Stemcor announces full year results 2007

Highlights

Record turnover and tonnage:

• Turnover up from £3,308m to £ 4,254m (+29%)
• Operating profit up from £79m to £92m (+16%)
• Pre-tax profit up from £52m to £65m (+27%)
  • Exceptional profit £16m (2006: nil)
• Steel up from 9.4m tonnes to 9.8m tonnes (+3%)
• Raw materials up from 9.5m tonnes to 10.5m tonnes (+11%)

Salient points:

• Achieved over 40% growth in tonnage sold in Continental Europe.
• Acquired international stockholder Steel Plate & Sections (SPS).
• Divested Savage River iron ore operations in Tasmania, retaining 10% stake.
• Invested in iron ore mining and pelletisation operations in India.
• Launched Stemcor Risk Management to use the new steel futures exchanges to manage price risk both for Stemcor and for our partners.
• Strong prospects for 2008, with solid forward order book.
• In March 2008, acquired UK stockholder Barclay & Mathieson.

Chairman's statement

It is pleasing to be able to report another successful year, both in terms of results and strategic progress. The underlying numbers are not as good as the headline figures, because of the exceptional capital gains booked during the year. This was, however, a record performance. We again earned an after-tax return of over 40% on shareholders’ funds at the beginning of the year. Most of this return is retained within the company and our shareholders funds are £150 million.

Our growth in recent years has resulted from our ability to adapt to a changing world by reinventing ourselves through new strategies. One such important strategy has been to go downstream and provide more value-added services, including holding stock for quick or just-in-time delivery and processing prior to delivery. In Germany, our distribution, stockholding and processing subsidiaries - OKS, S+B Flachstahl and WSK - hold planned stocks in 12 different locations. In the USA, 2007 was the first full year of ownership of our stockholding subsidiary, Kenilworth, in Warren, Ohio and we also hold stocks at a number of port locations. In France, Italy and Central Europe, our fast expanding businesses now hold unsold stocks at various ports, as we have done for many years in the UK. In 2007 we purchased a well established steel stockholder and processor, SPS, which is headquartered in Birmingham, England, but has an international business with special focus on the offshore oil and gas industry. SPS holds stock in Birmingham, Glasgow, Rotterdam, Dubai and Singapore. We are planning further acquisitions and, although we fully intend to go global in stockholding, we believe this will be more easily accomplished by initially building up a strong base in the developed world. With this in mind we have just completed the acquisition of Barclay & Mathieson, a general steel stockholding group with 12 depots in the UK.

We monitor and control the level of unsold stocks very closely and every unit has to operate within limits set by our risk director. Our unsold stocks amount to just 3% of the total steel tonnage we sell annually. We focus on the length of time material has been in stock to ensure minimum stock levels with maximum stock-turns. Any stock that is more than six months old is subject to obsolescence provisions, which are among the more conservative in the industry. This also serves to motivate our unit managers to ensure that our stock really does turn over quickly.

Prices that go up can also come down. Stockholders benefit from stock appreciation in a rising market but, even if they are skilled in controlling stock levels and anticipating price movements, they will still suffer when prices fall. This price risk has been difficult to avoid in the absence of a futures market and is one of the many reasons that we welcome the introduction of steel futures at the LME and other futures exchanges. We look forward to being able to hedge at least part of our price risk on our own steel stocks through futures markets. Steel futures will take time to become generally accepted but we are confident that they will take hold and have major implications for our industry. Apart from the ability to hedge trading positions we believe that more and more sales in future will be linked to exchange prices. We are exploring further activities we could undertake in the new world of steel futures and we have set up a specialist team for this purpose.

2007 was a very strong year for steel trading. The unprecedented rise in the cost of freight, however, did have a substantial negative effect on our profitability. We do hedge our freight exposure as appropriate, but it is often not possible to do so effectively. Volatility in our markets is becoming more pronounced and increasingly it will become necessary for a steel trading company to hedge its risk exposure both to steel and to freight prices.

Raw materials also saw strong growth in 2007. The disposal of the majority of our holding in Savage River in Australia might look premature in view of the recently announced steep rise in iron ore pricing, but we are re-investing the proceeds into iron ore projects in Orissa in India, where we believe we can obtain a better long-term return.

Our portfolio today extends beyond traditional trading into financial services. One example was our advisory role in the successful restructuring and privatisation of the Georgian ferro-manganese industry. This was a transaction that any investment bank would have been proud to accomplish. Our fee-based consultancy services in offset also had a good year.

Overall, 2007 was a mixed year for the global steel industry as the arrival of increased Chinese exports affected prices in the second half, despite the world-wide construction boom and the growth in world steel consumption. At the beginning of 2008 clear evidence that China was intent on controlling and reducing steel exports started an upward spike in steel prices, which is continuing as I write, and which has been described by one commentator as a price volcano. Other commentators are suggesting that without Chinese exports the rest of the world now faces a structural shortage in steel capacity, which will further fuel the rise in prices we have experienced in the first quarter.

Never has there been a more striking contrast or disconnect between the financial world with its credit problems and the real world of steel with its apparent growing demand. The question is how much longer can these two different worlds inhabit the same universe? The past history of the steel industry suggests that prices will not go on climbing for ever and the bigger the rise, the greater the risk of a correction. If the credit crisis continues, it will reduce both the purchase of consumer durables like cars and requirements for new retail and commercial construction. There will be an adverse impact on investment in general and therefore on the demand for steel. We therefore retain a healthy caution about what the future may bring. As far as our own prospects are concerned, we are confident that we have put in place the building blocks for continued success. We expect further growth and another good year in 2008, based on strong current trading and our substantial forward order book.

My thanks again to our customers, our suppliers and our bankers for their continued support and to our dedicated staff for all their hard work. We look forward to our future together with confidence.

Ralph Oppenheimer
Executive Chairman
4 April 2008

Click here for the corresponding consolidated profit and loss account and consolidated balance sheet.