Annual report 2017

2017 ANNUAL REPORT Železiarne Podbrezová a.s. 13 European and global metallurgy has faced a long-term crisis due to the large volume of unused production capacity and a decrease in demand for metallurgical products due to stagnation in the sectors with the highest steel consumption - infrastructure and construction, oil and gas mining and mechanical engineering. According to the World Steel Association, global steel production and consumption decline in 2015 and 2016 was followed by a global production increase by 5.3% in 2017, and the use of steelmaking capacity in the world increased to over 70%. The long-term problem is a significant imbalance between steel production and consumption in the world, especially in China, which produces 49.5% of global steel. However, last year, China started to shut down its least efficient and non-ecological capacities to limit the environmental impact on its population and to promote profitability and competitiveness in the sector. There was a decrease in the extensive price pressure in the tube production sector from 2016, which was caused primarily by the concentration of OCTG producers in our sector, as very low oil prices in 2015 and 2016 substantially limited new investments in this sector and shifted the capacities of producers to other sectors. The clean-up in the sector and growth in customer demand for almost all tube types since early 2017 resulted in market shortages and longer supply dates of major producers. Consequently, in the first half of 2017, the Company opened new shifts and recruited new employees. The demand and the prices of raw materials, steel and steel products, including seamless tubes of Železiarne Podbrezová a.s., continued to grow in the second half of 2017 and resulted in a significant increase in revenues from operating activities by almost EUR 52 million (26%) compared to the previous year. We generated an operating profit despite a significant increase in operating expenses by more than EUR 44 million compared to 2016, which was primarily due to higher costs of raw materials and personnel expenses. A reduction in most material and energy consumption standards, mainly due to optimisation of the steel mill, rolling mill and drawing plant technological equipment, also had a positive impact on the Company’s financial performance. Profit from financing activities, mainly dividends from subsidiaries, also contributed to the Company’s profit. At the end of 2017, the Company’s assets amounted to EUR 269 million and were covered by own funds at 74%. The sales and financial plan for 2018 was prepared based on the situation in 2017 and information and price estimates for input raw materials and prices of final products. The financial plan was also affected by the labour market situation where the demand for skilled workers exceeds supply in our region, and by legislative changes with an impact on shift work. We are glad that the market situation in 2018 is also positive, with strong demand and relatively stable prices compared to the previous year, and other European and global tube producers have a similar view. However, the expected US tariffs on steel products may have a negative impact on the 2018 results, mainly in the second half, deepening the imbalance between steel production and consumption on global markets and creating tariff barriers between countries or groups of countries. This would lead to product surpluses on some markets and consequent pressure on product prices. Another potential risk is an economic crisis or correction which would cause a significant drop in consumption and consequently investment in infrastructure, mechanical engineering or the automotive industry. However, we believe that if none of the above scenarios occur, 2018 will be positive for the Company, with a solid operating profit and consolidation of its financial position. BUSINESS ACTIVITY PRODUCTION AND SALES Business strategy has long been centrally coordinated by Železiarne Podbrezová a.s. and managed on a geographical basis via subsidiaries, PIPEX ITALIA S.p.A., ŽP Trade Bohemia, a.s., SLOVRUR Sp. z o.o. and Pipex Deutschland GmbH. The year 2016 was extremely unfavourable, but there was a significant recovery and increase in demand in Q1 2017 in the steel industry and on seamless rolled and precision cold-drawn tube markets. Our sales team obtained sufficient orders, allowing us to add shifts and recruit new employees in April 2017. In 2017, we produced a total of 355 400 tonnes of steel, an increase of 61 774 tonnes compared to the previous year and a more than 12% increase compared to the plan. Of the total quantity produced, 259 020 tonnes were used for REPORT BY THE BOARD OF DIRECTORS ON BUSINESS ACTIVITIES, ASSETS, AND FINANCIAL PERFORMANCE IN 2017 AND INFORMATION ON THE BUSINESS PLAN