recovered rapidly since the end of the last business year. In particular since the summer months, demand in the mechanical engineering sector has been increasingly volatile, while the construction industry overall has continued to be weak. In the energy sector, construction of power plants has been under ongoing pressure in Europe for years, while the drastic decline in the oil and gas industry is due to the deterioration of the oil price in the last twelve months.
Overall, the development for voestalpine in Europe in the first half of 2015/16 has been quite gratifying due to the stable and positive level of demand in the mobility sector (automotive, railway, and aviation), its strategic core customer segment.
North America
In North America, the growth trend that has been ongoing for two years has continued. In the spring of 2015, expectations for the year have even been raised again. This positive development is being driven by private consumption, exports, accelerated investment, and increasing public spending. The latest early indicators, however, show a somewhat more mixed picture for the next months. While the signs for private consumption, the service sector, and the construction sector continue to point to a continuation of the present robust economic development, a slowdown seems to be looming for the manufacturing industries. In addition to the continuing weakness of some important international markets, the strong US dollar is noticeably and adversely impacting exports.
Against this economic backdrop, the performance of the voestalpine Group in the NAFTA region in the first six months of the current business year has been very satisfactory. With the exception of the energy sector that is suffering due to the low oil price—especially in North America—almost all market segments have been contributing to the positive development.
Asia / China
Up to now, China’s economic growth was largely driven by infrastructure investment managed by the State, but now its economy has reached a level of maturity where economic development must be increasingly sustained by the private sector, both with regard to consumption and investment. The development in recent months has shown that this transformation process cannot proceed without economic reversals. The growth rates are being mainly impacted by sluggish investment
activity, increasing international competition, and growing sovereign debt. While private consumption and the service sector are relatively stable, performance in the manufacturing sector has fallen considerably. As the country was being industrialized, China built up huge overcapacity in many areas of industrial manufacturing that is now not only making it difficult for its own economy to thrive, but is creating turmoil on many global markets.
For voestalpine, this development has a greater impact in Europe than in China itself. For example, the European spot market price for steel has fallen to new lows since September 2015 due to massive imports from China at prices that are not economically sustainable by European suppliers. While this does not have direct consequences for the Group due to its philosophy of primarily targeting the premium sectors, this will have an indirect impact on pending contractual negotiations.
In China itself, the voestalpine Group’s performance continues to be positive. It is, however, increasingly difficult to make reliable forecasts due to the general uncertainty in the country.
The Chinese government has reacted to the slowdown in growth by stepping up its monetary policy and its fiscal measures, which created nervousness on the international capital markets in the summer of 2015 but had a stabilizing effect in the country itself—at least for the time being.
Brazil
In Brazil, the recent economic and political problems continue to plague the country. In a recessive environment that is also dealing with high inflation, companies are struggling with weak domestic demand and—despite a currency devaluation—declining exports. Cost-cutting measures by the public sector and recent scandals in that part of the economic sector that is within the government’s sphere of influence have had an additional negative impact on the situation. This means that another decline in GDP of around 2.5% is expected for 2015, and a recovery in 2016 seems rather unlikely.
As a result, the progress of voestalpine’s business is challenging in this environment. Comprehensive and far-reaching cost-cutting measures and efficiency improvement programs are being implemented at all locations in Brazil in order to maintain their competitiveness. This will also enable the companies to continue to achieve stable and positive results.
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