Declining Steel Production Poses Problems for Vesuvius
Vesuvius plc recently released a trading update. Since the announcement of its 2015 first half results in July, the company continues to experience headwinds in trading performance due to the ongoing deterioration in global steel and foundry markets. Its sales for the year to the end of October are 5.2% below the corresponding period last year at constant currency. However, the company reportedly has maintained margins broadly similar to last year. This resilience to the adverse trading environment reflects its strategic progress and the mitigating actions of the restructuring program announced earlier this year. These restructuring initiatives reportedly are being enhanced and the company expects to see some early benefit in its 2015 results.
Global steel production for the year to date in September was 2.4% lower compared to the same period last year, as reported by the World Steel Association. Although the company saw growth in India, it was offset by a decline in China and EMEA, as well as the continuing reduced levels in U.S. production volumes. Softening economic growth in China has lowered domestic steel demand with a resultant increase in export volumes to 110 million tons on an annual basis. The cheaper price of these Chinese exports has increased pressure on other steel producers. However, anti-dumping trade tariffs are being imposed in various countries, which should provide more protection for steel producers in those jurisdictions according to industry experts. Steel producers have also taken measures to preserve cash by destocking inventories, reducing purchases of consumables, curtailing production volumes and either mothballing or closing the least profitable plants. Steel producers in the U.S. and UK have been hit particularly hard due to the strengthening of the U.S. dollar and Sterling, coupled with weakening demand from the oil and gas industry. This destocking effect has amplified the decline in demand for Vesuvius products over the year.
Market conditions in the global foundry industry have remained challenging, particularly in mining in the U.S., Brazil, and Australasia. Although there has been some improvement over the quarter in light vehicle production, most notably in North America and Europe, steel foundries principally servicing capital equipment continue to be affected by the reduction in capital expenditure in all of Vesuvius’ major markets.
Vesuvius continues to operate with a strong balance sheet and remain strongly cash generative. There has been no material change in the financial position from that reported in its half year results on July 31, 2015. The strengthening of Sterling during the year continues to impact the translation of the results, though the foreign exchange headwind is greatly reduced compared to the same period last year. The company is maintaining its focus on working capital management to release cash and has reduced its 2015 capital investment program by one-third. The company expects the adverse market conditions to persist for the remainder of the year. Vesuvius continues to face these challenges through a combination of ongoing self-help and enhanced restructuring actions. Overall, the company expects its full year performance to be toward the lower end of the range of market expectations.
For more information, visit www.vesuvius.com.