707/III/74-E

~!Q;Q! OF THJD FINANCIAL AND flQOJiO~C, SITUATION OF TI¥J LAJlGE IRON AND S"~

ENT.IDRPRISES IN THE! NINE ' ......

-----· ( 1) The Working Party on General Obj'eoti ves in Steel asked Arthur D.

Little, London, to car1~ out a stu~ to see what fin~~cial resources the

iron and steel industries in the Nine would require for long-term

investments ( 1985) and ho-v; such requirements could be met.

It was clear that, for these consultants to be able to prepare the

forecasts, they would have to be in pos8ession of the most recent

information available on the sources of finance used by such undertakings

and their p:t'Ofi tabili ty. The Business Analysis and Mul tisectoral Studies

Department of the Directorate-General for Industrial and Technological

Affairs in the Commission, has·. collected the information using the

analytical data in the tables drawn up by the DAFSA company. One

advantage of tllese data sheets, which are based on the European method

employed by financial analysts, is that the basic parameters taken from

the balance sheets of the various undertakings are presented in a

homogeneous form arid so meAningful comparisons and ratios can be prodaced.

Most of the data sheets (seven) cover fi've financial years (1968-72)~

but -some,oover two financial years {one sh~et) or fo~(two sheets); this

· is because the undertakings concerned existed, in their present legal

form, only for ~wo or four of the·years under consideration.

-2- 707/III/74-F.l

'• "~>•"• pI

(2) ··'The follol"ting enterprises were stUdied:

August Tlcy"sac·nhntte )

Heesch AG ) Germany

Stahlwerke Peine Salzgi tter )

Hoogovens Netherlands

:British Steel Corporation United Kingdom

Cockerill Belgium

Usinor ) France Sacilor )

Italsider Italy

Arbed Luxembourg

These enterprises. account for 65% .of iron and steel production in the

Comnlunity; as ·they are the l!argest groups and companies, and the industry r • ' ~

concerneCI. is' fairly homo€;aneo~,. it IDC\)' be assumed _th~t the information ... ' . ~ '

on them reflects 'the general ten.denoy and. the financial and economic . . •', .

situation of the entire integrated iron and steel industr,y.

The first Annex to this study contains the data sheets for the individual

undertakings or groups, showing the main financial indicators for the

years far which figures are available; the second Annex contains a

table summarizing the ratios which are considered to be the most

significant as regards the economic and financial situation of the

enterprises and their profitability.

-·3 -- 707/III/74-E

(3) .. With the help of weighted ave.rages, these ratios provide a fairly

accurate picture of the industr,y during the period under consideration.

Turnover figures (sales) for the beginning and end of the period show. that

the average growth·rate (for all the enterprises) was approximately

8. 4~~ per a.mrurn.

Ho-vrever, this grotvth rate varies fairly sharply from one enterprise to the

next, ranging from 2.6% for A. ~ssen to 17.4% for Cockerill~ Another

fact revealed by the data sheets in Annex I is that 1971 saw a general

decline in sales for all tl1e enterprises, followe~ by a distinct recover,y

in the second quarter of 1972.

Production of crude steel by the ten compani~s analysed averaged

approxin~tely 86 million tonnes per ~~um.

Annex I sets out in full detuil the main financial indicators which will

make it possible to examine, with the help of a number of ratios, the

profitability of each. enterprise and any grotrlh t-1hich might have taken

place.

The following.general formula for the activities of an undertaking:

(turnover before (raw materials

tax s~les) and other

purchas~s)

+ L.c. · + Margin

(labour costs) (or gross result

before depreciation)

gives a very broad outline of the. principal. aspects of a fina."lcial year.

Pa.rticulq.r attention should, ll9Wever, be paid to the aggregates· L.O. +

tna.rgin1 which together make up value .added .•

Labour costs show the contribution made by labour, and the gross result

indicates the funds required to keep the plant in good operating oond.i tion

(depreciation) and to p~ the return on the enterprise's own capital

(dividends and reserves) and on outside capital (interes·t on debts).

-.4 ~ 707/III/74-!i!

Ratios I- II- III (see Annex. 2) (weighted averages .for the_ period) are-. ' . , -,

quite important in this com>.eotion:

Value OJlded./ turnover _(P..atio I) is -app:ronmately 4rtfo. , whioh ~ea.ns _that

the cost of production (mainly raw: materi~s) is approximately 6o%;

The proportion of labour in total value add.ed is 65% (Ratio II);

The gross result of the enterpris~ as. a pro~rtion of value ad~ed.is

35% (Ratio III).

However, an examination of Ratio I (value added/turnover) for eaoh

enterprise shows fairly marked variations; the figures range from 25.7% {Sacilor) to 48.8% (Hoogovens). . In other words, the first enterprise

has much higher raw material costs than the second, : The main factors t ,·' •

behind this a.re the location of the plants, the ea.se with whioh supplies

of ores can be obtained tmd certain marke·~ oond.i tions.

In the case of Ratio II (labour costs/value a.d.o~ed - average 65%) ,_ the'.·

differences between enterprises are less appreciable. However, HooGOvens

and Usinor are an exception, with labour costs lotver than the u.verage

(54%). This means that for those two e~terprisGs the gross result

before depreciation/value added (Ratio III) is higher, at about 46% compared with a.n average of 3.?%•

The percentage is about the same in the case o_f Ita.lsider too, but here the net result is negative (loss). Italsider is an enterprise

belonging to the IRI group and formed fairly recently, whioh, when it

fire,t ~tarte4_ operating, had to bo~ow .. large ~ounts of oa.pi tal for ita

plant and infrastructure, especially for the Tarente iron and steel

works 't!hioh if! ~~ng tl~e mos.t ~odern in Europe~ . Consequent.ly, i~s

depreciation and financial cost~_-a.re very I?-igh.

I J ' '

/ .

·,

-5-. 707/III/74-E

Therefore, even though the gr~ss result before depreciation (result/value

added 46.·8%) is· satisfactory, profits at the begin11ing of the period

analY,sed vrere very low _and a net loss has been recorded· in the last three

financial.years. The. company produoe.s a. large. amount of crude steel

(approximate1~ 8 million tonnes per annum); however, it will have to be

. re-examined on a. longe-~term ba.sis if a more accurate picture is to be

obtained and also to take account of a possible upturn in Italy's general

economic situation.

Two other companies have made losses ih the last three financial years;

Sa,cilor-Jrrapce (formerly Wendel-Sidelor) and the British Steel Corporation

in the United Kingdo~n.

The comments made concerning Italsider can also be applied to the British

Steel Corporation, although its .infrastructure is older: nationalized in

195·1, denationalized in 1953 an~ renationalized in 1967, it currently

comprises twelve-former ~ron and steel enterprises. Its result reflects,

abotre all, th~ current economic;situation in the United Kingdom, especially

t~ effects of the British Government's prices policy.

In the case of Sacilor, the merger of Wendel and Sidelor led to an ~nc~ea~~

in oa.pi ta.l as a resu.l t of new issues and large investments.; the figures .

Should therefore be treated with ... caution, a.n improtrement in the enterprise's ! . . ' .

flnancial result looking likely in the medium term, resulting in particular

. f'rOt:n new investments (Fos).

,"~the li~ht of the_a.bove, Ratio IV, which is a fair guide to profitability,

, ca.n be examined •

. !be numerator shows current after-tax profits, which are not the profits ! . .

,indicated by the enterprise in the balance sheet., but the reau.l t calculated

-c Oh the basis of the financial analysts·• Ehl.ropea.:n method; the denominator 1

-J~ives own .resources (company capital + reserves). ·' ·.. '

' , I ~·

\

;,)'~--

-··6·~·· ' 707 /lii/7+-E tl .

\

The weighted. a.vel;-a.ge for. a.ll ·th~'"enter!)rises during the periodurider. · ·

consideration is .relatively lo.w (3.1%); hewever, fairly considerable-·

va.riations.a.ra to .. be no .. ted here·too: lloogovens1 (7.4%)', Hoesoh1 (5•1%).-­

Usinor (5.~). ·~In general· these enterprise~ have plants-~ocated on the·

coast -or on large .:wa.ter.wa.ys,.· and this meana'··that savings ',~a.n be· mo-de! on transport costa and the.refore on the cost :of raw materials· {ores' and: ·

furnace 09ke)~ ~ . . - :

Ratios V - VI - VII represent the amount in u.a.. of value added, and of

its two eomponentsf per unit employee. The figUres for-Ratios V (value

added/ employees) and VII (gross result/ employees) ·follow the' same pa.tt~rn · · ' '

as the figures for Ratio I (value added/TOBT), whereas for 'Ratio Vl (labour Qosts/employees), there are no appreciable variations.

._, ,·.

• !- •'

1 . . . . . . . . . . . . . .: . ,: ~ . . : ' : .· . . . : .. ; These ·tW<>'·enterp:rises·merged· in.-1912; .:harmoni.zed figures are not yet-avail~bl_e for the. new ·.company ,(called ES'l"EL). ., · · · · •· .· · · "·' - ·. ·· , ..

.. : .... ··

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-7- 707/III/74-E

After an economic slowdown in 1971, which continued during the first half

of 1972, steel markets throughout the wor·;I.d 'began to ex9and again; the

increase in demand during the second half of the year therefore enabled

world production to rise ~~ a high level. ' .. ,,,. . . . '

Th~ _t~tal world steel output (including production in the People's

Republic of China)t in 1972 of 628.1 million tonnes was 7.9% higher than

the· 5a2 million tonnes produced in 1971~ 'In almost every country the

previous record production figures "t·rere exceeded, except 1 hot...rever, in the

United Kingdom, Germany, Sweden and Luxembourg.

~1is irregular growth pattern has marked the general trend, particularly

in the co·wntries and groups of countries ~ith free market economies, where

production developed as follows:

Production in

million tonnes

in 1972

% change

•ol F'''

I 1972/71 1972/70 I

. =~. j ·~~~:~ +:::X i ~::= 1 L I ~ . . .. .. . ".... . l ' ~· I ··••• •• ' " . ,...... . 1

Japan .,.. 96o9 ..f-9.4 +3.9 t

·--------------------~------·-----------------+Source: OECD

x(United Kingdom ~-7)

xx(United Kingdom ~9.0)

~,,.,,, ........ ,, ........... , .... ·~~"' , .. , .. ~ ........................ .

- 8- ., 707/Iti/74--E

The 1ear-to-year .incrqase in product;on in ~b~ State-trading countries,

with the exception of the People's Republic of China, which, admittedly,

were not affected by tne economic downswing in 1971, was less vigorous.

The figures for the principal countries or groups of countries were as

follows:

USSR

Other COMECON countries

People's Republic of China

Production in

million tonnes

in 19721

126.0

44·5

23.0

1

i -

% change

1972/71 ~~

1972/70

i-4.4

'' 1-8.7

+5·0 ' +11.0

+9·5 +24.3

Output increased in all the Member States o: the Community of the Nine in

1972, but the rates varied considerably from country to country, reflecting

once again the lack' of' homogeneity of 'marke't-.. condition'8'. ' The 9·4% increase for 1972/71 sl1ow.n in the table on_ the previous page o~~ be brOken

down as follows between the various Member States:

i Production in -·!-· "-,, ....... ..

I' million tonnes

j in1972

Germa.r17 France

Italy

Belgium

Netherlands

Luxembourg

United Kingdom

. I I

I

1source: ECSC statistics

.43 .• 703. ., ' 24.054 19.784

14.530 5·580 5.457

24.200

l "'"" i·

I I ! i I

i

% change

1972/71 1972/70

~~l .... ~.4 ' . -3.0

+5·3' +1.2

+13.4 +14.6 +16.8 . +15.3

+9.8 +11.0

-t4.1 0

+4·1 -9

I,

- 9 ~- 707/III/74-E

However, turnover did not increase in line with the higher tonnages

produced~ Prices, which had begun to nark time in mid-1971, mainly as a

result of t:hc slackening in steel consumption, became even more depressed

as users r~ cow.n their stoCks and imports froQ non-member countries rose.

The recovery of export demand and the upturn in the economic situation

together helped to restimulate the price trend from autumn 1972.

Some of the factors behind the slow but crure recovery of the iron and

steel markGt Here:

the easing nf the prossure of imports from Jap&n, following the recovery

of tho domestic market and the opening up of the Chinese market;

the reversal of the ~revious tendency in the East-bloc countries,

which resumed pnrcr.ases, after unloading their products in past ~rears

on the 't'ITestern markets c;..t r:trticularly low prices;

the general revival of uctivity in the Community.

However, increased output, better prices and even productivity gains could

do little to offset the coaring production costs in the 1972 financial

year (end of the period analysed).

The large ~~ge increases granted at the beginning of the year by the

entire European iron and steel industry were the n~jor factor here. In

spring 1972 wagos in most European countries were a~proximately 10%

higher than at the SiJ,me time in 1971. These increases ge.ve an exceptionall~;·

sharp twist to the inflationary spiral, a trend that continues to be the

main cause of concern for all Et1ropean countries.

!

Production costs rose still further as a result of the upsurg~ in the cost

of the materials making up the charge, and particularly the further

increase in the price of coke.

Un~er the combined impact of virtually stationary selling prices, increased

labour costs and the rise in the coot of the materials making up the

charge, the resalts of the iron and steel companios in 1972 could not in

general bo termed s~tisfactor.y.

Without being over-optimistic, better financial results may be expected in

the short term, a~ industrial activity has now clearly.recovered. In

reality, however, this optimistic forecast could be tempered by a general

increase in raw material prices due to the recent oil crisis.

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