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As a result, although overall performance for the year will still be significantly ahead of 2007, reflecting the addition of Foseco’s contribution and continuing currency translation gains, full year performance for 2008 is now anticipated to be below management’s earlier expectations. The weaker end-market conditions are expected to prevail throughout the fourth quarter and into 2009, and management has initiated appropriate and decisive actions across the Group to mitigate the effects of this slowdown.
According to the latest World Steel Association statistics, global steel production, the main endmarket for Cookson’s Steel Flow Control and Linings businesses, fell 3.2% in September compared to the same month last year, giving a growth rate for the nine months year-to-date of 4.6%. The sharply declining growth rate was principally driven by China, where production in September was 9.1% lower than the same month last year.
Global steel production figures are not yet available for October, but in recent weeks producers in most regions have been announcing production cuts to reduce inventories and to support prices for finished steel. The duration of these production cuts is as yet unclear, and, as a result, it is not possible to gauge the likely level of steel production in the full year 2009, but the global steel industry appears to be reacting much more quickly to the slowing demand than in previous downturns. The division is managing its operations on the assumption of a significant reduction in global steel production in the remainder of 2008 and in the first quarter of 2009.
The Foseco Foundry business has recently seen some slowing in activity compared with the high levels experienced over the first nine months of the year, and, given the current difficult economic environment, weaker growth is expected in the fourth quarter of 2008. The integration of Foseco continues to make good progress and is on track to deliver the targeted synergy cost savings of £6 million (~ $9 million) in 2008 and a further £12 million (~ $18 million) in 2009.
Fused Silica growth remains strong, driven by demand for Solar Crucibles™ used in the production of solar cells. For the Ceramics division as a whole, underlying performance for the full year 2008 (on a pro forma basis for Foseco and at constant currency) is now expected to be in line with 2007.
Consumer electronics end-markets remain flat and automotive end-markets (representing approximately 15% of the Group’s Electronics division’s revenue) are weakening. As a result of these trends, underlying performance for the division for the full year 2008 is now expected to be slightly down from last year. Reported revenue will also be reduced by the pass-through of the lower current cost of tin and silver used in solder products, the prices for which are now significantly below the levels at the mid-year. This pass-through effect does not impact underlying profit.
While the Group has little transactional exposure to movements in exchange rates, its reported results are impacted by the translation of non-UK results into sterling. Compared to 2007, sterling has weakened significantly against the majority of currencies, and, for the first half 2008 results, this had the effect of increasing reported trading profit by 12%. Since then sterling has continued to weaken, particularly against the euro, U.S. dollar and Chinese renminbi, such that if exchange rates remain at current levels, the increase in reported trading profit would be around 14% for the full year 2008. Conversely, this weakening of sterling has an adverse impact on the Group’s level of reported net debt through the translation impact on non-sterling denominated debt.
The weaker end-market conditions experienced since the end of the third quarter are expected to prevail through the fourth quarter and into 2009. As a result, full year performance for 2008 is now anticipated to be below management’s earlier expectations. Overall performance for the year will still be significantly ahead of 2007, reflecting the addition of Foseco’s contribution and continuing currency translation gains.
Trading performance in 2009 will be dependent upon the depth and duration of the global economic slowdown. Management has initiated a program of appropriate actions across the Group to take account of the current and anticipated slowdown, and will continue to act decisively to adapt the business to market conditions as they evolve. The Group’s performance in 2009 will benefit from these actions, from a full year contribution from Foseco (vs. only nine months in 2008) and from the progressive realization of the Foseco integration synergies. The reported results will also benefit from currency translation gains if sterling remains weaker than average 2008 levels.
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