Handelsblatt Exclusive

Salzgitter: Get Used to Import Tariffs

  • Why it matters

    Why it matters

    Steelmakers are struggling with overcapacity on the market and this could worsen especially if China is wins the right to be classified as a market economy.

  • Facts

    Facts

    • Salzgitter CEO Fuhrmann renewed the European steel industry’s call for protection from anti-competitive Chinese dumping with tougher trade tariffs.
    • Even with trade restrictions, it could take “seven to 10 years” to return to the global steel market to relative supply-demand balance, Mr. Fuhrmann told Handelsblatt.
    • Thanks in part to a diversification strategy, Salzgitter expects pre-tax profits to jump in 2016 to between €30 million and €60 million ($32-64 million) from €1.4 million last year.
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    Audio

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There's too much steel in the world. Get used to it. Source: DAPD

Global overcapacity has been hammering the steel-producing sector in many countries for years, but it’s a crisis without an easy solution that could remain for another decade, the chief executive of Germany’s second-largest steel maker Salzgitter told Handelsblatt.

That means import tariffs will remain in place and protectionism across the industry will grow even more common, Heinz Jörg Fuhrmann said in an interview at one of his factories in the northwestern industrial Ruhr region.

“The problem will not solve itself in a couple of years,” the 59-year old executive said. “We will need more time – I estimate between seven and ten years. In the European Union it also took years to address structural crises following a period of strong growth.”

Given the magnitude of the steel industry’s overproduction, change will not occur overnight, even with political backing. Mr. Fuhrmann said he expected trade tariffs to be a common feature of the steel market over the next decade as countries around the world ratchet up protectionist measures to shield their domestic industries against imbalances caused by overcapacity in China.

“There has never really been global free trade with steel.”

Heinz Jörg Fuhrmann, Salzgitter, Chief Executive

“In many regions, there will be trade restrictions to protect their own markets and companies until the sector finds a global equilibrium,” he said.

That includes the European Union, which has adopted important tariffs to cut down on China’s influence. While the 28-nation bloc “is not the first region with relevant steel consumption to reach for such measures,” Mr. Fuhrmann said the Continent is likely to keep them in place “until capacities and demand have found a balance.”

He does not view such a scenario as a threat to free trade, however, since in his view, “there has never really been global free trade with steel.”

Nor does the Salzgitter chief believe protectionism will trigger a broader trade war. “Every export-oriented economy in principle is interested in trade between countries and regions,” he said.

In response to protectionist approaches espoused by the U.S. president-elect, Donald Trump, Mr. Fuhrmann added, “I can’t imagine that we would halt economic exchange with the United States and the NAFTA members.”

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Despite the crippling overcapacity in the steel market and calls for consolidation, Salzgitter is not inclined to follow some of its European rivals down the path of reducing capacity through plant closures and mergers.

“We are quite busy and profitable. Why should I, even for a moment, consider sacrificing us at the altar of market correction?” Mr. Fuhrmann said. Capacities, he added, should be reduced where factories are “underutilized, outmoded, and unprofitable.”

Indeed, Salzgitter’s recent third-quarter financial report points toward improving profitability. Overall, the company expects pre-tax profits to jump in 2016 to between €30 million and €60 million ($32-64 million) from just €1.4 million last year.

The company, which expects sales to decline slightly in 2016 from €8.6 billion last year, seeks to instead grow organically by expanding its core steel and other related businesses, as detailed in its recently adopted strategic plan, “Salzgitter AG 2021.”

“Internal, qualitative growth also generates added value for shareholders, even if it is not so spectacular to market,” Mr. Fuhrmann, who served as the company’s chief financial officer before becoming CEO five years ago, said.

Consolidation might be good for rival steel makers, such as the potential tie up of European operations of Indian rival Tata Steel and bigger German peer ThyssenKrupp, but it was not an something Salzgitter would actively pursue. “From the point of view of other companies it might be right, but I look at it from Salzgitter’s perspective. We should not be a driver of consolidation,” Mr. Fuhrmann said.

“Supervisory board, management and our main shareholder – the state of Lower Saxony – are pursuing a business plan that foresees the further development of an independent company,” he said. “The problems of trade and climate policies cannot be solved through mergers, but rather can only be resolved on the basis of political decisions.”

The executive wants the European Union to fight what he claims is unfair competition from China’s heavily-subsidized industry.

“The sector has to deal with worldwide overcapacity, dumping imports from China, among others, and tightened climate protection regulations in the European Union,” Mr. Fuhrmann said.

E.U. steel producers want the European Union to impose higher import tariffs on Chinese steel and soften the carbon-reduction demands of the E.U. Emissions Trading System on the European steel industry.

Mr. Fuhrmann was one of 58 European steel bosses to write an open letter to E.U. heads of state in October in which they outlined the industry’s competitive and regulatory challenges and requested support.

“We expect political support on manufacturing under equal competitive conditions. That is all,” he said.

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With the steel industry in turmoil, Salzgitter is also looking elsewhere for growth. Diversification will remain a key facet of the company’s strategy, the chief executive said.

Salzgitter’s strategy envisions an expansion of non-core steel business units, such as its technology division, which supplies machinery and factories for bottling and packaging beverages. The company plans to boost sales in such divisions to 50 percent of total sales, compared to around 40 percent currently.

The automobile industry, for instance, is responsible for only about 20 percent of direct and indirect Salzgitter sales – a small share compared to some of its rivals. The food and beverage industry accounts for about 15 percent of company sales. Energy and construction are also key sectors for Salzgitter.

While Mr. Fuhrmann concedes Salzgitter’s relatively small share of steel sales to carmakers has limited its ability to profit from the auto industry’s upswing in recent years, it also limits the damage that could be done in a downturn, he added.

“We are constantly developing ourselves and continuing our path of diversification,” Mr. Fuhrmann said. “We are bringing out new accents and new projects, but we do not change our company strategy like a shirt.”

 

Grischa Brower-Rabinowitsch is head of Handelsblatt’s companies and markets section and is based in Düsseldorf. Martin Wocher writes about industry for Handelsblatt. Garrett Hering, an editor at Handelsblatt Global, contributed to this article. To contact the authors: brower@handelsblatt.com, wocher@handelsblatt.com

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