Stemcor announces full year audited results 2010

Highlights

• Turnover increased by 45% over 2009 to £5.1bn, recovering to pre-recession levels.
• Pre-tax profit of £84m was the highest achieved to date, although after-tax profit attributable to shareholders was below the 2007 level.
• Tonnes traded increased by 25% over 2009 to 19m tonnes, with raw materials accounting for 59% of total tonnage.
• All business activities delivered a strong performance.
• The continental European distribution businesses returned to profit.
• In India, AMTC doubled its turnover on the back of increased iron ore prices.
• A cautious approach to provisions was maintained throughout 2010.
• Dividend payments resumed after a freeze in 2009.

Chairman's statement

I can report on a solid year in 2010, even though our performance does not yet reflect our true potential. We have made a strong recovery from the damaging effects of the worst recession since the 1930s. We are well placed to further improve profitability in 2011 and subsequent years.

Profit before tax in 2010 was £84 million, the highest in Stemcor’s history. The previous record, which included exceptional income, was £65 million in 2007. However, because of minorities and high tax rates in some jurisdictions, the 2010 profit of £40 million attributable to Stemcor shareholders was below the 2007 profit attributable figure of £44m.   

Post-tax return on Stemcor shareholders’ equity was 21%, which is roughly the average return on equity (ROE) we have made over the last decade. Our headline ROE may seem acceptable compared to other companies. Nevertheless, I am not happy with our performance, particularly given that our equity does not reflect the true value of our Indian investments, any goodwill or the intellectual capital embodied in our staff. Going forward, I believe there is plenty of scope for improvement in our ROE.

Last year in my statement I wrote that “we have excellent businesses capable of delivering substantial profits”.  All our activities were profitable in 2010. Our business in international steel trading is relatively mature, although our raw materials trading business is still young and can be grown rapidly. The new upstream activities in mining and processing and the downstream activities in stockholding and service centres can be substantially expanded. Stemcor today is a global company with offices in 45 different countries. Key developing economies are forecast to grow at near-double digit rates and our strong presence in many of these growth markets, combined with our value-added services, gives us a strong competitive advantage. All our different activities benefit from our in-depth knowledge of the steel industry and have synergy with each other. Our strategy of building up a number of separate activities throughout the steel supply chain is proving successful and I see no need for changes in our broad approach.

Our original business of international steel trading continues to perform most satisfactorily, despite the threats from consolidation and disintermediation. Although the business is riskier today than in the past because there is a larger element of proprietary trading, we have found that, by being prepared to make a market and trade on our own account, we are adding value both for our suppliers and for our customers. Provision of finance continues to be a key element in our service offering. Our risk controls have been substantially tightened, but this is an area where I look for continuous improvement and where there is still work to be done.

Turning to our mining and processing activities, there have been delays in getting forestry clearance for the final stage of Brahmani River Pellets’ slurry pipeline, an integral part of the pellet plant that we have built in India. Given the substantial environmental benefits that this project brings, I am confident that we will achieve clearance, but whether this will be in time to allow a worthwhile contribution to our 2011 results is still uncertain.  We were, however, pleased to receive environmental clearance for an increase in mining at our subsidiary Aryan Mining (AMTC) and there should be a strong benefit from this increased production in the current year. We will continue to invest in the growth of AMTC, whose plans for a beneficiation plant and a further slurry pipeline have been approved in principle by the State Government of Odisha. Our central mining team is being enlarged and we are actively looking for further mining and processing projects in which to invest. We hope to continue the successful record we have demonstrated in mining in recent years.

2010 was an unusual year in that we made only two small acquisitions, but this apparent absence of activity does not reflect the active negotiations that are underway in steel stockholding.  Two of these negotiations have already come to fruition in 2011 and we would expect to conclude further transactions later this year. The constraints on growth by acquisition are twofold. Firstly we need to have the depth of management to handle the challenges and integration issues that downstream acquisitions bring. We are addressing this requirement by recruiting three very senior managers from the industry. Meanwhile, our relatively small stockholding interests are all performing well and we look forward to rapidly expanding this downstream sector of our business.

The second constraint on our growth by acquisition is of course cash. So far we have been able to finance both turnover growth and acquisitions through increased equity resulting from retained profits. In future years, cash constraint may prevent us from growing as rapidly as we would like. Although we expect strong cash generation from our existing businesses in the next few years, we are part of a global industry that is becoming increasingly consolidated. If we are to play a full part in that consolidation, then we may need to increase our firepower by raising some additional longer term capital. We did investigate a private placement during the course of last year and, although there was real interest, we were not happy with the terms put forward and declined the offers. This is, however, an issue that we may revert to in future.

2011 has commenced strongly for us, although currently there are signs of uncertainty and price weakness, which may have an impact on our profitability as the year progresses. Nevertheless I am hoping for a good year, even better than 2010, and am confident that we are on the right road. My thanks to all our customers, suppliers and bankers for their continuing support and to our excellent staff whose skills and dedication are second to none.

Ralph Oppenheimer
Executive Chairman
24 March 2011

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