• 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

Economic success expands the scope for sustained action in the interest of all stakeholders. With a strategy focused on effectiveness and efficiency, ThyssenKrupp Steel succeeded in achieving the highest earnings in its history in fiscal year 2004/2005. As a result it again significantly increased its contribution to value added in the ThyssenKrupp Group.

ThyssenKrupp Steel key figures1)
1) continuing operations only 2) before taxes and minority interest
			2003/2004		2004/2005
Order intake	million €		13,696		14,399
Sales	million €		13,151		14,752
EBITDA	million €		1,727		2,097
EBIT	million €		996		1,370
Income2) (EBT)	million €		916		1,302
Employees (Sept. 30)			44,013		43,777

 

Global economy remains robust

The global economy remained on a growth track in 2005, though the rate of expansion slowed towards the middle of the year. A major factor here was the significant increase in energy and raw material prices, with the drastic increase in the price of oil in particular impacting economic growth in the oil-importing industrial countries. According to current estimates, global GDP will increase by around 4% in 2005, compared with 5.1% the year before.

Gross domestic product 2005 Real change vs. prior year in %¹⁾

1) estimate

 

The main growth impetus again came from North America and Asia. In the USA the economic expansion was mostly driven by strong domestic demand for both private consumption and investment. The Chinese economy grew by over 9%. The other emerging economies of Southeast Asia reported similar growth rates. In Latin America the upswing continued at a slightly slower pace. In Brazil the economy was supported in particular by increasing exports.

The situation in Central and Eastern Europe was characterized by continued high growth in 2005. By contrast the economic recovery in Western Europe was subdued, with gross domestic product in the euro zone only expected to increase by 1.3%, with heterogeneous trends in the individual countries. Growth in Germany will be below the average for the old EU countries at less than 1%. Lively export activity despite the strength of the euro was not enough to fully compensate for weak domestic demand.

Trade shows as market compass: BAU 2005 in Munich, Euroblech 2004 in Hanover, IAA 2005 in Frankfurt.

 

Mixed trend among steel-using sectors

Following the growth in output in the steel-using industries of Western Europe in the previous year, 2005 was characterized by stagnation or only slow growth. Although the performance of the global automobile market was positive overall, production in Western Europe was 2% lower than the year before. Nevertheless, in Germany the positive trend continued with growth of 2%. The strongest expansion was recorded in the truck market. The German mechanical engineering sector increased production by 4%. An extremely positive trend in foreign business – aided by several major orders – was set against slightly less dynamic domestic demand. Construction activity in Europe developed favorably. The only inhibiting factors in 2005 came from Germany; this important market was in recession for the tenth year in success. By contrast, demand in the construction markets of Central and Eastern Europe showed above-average growth.

ThyssenKrupp Steel sales by customer group 2004/2005

 

China boom driving world crude steel production

On the international steel market, the high rate of expansion observed the year before continued in individual regions in 2005. World crude steel production increased by 7% to 1.13 billion metric tons. While unchecked production growth – mainly in China but also in India – contributed to this, production in the Nafta region and Western Europe was cut back from spring 2005 in response to falling demand. In the EU 25, crude steel production was thus 5% lower at 183 million tons. The German steel mills also recorded lower output at just under 45 million tons. After operating at their capacity limit in the first months of the year, they finally cut back production in May and then increasingly in the summer months.

 

World crude steel production by region in million metric tons/year

1) estimate

 

However, the situation on the international steel markets over large parts of the year was also characterized by demand weakness, mainly due to inventory cycle factors, and initially still high supply. The strong demand pull from China and North America which had characterized steel market activity worldwide in the previous year and led to temporary supply bottlenecks for steel and raw materials into the first half of 2004, weakened. The extreme price increases accompanying the global growth in demand had led to speculative inventory building in many regions. These inventory overhangs resulted in a marked decrease in steel demand in most markets from the beginning of 2005. In parallel with this, competitive pressure increased, especially in the USA and Western Europe, due to higher imports. As a result, steel prices decreased across a broad front. In Western Europe prices only started to come down from spring 2005, with the market finding its balance again towards the end of the 3rd quarter of 2005, supported by reduced shipment volumes and declining imports.

Stainless demand regionally mixed

World production of stainless steel in 2005 was level with the prior year at 24.7 million metric tons. Demand for cold-rolled flat products stagnated at 13.3 million tons. The decline in Europe and North America was offset by the positive trend in Asia. Demand increased above all in China. In China and on the European market, new capacities and inventory cycle factors put pressure on base prices. A pleasing development was the significant recovery in demand for nickel-base materials, which allowed marked price improvements to be made.

 

ThyssenKrupp Steel: Sales supported by higher revenues

ThyssenKrupp Steel performed outstandingly in a much more difficult market environment. The
value of new orders at continuing operations increased by 5% to just under €14.4 billion. Order
volumes were significantly lower but they were offset by higher average prices made necessary
by extreme cost increases for raw material purchases. The same trends also influenced sales,
which increased 12% to just under €14.8 billion.

ThyssenKrupp Steel sales in million €
1) continuing operations only
		2003/2004		2004/2005
Carbon Steel		8,387		9,291
Stainless Steel		4,990		5,568
Special Materials		321		387
Total		13,698		15,246
Consolidation/Corporate		(547)		(494)
Total1)		13,151		14,752

 

Carbon Steel increased its sales by 11%, mainly due to the price-related business expansion. Shipments decreased significantly. At the subsidiaries, pleasing sales growth was achieved in particular in the tinplate, medium-wide strip and European service center activities.

Despite reduced volumes and different trends in the individual regional markets, Stainless Steel increased its sales by 12% mainly as a result of higher base prices and scrap and alloy surcharges in the core stainless flat business. The nickel-base alloy business continued its positive performance in terms of volumes and revenues.

ThyssenKrupp Steel sales by region 2004/2005

 

The Special Materials business unit disposed of the specialty steel long products operation in the reporting period, leaving only the grain-oriented electrical steel activities. ThyssenKrupp Electrical Steel recorded a sales increase of almost 28%. The market was characterized by high growth rates throughout the reporting year, which allowed us to improve prices significantly.

ThyssenKrupp Steel achieved 58% of its sales outside Germany, mainly in the core market of Western Europe. However, with the globalization of the sales markets other regions are taking on increasing importance.

TAGAL hot dip galvanizing facility – quality leader in China.

 

Portfolio streamlining: Discontinued operations

In the reporting year the portfolio streamlining process was continued and largely completed. Edelstahl Witten-Krefeld GmbH was sold to Swiss Steel AG, part of the Düsseldorf-based Schmolz + Bickenbach group. In addition, Hoesch Contecna Systembau GmbH was acquired by the Franzen group. For reasons of comparability, both companies have been treated as discontinued operations and are no longer included in the figures. They contributed €406 million to the business volume in 2004/2005. In fiscal year 2003/2004 sales of discontinued operations amounted to €1,119 million.

At the end of October 2005 the Italian Calvi Holding group and Hoesch Hohenlimburg GmbH agreed in principle that a majority shareholding of 75.1% of the special profile activities of Hoesch Hohenlimburg is to be sold to Calvi. The economic transfer takes place at the end of 2005.

Production cutbacks to stabilize the market

Crude steel production at the continuing operations of ThyssenKrupp Steel was almost unchanged from the year before at 16.5 million metric tons. Initially the core production units were running at full capacity, but from the middle of the period Carbon Steel had to cut production in the processing operations as a result of lower demand. From spring 2005 Stainless Steel reacted to the weaker market in Europe by cutting production. Overall, rolled steel production for customers decreased by 5% to 15.5 million tons.

ThyssenKrupp Steel rolled steel production in million metric tons

 

Enormous cost pressure in raw materials

Due to the tight situation on the raw materials markets resulting from the steel boom in China, Carbon Steel had to accept price increases for iron ore of between around 70% for fine ore and 87% for pellets in the 2005 supply year. Coking coal prices increased by 120%, while prices on the world market for blast furnace coke came down from the previous year’s record high.

At Stainless Steel raw material prices were very volatile. Prices for the key alloying elements nickel, chromium and molybdenum were extremely high at the beginning of the year but weakened significantly thereafter.

The Steel segment incurred additional costs as a result of higher energy prices for oil, gas and electricity. The extra costs resulting from the subsidization of renewable energies, combined heat and power plants and the electricity tax are still impacting power prices in Germany. These have already reached the level they were at before the liberalization of the market in 1999 and are the second highest in Europe.

Improved performance boosts earnings

The efficiency enhancement programs under ThyssenKrupp best were continued with great intensity in fiscal year 2004/2005 and new elements were added. They made a significant contribution to strengthening the quality of earnings. A total of 166 new projects were launched which will make processes better, faster and more customer-focused. Alongside operating efficiency, the sales and purchasing initiatives were key elements. From the start of ThyssenKrupp best in the fall of 2001 to the end of September 2005, a total of 669 projects were launched, of which 262 have already been successfully completed, 361 are in progress and 46 are in the concept phase. Central modules are the WorkPro and Project 2006 programs at Carbon Steel and Success in Stainless Steel.

ThyssenKrupp best project landscape

Outstanding success has been achieved in the Six Sigma program carried out jointly with the Automotive and Technologies segments. In the past fiscal year 13 new ThyssenKrupp Steel black belts were trained. In parallel with the theoretical training, the participants developed improvements in production and administration. In view of the positive response at management and employee level, training and use of the Six Sigma methodology is to be continued and intensified in fiscal year 2005/2006.

A team from Carbon Steel won second prize in the Group’s internal “ThyssenKrupp best Award” in April 2005. The aim of the project was to use the existing facilities to produce and sell a product mix which optimally matched the company’s production facilities with market demand. The actions developed created the basis for a considerable improvement in earnings.

Investment projects strengthen competitive position

The earnings-oriented corporate policy of the Steel segment has widened the scope for strategic investment which will not only secure jobs at the core locations but also open up perspectives for growth. In fiscal year 2004/2005 ThyssenKrupp Steel invested €753 million in intangible, tangible and financial fixed assets. Of the total amount, Carbon Steel accounted for €521 million and Stainless Steel for €203 million.

Total investments in 2004/2005

Carbon Steel focused in particular on strengthening its high-performance plant configuration in Germany, with considerable funds being allocated to the implementation of the forward strategy in the tinplate business. Investment also focused on expanding the company’s international presence. Stainless Steel concentrated on moderately adjusting capacities to regional market requirements and improving structures in sales and services. Information on key investment projects is contained in the sections on Carbon Steel and Stainless Steel.

 

Rasselstein – Germany’s only manufacturer of tinplate.

Record earnings

With a pre-tax profit of €1,302 million, ThyssenKrupp Steel reported record earnings in fiscal year 2004/2005. An improvement of €386 million was achieved against the previous year.

ThyssenKrupp Steel income in million €
1) adjusted due to the presentation of discontinued operations 2) before taxes and minority interest (EBT)
		2003/20041)		2004/2005
Carbon Steel		608		1,002
Stainless Steel		385		282
Special Materials		(80)		22
Corporate/Consolidation		3		(4)
Total2)		916		1,302

 

Income at Carbon Steel increased by €394 million to €1,002 million. ThyssenKrupp Stahl made a major contribution to this growth in profit. The main reasons for the rise in earnings were higher average revenues and the consistent continuation of performance-enhancement measures. On the other hand, the drastic cost increases for key materials such as iron ore, coal/coke and scrap as well as for freight rates and energy had a negative impact. The steadying of the market following the demand boom of the previous year also led to a drop in shipment volumes. In a particularly favorable market environment, the medium-wide strip products activity more than doubled profits despite having to absorb nonrecurring expenses from the disposal of the special profiles business. The steel service centers and non-grain-oriented electrical steel activity likewise returned substantially higher income and made a major contribution to the improvement in earnings. In tinmill products and tailored blanks, profits were down from the good prior-year level. The building construction activities generated a small profit in a difficult market environment. The cold room business significantly improved on its prior-year income.

 

The plant in Andernach – expanded into the biggest tinplate site in the world.

 

Stainless Steel reported income of €282 million, compared with €385 million a year earlier. Demand for cold-rolled products in Europe fell sharply in the course of the year. As a result, base prices entered into a steady decline from the second quarter onwards. Added to this were increased costs for energy and freight rates as well as price increases for input materials such as nickel, chromium and scrap. The passing on of cost increases for input materials in the form of alloy surcharges is possible only to a limited extent outside the European and American markets, and even in Europe and America the process entails a time lag. As a result of the continuing implementation of cost-reduction and efficiency-enhancement programs, our German activities achieved outstanding profitability in this environment and almost repeated the income level of the previous year. In Italy profits were down from the year before due to restructurings and capacity cutbacks.

 

Following a recovery, the Chinese market was characterized by a dramatic fall in prices form April 2005, triggered by substantial new capacities forcing their way onto the market. As well as operating losses, this led to inventory write-downs, which were the main reason for the loss reported by the Chinese cold rolling mill. In a generally stable market, the Mexican cold rolling activities almost succeeded in repeating the very good earnings of the previous year. The nickel-base alloys activity reported significantly higher operating income.

Special Materials returned a profit of €22 million after showing a loss of €80 million in the previous year. The German and French grain-oriented electrical steel activities achieved a strong profit following losses the year before. However, the Italian activity again reported a loss. In the reporting period it includes €17 million of strike costs at the Terni plant and expenses for the now completed closure of electrical steel production. Even without the nonrecurring charges, income in both years would have been negative.

ThyssenKrupp steel service centers form an important part of the supply chain.

 

Value-based management

The ThyssenKrupp Group – and so also the Steel segment – is managed and controlled according to a value-based management system. This focuses on achieving a continuous and sustained increase in the value of the Company by concentrating on businesses which in terms of performance are among the best in the world. To achieve this objective, an integrated controlling strategy has been adopted which allows the goal-driven control and coordination of all activities, supports decentralized responsibility, and promotes overall transparency. Central performance measures are ROCE and EVA. These two ratios reflect the earning power of capital employed.

ROCE is the ratio of earnings before taxes and interest to capital employed. Only when it exceeds the weighted average cost of capital, which for ThyssenKrupp Steel is calculated at 10%, is it possible to increase the value of the enterprise.

Value indicators

Following the progress made in the previous year, ThyssenKrupp Steel achieved a further significant improvement in the value indicators in fiscal 2004/2005. As well as a favorable market environment, the performance enhancement programs implemented throughout the segment played a decisive role in this. As a result, ROCE and EVA were well above target. The value indicators also take into account discontinued operations.

Value indicators 1)
1) including discontinued operations 2) earnings before taxes, minority interest and interest (net interest incl. interest expense for accrued pension liabilities)
			2003/2004		2004/2005
EBIT (ROCE)2)	million €		1,095		1,406
Capital Employed	million €		8,685		8,804
ROCE	%		12.6		16.0
EVA	million €		226		526
Free cash flow	million €		800		555

 

Earnings before interest increased €311 million to €1,406 million and include the interest expense for pension liabilities. With capital employed slightly higher, ROCE reached 16.0%, compared with 12.6% the year before. This means that ThyssenKrupp Steel not only generated its 10% weighted average cost of capital but in addition to this delivered a substantial contribution to increasing the value of the ThyssenKrupp Group. EVA climbed €300 million to €526 million.

Free cash flow – the balance of cash flow provided by operating activities and cash used in investing activities – reached €555 million. It was used to reduce debt and for profit transfer.

continue with Carbon SteelMembers of the Executive Board

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