The “re-industrialization” of the U.S. and demand from the energy, automotive and heavy transport industries have boosted profitabilty of SSAB’s local operations, Chief Executive Officer Martin Lindqvist said in an interview in Stockholm. While the CEO doesn’t forecast a “fantastic business cycle” in Europe, he’s “expecting it to be fairly flat and grow from where we are today, in line with GDP.”
Rising demand makes it less likely that SSAB will achieve the full 1.4 billion kronor ($194 million) of possible savings from its merger this
year with Finland’s Rautaruukki Oyj (RTRKS) as markets would have to weaken for the company to idle more production capacity. About 350 million kronor in savings would only be achieved “in a worse market situation, like 2013 or slightly worse,” the CEO said.
Lindqvist, a 16-year veteran of SSAB, took over as CEO in 2011 and has overseen the company through a challenging period in which the European steel market has been plagued by weak demand and overcapacity while a strong Swedish krona has dented profits and demand for Swedish exports. In July, he completed the 1.1 billion-euro ($1.4 billion) Rautaruukki deal to create a Nordic steel company with a production capacity of 8.8 million tons and 17,300 employees.
Cost Synergies
When announcing the Rautaruukki deal on Jan. 22, SSAB said it sees cost synergies of as much as 1.4 billion kronor within three years and that reaching the full total would depend on market conditions. If steel demand weakened, SSAB could idle some of its five blast furnaces, resulting in fewer costs for personnel and operations, Lindqvist said.While the CEO said he is “extremely confident” that SSAB will be able to deliver on the planned cost savings, current market conditions and outlook imply that they will exclude the 350 million kronor that can be achieved if demand weakens.
The current recovery already left its mark in the second quarter, when the company reported a profit of 133 million kronor, following a 1.1 billion-krona loss in 2013. SSAB’s earnings are also being boosted by an almost 40 percent drop in iron ore prices so far this year and a weaker Swedish krona.
SSAB is fully booked in North America for the third quarter “and we have an order book that we think is fairly OK” for coming quarters, Lindqvist said. “We haven’t communicated on the fourth quarter but we typically run our mills on decent capacity levels,” he said.
Manufacturing Boom
The U.S. has seen an increase in manufacturing and engineering investments as the shale-gas boom has slashed energy costs. Fracking, the gas extraction method that injects water and chemicals underground, has made the U.S. the world’s largest natural gas producer, overtaking Russia.“What we see right now and what we were expecting to see was normalized margins in the U.S. and one year ago the margins were extremely squeezed -- they were below the historical average,” Lindqvist said. “I claimed at that time that we will again see margins on the historical average and that is what we roughly see today.”
The stock has risen 24 percent in Stockholm trading since the start of the year, valuing the company at 32 billion kronor and outperforming the 4.3 percent gain of Sweden’s OMX Stockholm 30 benchmark index.
Asked about the European market, the CEO said that “the underlying or real demand in Europe is not getting worse. So it has bottomed out -- on much lower levels than we saw before the Lehman crash but still, it’s not trending downwards.”
While the Stockholm-based company won’t close any of its five major production sites in the Nordic region, it still expects to shed some 900 employees after the Rautaruukki merger. SSAB may also in the future decide to divest its Ruukki Construction unit, which provides building components and counts Russia as one of its most important markets.
“We haven’t taken any such decisions but that could be a potential candidate for divestment,” said Lindqvist.
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