European fabricators facing the crisis - IWCC Joint Meeting - -Tokyo 2013- Marco Calamia KME Group KME Group - IWCC Joint Meeting, Rio - May 2010 1 1
Legal Disclaimer The purpose of this presentation is to guide programs benefitting the copper industry and provide meeting attendees information to make independent business decisions KME Group - IWCC Joint Meeting, Rio - May 2010 2
KME EUROPEAN LEADER AND INNOVATOR IN COPPER PRODUCTS A major European Group and one of the world largest fabricator of copper and copper alloy semi-finished products plus a wide range of high technological special products Recycle SpA 100% Group S.p.A. 100% Germany A.G. 100% On average, KME posted a yearly turnover of 3 billion and produced approx between 500-600 ktons of copper and copper alloy products One of the worldwide and European market leader of copper and copper alloy semifinished products 13 plants in Europe and 1 in China ~21,000 commercial partners ~6,500 employees Headquarters in Florence Italy Italy SpA Brass Italy Srl France France SAS Brass France SAS Germany Germany A.G. & Co. KG Architectural Metals Gmbh & Co.KG Brass Germany Gmbh Spain UK China Spain S.A. Yorkshire Ltd Ibertubos S.A. Dalian Dashan Chrystallizer Co. Ltd Dalian Surface Machinery Co. Ltd. Dalian Heavy Industry Machinery Co. Ltd. KME Group - IWCC Joint Meeting, Rio - May 2010 3 3
A WORLD UNIQUE PORTFOLIO OF PRODUCTS Division Product Main end uses Rolled Products Building, drainage, architecture, decoration, electrical engineering, connectors, boilers, coinage, solar collectors, snap fasteners, Tube Products Air conditioning & refrigeration, fittings, sanitary installations (water, heating, gas), boilers, electrical uses, thermal solar, medical industry Brass & Copper Rods Taps, valves and fittings, precision mechanical parts, automotive and transportation, electronic and electrical appliances, lock industry, building and architecture Special Shipbuilding, offshore, chemical Industry, machine building, house energy, steel industry KME Group - IWCC Joint Meeting, Rio - May 2010 4 4
METAL BULLETIN COPPER CONFERENCE 2011 In 2011, I was invited to the Metal Bulletin Copper conference, to discuss the following topic: IS FABRICATING SHARING IN COPPER S WEALTH? Copper price was in the region of 10.000 $, producers were sitting on a enormous cash, their average ebitda/sales ratio over 50%, while fabricators ebitda/sales ratio in the region of 5% and they were facing a lot of issues The outcome of the analysis was not at all KME Group - IWCC Joint Meeting, Rio - May 2010 5 5
METAL BULLETIN COPPER CONFERENCE 2011 The slide below generated amazement: This slide was showed again at the beginning of the copper conference in June 2011 by other colleagues, in order to reinforce what was analyzed 3 months before. KME Group - IWCC Joint Meeting, Rio - May 2010 6 6
CURRENT SITUTION IN THE COPPER MARKET Did the situation improve after 2 years? On one hand fabricators still set a side in the wealth generated by the main producers, but also, on the other hand, they are facing one of the toughest industrial crisis Some steps back are necessary KME Group - IWCC Joint Meeting, Rio - May 2010 7 7
PREMISES: THE 1 st CRISIS IN 2009 At the beginning of 2009, the financial crisis started in 2008 turned into an economic crisis The real issue was: all major studies based on past experience indicate that an economic crisis introduced by a financial crisis is on average 2/3 times deeper and 2/4 times longer than a standard crisis. The slowdown in demand occurred globally WE was particularly affected by the crisis, with very sharp and unprecedented drops for all major product families. KME Group - IWCC Joint Meeting, Rio - May 2010 8 8
PREMISES: THE 1 st CRISIS IN 2009 By the end of 2009 preliminary signs of recovery appeared and also in WE copper consumption started to increase, even if not in a relevant and stable way. In early 2010 WE consumption has been more concrete, even if the copper price, coming back to the quotation ante-crisis, is not supporting the recovery in consumption. In Q1 2010 the increase of WE demand started to be more evident, although showing notable differences among single products and applications: Good in industrial application Still weak in building KME Group - IWCC Joint Meeting, Rio - May 2010 9 9
THEORETICAL MODELS OF THE CRISIS Different theoretical hypothesis were considered at that time, regarding the crisis: L crisis, collapse and then a very slight recovery U crisis ; collapse and then a concrete and quite fast recovery W crisis ; collapse, temporary recovery, collapse again and gain recovery KME Group - IWCC Joint Meeting, Rio - May 2010 10 10
2 nd CRISIS 2011-2012 AND FUTURE DEVELOPMENT 2 nd H 2011 another crisis started, compared to the previous one, more focused in Europe, specially in Southern part, driven by different factors: Industrial crisis Sovereign debt (Greece, Portugal, Ireland Spain) Industrial weakness of some relevant countries (Italy, France, Spain) Rigid policy of Euro governments brakes the investment and the development Strong bank restriction, reducing the liquidity of the system The first effect occurred in Q4-2011, but the situation did not improve in 2012 and no effective sign of recovery are appearing in 2013. From industrial perspective is probably the longest crisis after the second world war Therefore, among the hypothesis done, it seems a W crisis model. Relying on full application of the scheme ( last /) KME Group - IWCC Joint Meeting, Rio - May 2010 11 11
COPPER MARKET EFFECTED BY DUAL CRISIS Copper industry is influenced on one side by the general health of the global economy, from the other side by deep and cyclical internal structural crisis of the copper market ; On the internal side the key areas of relevance are: General industrial crisis Downstream copper markets erosion and potential market collapse Automotive Building Global financial restriction Substantial consumption reduction Copper weakness High volatility Increment of substitution Substantial over capacity of the industry KME Group - IWCC Joint Meeting, Rio - May 2010 12 12
(Ktons) WE: GENERAL OVERVIEW 3.000 EU15: OVERALL DEMAND FOR NON-ELECTRIC COPPER AND COPPER ALLOYS SEMIS 2.500 2.000 1.500 1.000 500-27% +22% -6% -5% 0 Source: IWCC Statistical Bulletin, Dec. 2012 1998 99 00 01 02 03 04 05 06 07 08 09 10 11 12 2013e Between the last peak in 2006 and 2012 demand for non-electric copper and copper alloys semis in WE dropped by -36% (-850 Ktons). After a partial recovery in 2010, demand dropped at the end 2012 of 11% (2011-5%) (2012-6%); mainly due to the building industry s slowdown and the global economic sluggishness. First expectations for 2013 is an overall stagnation in demand on low levels (especially in the Mediterranean economies). KME Group - IWCC Joint Meeting, Rio - May 2010 13 13
(Ktons) WE: DETAILS FOR ALL MAJOR GROUPS OF NON-ELECTRIC PRODUCTS 1.400 EU15: DEMAND FOR MAJOR FAMILIES OF CU AND CU ALLOYS SEMIS (NON-ELECTRIC) 1.200 Alloy Rods 1.000 800 Rolled products -5% (cumulated 2010-2012) 600-15% (cumulated 2010-2012) 400 200 0 2012 vs. 2006 comparison Cu Tubes Source: IWCC Statistical Bulletin, Dec. 2012 1998 99 00 01 02 03 04 05 06 07 08 09 10 11 2012 Alloy rods: -32% (-345 KT) Rolled products: -36% (-244 KT) Copper Tubes: -47% (-224 KT) KME Group - IWCC Joint Meeting, Rio - May 2010 14-20% (cumulated 2010-2012) After recovering in 2010, demand for the major families of non-electric semis contracted again in 2011 and 2012 (mainly with reference to the building-related products). 14
WE: DETAILS FOR ALL MAJOR GROUPS OF NON-ELECTRIC PRODUCTS EU15: QUARTERLY YEAR-ON-YEAR VARIATIONS IN THE DEMAND FOR THE MAJOR GROUPS OF NON-ELECTRIC PRODUCTS 2010 vs. 2009 y/y var. 2011 vs. 2010 y/y var. 2012 vs. 2011 y/y var. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Rolled Products 24% 35% 27% 16% 3% -10% -9% -14% -2% -7% -12% -12% Copper Tubes -2% 5% -1% 3% -6% -12% -9% -19% -3% -13% -10% -12% Alloy Rods 39% 48% 18% 11% 2% 2% -3% -16% -2% -9% 4% 6% Source: Total above IWCC Statistical Bulletin, 24% Dec. 33% 2012 16% 11% 1% -4% -6% -16% -2% -9% -4% -4% From Q2 2011 onwards, demand for rolled products and copper tubes has continued to progressively and continuously downsize. Better scenario for alloy rods that have partly recovered in H2 2012. KME Group - IWCC Joint Meeting, Rio - May 2010 15 15
NEARLY 4 MILLIONS TONS LOST IN THE LAST 7 YEARS Source: ICA 2013 Substitution Report KME Group - IWCC Joint Meeting, Rio - May 2010 16 16
ALL KEY MARKETS ARE UNDER ATTACK (1 of 2) Source: ICA 2013 Substitution Report KME Group - IWCC Joint Meeting, Rio - May 2010 17 17
SUBSTITUTION RUNNING HIGH ABOVE ALL IN CHINA AND N.AMERICA Source: ICA 2013 Substitution Report KME Group - IWCC Joint Meeting, Rio - May 2010 18 18
OTHER EXTERNAL FACTORS IMPACTING ON THE COPPER MARKET Other financial and external factors are disturbing the industrial operation creating instability of the copper market Unusual and unclear situation of the warehouses, mainly influenced by the ownership of the traders Copper managed as a financial commodity, influenced by speculative behavior of the funds Creating high volatility in the market, Influencing the physical availability of the new metal Disturbing the scrap market, that remains one important driver of profit for fabricators KME Group - IWCC Joint Meeting, Rio - May 2010 19 19
OVERCAPACITY IN THE COPPER INDUSTRY Industrial crisis and erosion of the consumption have pushed an issue already in process, determining a dramatic increase of the over capacity in the copper industry that now, even if we don t have precise figures, the estimation is not going to be far 50%. The situation has increased the competition in the market that is anyhow focus on volume, destabilizing the structural equilibrium. No any aid from the European governments to support the industrial restructuration, as occurred in the past in favor of similar sectors. KME Group - IWCC Joint Meeting, Rio - May 2010 20 20
THE FABRICATORS MARGINS SIGNIFICANTLY ERODED BY FINANCIAL MODEL CONSTRAINT Hedging Financing 20 60 days Cash payment on arrival Customer Payment 60/90 days after delivery 90 days 7 days for physical material Production Order Product specification Fabricators are forced to hedge the system for 90 days Fabricators should finance the system from 80 to 180 days Fabricators are financially committed for 180/270 days KME Group - IWCC Joint Meeting, Rio - May 2010 21 21
OUTCOME OF THE ANALYSIS (1/2) Finally European fabricators have to face various issues Financial unbalance of the supply chain Industrial crisis Collapse of the market Strong overcapacity needs industrial restructuration, but very difficult for High costs Social constraints KME Group - IWCC Joint Meeting, Rio - May 2010 22 22
EVALUATION OF POTENTIAL SCENARIOS FROM THE PRODUCERS TO FABRICATORS PROSPECTIVE What we can do? KME Group - IWCC Joint Meeting, Rio - May 2010 23 23
WHAT PRODUCERS SHOULD DO Producers should support, throughout the fabricators, the downstream supply chain allowing higher equilibrium in the financial structure of the chain Strongly pushing the final copper consumption, supporting fabricators in research, development, advertising directly or through association Finally, fabricators are selling the copper of the producers (at least for the 80/90 %) KME Group - IWCC Joint Meeting, Rio - May 2010 24 24
WHAT FABRICATORS SHOULD DO Investing in efficiency and technology Emerging markets could be an opportunity instead of a threats, investing in efficiency and technology: Investing upstream Western economy are the most important scrap mine world wide; Our economy is obliged to profit of this richness, trying to get all the opportunity from the recycle business. Investing in copper promotion Promote the use of copper to the end user and make copper visible and connect copper to a top quality product is a strong tool to support our market Investing in new application and products To face substitution new areas can be developed such as renewable energy, electric vehicles, antimicrobial market development and water infrastructure KME Group - IWCC Joint Meeting, Rio - May 2010 25 25
CONCLUSION In the actual economic scenario, in order to over come the crisis that is slowing down Europe and also impacting on the global scale, it is necessary the effort and creativity of all the parts involved, but it is also essential to create strong synergies between fabricators and producers, in order to balance the industry. Therefore it is absolute vital to delineate and implement common targets and concentrate all effort and energies to pursue one specific objective, the durable sustainability of the global copper industry KME Group - IWCC Joint Meeting, Rio - May 2010 26 26
European fabricators facing the crisis - IWCC Joint Meeting - -Tokyo 2013- Thank you for your attention Marco Calamia KME Group KME Group - IWCC Joint Meeting, Rio - May 2010 27 27