• ThyssenKrupp in Brief
• Key figures
• ThyssenKrupp Steel overview

• Members of the
  Executive Board
• Letter from the
  Executive Board
• New structure of steel activities from 2005/2006
• Business performance 2004/2005

• Members of the
  Executive Board
• Foreword by the
  Executive Board Chairman
• Business performance and strategic development

• Members of the
  Executive Board
• Foreword by the
  Executive Board Chairman
• Business performance and strategic development

• Employees
• Research and development
• Sustainability
• Members of the Supervisory Board
• Executive officers of ThyssenKrupp Steel companies
• Major subsidiaries and
  equity interests

As a leading flat carbon steel producer, the new ThyssenKrupp Steel will continue to focus on intelligent material solutions, product-specific processing and comprehensive services for key customers in the future. Operating as the Carbon Steel business unit in fiscal 2004/2005, this activity made an above-average contribution to record earnings.

Carbon Steel key figures1)
1) continuing operations only 2) before taxes and minority interest
			2003/2004		2004/2005
Order intake	million €		8,839		8,791
Sales	million €		8,387		9,291
EBITDA	million €		1,216		1,625
EBIT	million €		660		1,045
Income2) (EBT)	million €		608		1,002
Employees (Sept. 30)			30,618		30,368

For the new Steel segment formed at October 1, 2005, focusing on carbon steel, corresponding key figures were calculated on a pro forma basis.

Steel segment key figures (new)1)
1) continuing operations 2) before taxes and minority interest
			2003/2004		2004/2005
Order intake	million €		9,134		9,255
Sales	million €		8,683		9,673
EBITDA	million €		1,182		1,660
EBIT	million €		615		1,067
Income2) (EBT)	million €		592		1,063
Employees (Sept. 30)			32,202		31,576

The comments on the business performance in fiscal year 2004/2005 are based on the key figures for the Carbon Steel business unit.

Flat carbon steel market

The Western European market for carbon steel flat products continued to be characterized by supply bottlenecks in 2004. However, the situation began to ease considerably from the beginning of 2005. The general picture was one of weak demand coupled with high inventories at steel users and distributors, shortening delivery times and shrinking order books. Initially still high shipments by Western European producers, combined with large increases in third-country imports in all product segments, resulted in a significant supply surplus. In Asia, especially China, as well as North America, the growth in demand had already begun to weaken in the second half of 2004, and consequently steel trade flows were again increasingly diverted to Europe. As a result, prices in our core market, which had previously reached record levels, came under pressure from the 2nd quarter of 2005.

 

Rolled Steel producer prices Germany Index 2000 = 100

Increased efforts by Western European producers to adjust supply to the lower level of demand were initially frustrated by the increased imports. Inventory reductions by customers continued until the end of the fiscal year. Imports began to decrease again from mid-year as Western European steel was available more quickly and at lower prices; the slightly weaker euro was probably also a factor here. Towards the end of the reporting year, the market was largely back in balance, supported above all by reduced shipments by Western European suppliers.

Market supply of carbon flat steel in the EU 15 in 1,000 metric tons/month¹⁾

1) incl. tinplate and electrical steel

 

Western European real steel consumption showed hardly any growth in 2005 – after expanding the year before. Producers of carbon steel flat products made up to some extent for volume losses in the EU with higher exports to non-EU countries – increasingly so from the 2nd quarter 2005. However, overall shipments in 2005 were significantly below the record level of the previous year. The same was true of the market supply.

Sales value higher

Order intake at Carbon Steel totaled €8.8 billion in fiscal year 2004/2005, 1% lower than the year before. The effects of the significantly weaker order volumes could not be fully offset by the price development. Sales increased 11% to €9.3 billion.

Sales by company in million €
1) since October 5, 2005 ThyssenKrupp Steel AG 2) continuing operations only
		2003/2004		2004/2005
ThyssenKrupp Stahl AG1)		6,626		7,383
Rasselstein		928		1,018
ThyssenKrupp Hoesch Bausysteme		165		161
Isocab/ems Isoliersysteme		173		173
Hoesch Hohenlimburg		535		679
ThyssenKrupp Stahl-Service-Center		757		883
ThyssenKrupp Steel North America		240		246
ThyssenKrupp Tailored Blanks		325		325
Other sales		790		866
Total		10,539		11,734
Consolidation		(2,152)		(2,443)
Sales2)		8,387		9,291

Hot-rolled coil and heavy plate are manufactured in accordance with material and process approvals from major classification societies.

The advantages of tinplate as a packaging material are particularly clear in the food sector: cans made of tinplate keep in valuable nutrients and protect them from harmful environmental effects.

Sales at ThyssenKrupp Stahl AG reached €7.4 billion in the reporting year; the 11% growth compared with the previous year was due entirely to the price increases achieved on the market. These were made necessary by further extreme cost increases for raw material purchases. The high level of shipments caused by extremely high customer call-off orders in the first quarter of the fiscal year could not be sustained in subsequent quarters on account of the weaker market. Overall shipments decreased by 8%. More or less all regional markets were affected by this. In the final quarter of the fiscal year, the lower sales volume in the EU was offset to some extent by strong growth in shipments to countries outside the EU. This was particularly the case for sales of hot-rolled strip for the welded tube sector, for which good prices were generally achieved. With the exception of heavy plate, where shipments exceeded the high prior-year level as a result of orders from new customers, the yearly average sales of all other products showed a decline.

In the breakdown by customer group, sales to the automobile industry were again expanded. In particular in the first half of the fiscal year, supply bottlenecks were still affecting some supplies to customers. The volume of business was also increased with the expanding tube industry, shipyards as well as in-house and external electrical steel producers. By contrast, supplies to rerollers, the construction sector, distributors and steel service centers showed a decline.

The price increases already being seen at the beginning of 2004 continued up to the middle of 2005; from the fourth quarter of the fiscal year the market weakness made it necessary to adjust prices in quarterly contracts. Nevertheless, the average price for the full fiscal year was 23% higher than the year before. This reflects above all price increases we achieved in contract business.

Steel construction elements - used successfully in industrial and commercial construction for many years. Their high strength, ease and speed of installation and favorable costs provide tangible advantages.

 

Almost without exception the subsidiaries repeated their very positive performance of the previous year. In the Tinplate operating group, Rasselstein succeeded in increasing its sales by 10% to exceed the €1 billion mark for the first time. The continued low demand for beverage can material in Germany was offset by expansive export business. Significant price improvements were achieved. The cost increases could not be passed on in full to the customers. In line with the objectives of the forward strategy, the share of coated material increased to 92% of total production.

Following the transfer of Hoesch Contecna Systembau, the remaining activities of the Building Construction group led by ThyssenKrupp Hoesch Bausysteme achieved sales of €161 million, 2% lower than the year before. The decline in volumes was almost completely offset by improved margins.

The Cold Room operating group operated in an extremely difficult competitive environment. Both in Germany and on the export markets, prices came under massive pressure. Sales remained stable at €173 million. Business in countries outside the EU was significantly expanded.

Hoesch Hohenlimburg reported 27% growth in sales to €679 million. Sales of medium-wide strip, which has unique selling points in the market for hot-rolled strip steel on account of its outstanding technological properties and high logistical flexibility, increased as a result of improved plant productivity and the start-up of a second slab furnace. Prices, too, showed a significant improvement. The special profiles business unit was sold at the end of 2005 as part of a best-owner solution.

Our European Steel Service Centers recorded a 17% rise in sales to €883 million. The reduced volume of business above all in European countries outside Germany as a result of lower demand due to the inventory cycle was more than offset by substantial price improvements.

At the ThyssenKrupp Steel North America processing center, sales were 2% higher at €246 million. The service portfolio was significantly expanded following the takeover of the service center activities in Mexico the year before. Supplies to the North American auto industry showed a severe decline, and here, too, the inventory cycle was mainly responsible for the weakness in demand. The improvement in revenues was countered by exchange-rate effects resulting from the overall increase in the euro exchange rate in the reporting year.

At €325 million, sales at ThyssenKrupp Tailored Blanks remained unchanged. After rapid expansion over recent years, market growth in Western Europe has now flattened slightly. Call-off orders from the auto industry were lower than the year before. A second location in China was opened to boost the international activities. A new production plant is being established in Sweden.

Sales at the other subsidiaries totaled €866 million, compared with €790 million a year earlier. The key activities were the logistics services performed within the Group by the raw materials and transportation companies, where sales increased by 9%.

Production cutbacks in the 2nd half of 2004/2005

In the first half of fiscal 2004/2005, the workload situation at Carbon Steel was characterized by restricted capacity due to the limited availability of steel. To supply the processing operations with starting material, slabs had to be bought in from other steel producers. Later in the year we responded to the weaker demand according to the principle of “price before volume“ and given our high inventories of finished products we cut production above all in the processing operations. The cutback mainly affected the cold-rolling mills and coating lines. Compared with the available capacity, the cutback amounted to some 800,000 metric tons in the second half of 2004/2005. Total rolled steel production in the fiscal year decreased by 4% to 13.6 million tons. Due to the structurally restricted slab capacity, crude steel production including the volumes procured from Hüttenwerke Krupp Mannesmann decreased by only 1% to 13.8 million tons.

Raw materials scarce and expensive

Due to continuing strong steel production growth, mainly driven by China, the situation on the global raw material markets eased only slightly in 2005. This was associated with further substantial price increases for raw material purchases. Cost pressure for steel producers rose enormously.

Overseas demand for iron ores increased again significantly following a 10% rise last year. Against this background, price increases on a US dollar basis of between around 70% fob for fine ores and 87% fob for pellets had to be accepted for supply year 2005. Purchases of ThyssenKrupp Stahl AG were around 16.9 million metric tons in fiscal 2004/2005, compared with 16.3 million tons in the previous year. As in the past, Brazil was the most important supply source with 11 million tons, followed by Canada with 2.7 million tons and Australia with 0.9 million tons.

Prices for Goonyella coking coal US$/t fob Australian ports

On the international coking coal market, the supply situation also remained very tight, due to increased demand from China and India combined with supply-side disruptions and weather related logistical problems. The price increases for the coal year beginning in April 2005 amounted to 120%.

On the international coke market, on the other hand, prices declined. The increase in cokemaking capacities in China and decreased demand from Europe and America due to lower steel production meant that towards the end of the fiscal year export prices for Chinese blast furnace coke had reached the level they were at in the second half of 2003 – the start of the raw materials boom.

Sea freight rates fluctuated widely and averaged out at a high level, so there was no cost reduction there.

Average prices for grade 2 steel scrap (Germany) in €/t

Scrap prices were also highly volatile. The price for grade 2 unalloyed steel scrap in Germany decreased by more than 50% up to June 2005 – starting from an all-time high at the beginning of the fiscal year – to reach 2003 price levels. However, there was a renewed trend reversal from July as demand picked up.

Alloys and metals showed widely diverging trends. Bulk alloys such as ferromanganese and ferrosilicon experienced significant price declines, while at times prices for noble alloys such as ferrovanadium and ferrotitanium increased exorbitantly driven by speculative buying.

Strengthening of competitive position in Germany

As a technology leader in premium carbon steel flat products wishing to remain internationally competitive we must constantly improve the efficiency of our central location Duisburg and all other plants. All opportunities are being utilized to optimize our internal processes and make them more customer-focused. In fiscal year 2004/2005, the WorkPro initiative, aimed at optimizing our customer and product portfolios from the point of view of value, was completed with significant contributions to earnings improvement.

In addition, the “Project 2006” was successfully stepped up. To secure and strengthen our competitiveness in the European marketplace, around 1,300 concrete measures with ambitious cost reduction targets were developed which are to be implemented by the end of the 2006/2007 fiscal year. This project has become a continuous improvement process which is significantly increasing the productivity of the company and already made a significant contribution to earnings in fiscal year 2004/2005. The improvement activities are focused on the administration, sales and production areas.

Blast furnace program stabilizes hot metal production

Duisburg is the largest steelmaking location in the world and has an optimum plant configuration. Its efficient iron and steel making facilities are to be strengthened in the next few years by investment of €340 million in iron production. The centerpiece of the modernization program is the construction of blast furnace no. 8 in Duisburg-Hamborn as a replacement investment. Also, blast furnace no. 9 directly nearby is to be relined. This program, to be implemented by 2008, is aimed at stabilizing the hot metal base for the production and processing of steel at our German plants. It will secure 1,200 jobs directly and another 3,600 indirectly.

Increasing our strengths in high-value products

Our portfolio is focused firmly on premium products offering customers added value through processing at our subsidiaries. These high-value products include tinplate, medium-wide strip, electrical steel, tailored blanks, steel service activities as well as building elements and cold room products.

External shipments by product group 2004/2005

1) incl. tailored blanks, construction elements

Important milestone in the forward strategy for medium-wide strip: start-up of the new slab furnace in Hohenlimburg.

 

We intend to systematically expand our strengths in growth areas in the coming years. In the specialized area of tinplate, the Andernach plant of subsidiary Rasselstein was upgraded with a €160 million investment program. It included the building of a new continuous annealing line for high-quality grades, the relocation of a coating line from a disused plant in Dortmund and the construction of a finished-products warehouse with a modern shipping logistics system. The facilities went into operation at the end of fiscal 2004/2005. Andernach today is the largest tinplate plant in the world with a capacity of 1.44 million tons.

Hoesch Hohenlimburg is a company specializing in high-quality medium-wide strip meeting close tolerance requirements. To better utilize the capacity of the medium-wide strip mill, bottlenecks were removed with the commissioning of a new walking beam furnace. Under the forward strategy, production will increase from 920,000 tons today to more than 1 million tons by the year 2008.

New tailored blanks operations

The tailored blanks production in China supplying the local auto industry was further expanded. A second laser welding line and a blanking press began operation at the Wuhan plant. A new production site in the northern Chinese city of Changchun began production in early August. The Chinese partner Angang New Steel Co. has a minority stake in the company, called TKAS (Changchun) Tailored Blanks Ltd. It currently produces around 70,000 tailored blanks, and this is set to increase to around 820,000 from the end of 2006. A service center with cutting equipment and warehouse capacities are to be added to the plant in 2006.

World ranking of tailored blanks producers in 2004 in 1,000 metric tons

1) incl. subsidiaries and international joint ventures

ThyssenKrupp Tailored Blanks is world market leader.

 

In Sweden, ThyssenKrupp Tailored Blanks Sverige A.B. was established in the reporting period. From 2006 it will supply the Swedish auto producer Volvo with 80,000 tons of tailored blanks per year from a factory on the site of the plant in Olofström.

Cooperation with JFE intensified

Together with JFE Steel Corporation, Japan’s second largest steelmaker, we established the Tokyo-based company JEVISE in 2005 to support the common automotive customers on materials issues at an early stage of new car development. The establishment of the company was part of the strategic alliance with the Japanese steel producer. Back in 2002, JFE and ThyssenKrupp Steel agreed common specifications for automotive steels and concluded a cross-licensing agreement allowing products to be supplied by the respective partners in Europe and Asia. In the future, both companies plan to expand their global network for supplying high-quality steels to the auto industry.

Integrated forward strategy: Brazil steel mill project

Following the completion of our restructuring process we are working on a forward strategy for the future based on our established strengths. To share in the expected growth of the international steel market, we plan to build an additional steelmaking site in Brazil to exploit regional cost advantages and utilize proximity to iron ore sources. The project is currently being prepared on the basis of a feasibility study. After the approval of the Group’s decision-making bodies, the Brazilian mill could begin production from mid-2008. The plans involve the building of two blast furnaces, a BOF meltshop, two continuous casters and a harbor at the coastal location of Sepetiba in the state of Rio de Janeiro. The total investment is US$2.0 billion. The world’s biggest iron ore producer Companhia Vale do Rio Doce will take a 10% stake in the project.

The Brazil project is the central element of an integrated internationalization strategy.

 

The Brazil project is the central element of an internationalization strategy which also includes all our other activities. We plan to use the slabs from Brazil to address the Nafta market intensively, but we will also be systematically expanding our presence in the European markets with products and services where we have specific strengths and sustainable competitive advantages. For this we will also be investing to expand our existing rolling and coating capacities in Germany, allowing us to process the Brazilian-produced slabs into high-quality products for customers in our core European market.

Start of the new fiscal year and outlook

World economic growth remained relatively robust at the start of the new fiscal year. According to current forecasts, the growth rate in 2006 will remain unchanged from the prior year at around 4%. Economic growth in our core market of Western Europe is expected to accelerate slightly. In Germany, the economic situation is expected to improve only moderately in 2006.

World steel industry remains on growth course

The outlook for the world steel market remains favorable overall – assuming a gradual stabilization of the world energy market. According to the latest IISI forecast, the market supply of rolled steel will increase by over 5% to 1,053 million tons in 2006. That equates to a crude steel output of almost 1.2 billion tons. Important demand stimulus will continue to come from China and other emerging countries of Asia and Latin America. In the EU 25, growth of around 3% is expected following the fall in demand in 2005 for inventory cycle reasons. A slight increase in demand in Western Europe is expected to trigger positive inventory cycle effects. German crude steel production should exceed the 45 million ton mark.

IISI forecast of rolled steel demand in 2006 in % versus 2005

Significant investment is being made to expand our rolling and coating capacities in Germany.

ThyssenKrupp Steel on strong footing

The new ThyssenKrupp Steel expects an increase in sales in the coming fiscal year, which will mainly come from higher shipments, with prices rising slightly. Against the background of further increasing costs on the raw materials side, prices for carbon steel flat products were increased for quarterly deals effective October 1, 2005. A further price increment is planned on January 1, 2006.

Capital expenditure remains at a high level. Additions to fixed assets of around €630 million are expected in fiscal year 2005/2006. The main areas will be the implementation of the blast furnace program at Duisburg-Hamborn, modernization measures at the hot and cold rolling mills, and the expansion of production capacities for water-quenched heavy plate grades. ThyssenKrupp Electrical Steel is expanding its capacities for grain-oriented electrical steel at its Gelsenkirchen and Isbergues plants.

The workforce will decrease to around 30,000 employees mainly due to the systematic continuation of existing programs and the planned sale of the special profiles plant of Hoesch Hohenlimburg in Schwerte.

continue with Stainless SteelMembers of the Executive Board

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