Outlook

Such a scenario would not only stimulate exports from Germany and the EU: the improvement in expected sales and earnings should also strengthen companies’ willingness to invest. However, factors such as the continuing appreciation of the euro and the ongoing strain on public sector finances are still capable and dampening economic development in the euro zone. Against this background it must be expected that neither the German nor the euro zone economies will exhibit strong dynamics in 2004. Forecasts at the beginning of the year predict a rise in GDP of 1.7% (2003: –0.1%) in Germany and likewise 1.7% (2003: 0.4%) in the euro zone.

The rolled steel market began the year 2004 on a more promising note than in the preceding year. A revival in international trade is likely to be accompanied by an expansion in worldwide sales of steel. The ability of the Asian markets to absorb supplies should generally continue to rise; China in this context is both a ray of hope and a potential risk. It is reasonable to expect that in the current year steel consumption in the EU will once again develop along more favorable lines. According to initial forecasts, the anticipated revival in investment activities in the EU and the expansion of production by important steel processors (the tubes industry, mechanical engineering) will lead to a rise in consumption of 2% or more. On the other hand due to the difficult raw material situation, growth in the production of crude steel in Germany will probably be limited.

Imports from non-EU countries are unlikely to greatly exceed their scope to date. High US dollar prices in other regions have the potential to limit the attraction of European markets. The extent to which exports of rolled steel from the EU are capable of growing is questionable given the current exchange rate situation. The strong market in Asia and the hale condition of the US economy, as well as detectable signs of firming demand emanating from India, Russia and South America, are all likely to provide positive impulses. On the other hand, in some sectors in Germany at least, there is no discernible potential for a sustained upturn.

Similarly, the development in the steel tubes market in 2004 will also be closely intertwined with movements in the global economic situation. The oil and gas segment will effectively be dependent on the extent to which the major oil companies choose to invest in their production, transport and handling systems. A breakthrough in the backlog of projects was already becoming apparent in the second half of 2003.
There is also likely to be a revival in power station construction, and the European mechanical engineering and plant construction sectors expect investments to pick up in line with rising economic growth. The automotive industry anticipates to reach production of at least the same level as in 2003. However, here too the strong euro gives cause for concern as it impairs the international competitiveness of both European steel tube manufacturers and their customers who are based in the euro zone. Nevertheless the European steel tube industry should still develop more positively in 2004 than in the year before. This will, however, hinge on the continuing substantial efforts to remain competitive at an international level.

We expect that the individual Salzgitter Group companies will develop along the following lines in 2004.

With the regard to the current financial year the Steel Division anticipates a profit around the level achieved in 2003. This will include a mid-range, double digit million profit on the part of SZFG, clearly positive results at ILG and SZGR, and a significantly lower loss at PTG.
Factors determining the scheduled developments at SZFG include positive progress on revenues, increased purchases of slabs and more extensive maintenance works in association with the relining of the blast furnace. Rising sea freight costs and price increases for US dollar-dependent materials and resources contrast with positive benefits from the improved value of the euro against the US dollar and the positive effects of numerous PIP projects.
Higher product revenues – including the passing on of fluctuations in the scrap price through the “scrap surcharge” – as well as better capacity utilization, further workforce downsizing and PIP projects, should contribute to improved results at PTG.
Normalization of shipment volumes and a rise in input material prices are expected to account for a lower profit at ILG in comparison with 2003.
SZGR expects its result for the year 2004 to be virtually unchanged from the previous year.

The trend in results at the Trading Division is once again headed upwards in financial year 2004.
With its expected profit, the SHD group should emulate the previous year’s figures. Changes in sales structures and an extensive cost reduction program will enable SSH to improve its result. SCB and SHN anticipate a slight downturn in earnings. With slight sales growth hampered by sourcing bottlenecks and higher freight costs, SID is planning for a reduction in returns and a somewhat lower but nevertheless satisfactory profit. STV and SIH are striving to increase their earnings in an improved market environment.
HLK expects the new slit coils and blanks products to deliver increased profits.
Results at UES should benefit from higher processing margins and stronger export sales. In the face of continuing intense competition, RSA anticipates a somewhat lower profit.

The contribution to results made by the Services Division in the year 2004 is expected to match the previous year’s level. The main reason for this development lies in a change of philosophy with regard to the allocation of earnings between some of the service companies and their main Group customers, the companies of the Steel Division. In the new financial year there will be a reduction in the result generated by VPS, as the relining of the blast furnace will reduce transportation volume and increases in costs cannot be passed on to Group customers by way of price rises.
Profits at DMU are likely to rise due primarily to an increase in the utilization of shredder capacity for steel scrap. Thanks to an improvement in its technology segment resulting from higher attendance rates and further cost reductions, PPS is expecting to once again return an approximately break-even result.
While GES plans to maintain profits at a relatively constant level and the TELCAT group aims to increase external sales and thereby further boost its net income, HAN expects to see profits decline as a result of various increases in costs which cannot be compensated for by higher volumes, as its existing handling capacity is already being fully utilized.

Following a break-even result in financial year 2003 – supported by extensive interventionary measures – the Processing Division will post an operating loss in 2004, albeit at distinctly reduced level.
Due to the continuing difficult market situation in the sheet piling business, HSP anticipates a further negative result, though on a lower scale than in 2003. By increasing its sales volume and simultaneously improving net revenues in 2004, SZBE is looking to halve the loss made in 2003 (prior to the waiver of claims). SZEP intends to increase its profit slightly, while SZAE, primarily due to the low level of orders received, does not expect to see any marked improvement in the earnings position, despite further cost reductions.

At the Tubes Division, an improvement is expected in 2004 in comparison with the year before. Substantial factors in this upturn will be the non-recurrence of one-time expenses, ambitious PIP projects and increased sales volumes in large-diameter pipes and cold-rolled tubes.

With demand for gas and oil field pipes increasing compared to 2003 and consumption of structural tubes remains strong. Nevertheless, due to exchange rate pressures the results in the seamless tubes segment (V&M Tubes) are anticipated to be emulating the previous year’s level.

Cold-finished tubes are expected to see a positive improvement in results. While MHP is forecasting that better volumes and returns will deliver significant gains in results, DMV is planning to increase shipments, enhancing its costs situation and expects to reduce its losses in 2004.

Medium line pipes are expected to yield a positive contribution to results on a par with last year. MLP is looking to increase its sales of uncoated line pipes and oil field pipes. With overall shipments remaining at a constant level, RGF anticipates a further shift away from oil and gas pipes in favor of water pipes and structural tubes.

The major “Ormen Lange” project already provides a firm base, and Europipe forecasts demand for its large-diameter pipes to fill its order book and utilize capacity.
With the cost of shutting down the Joeuf plant and its negative impact on results no longer featuring on the balance sheet and additional potential savings being realized, the substantial loss in 2003 should be followed by a break-even result for 2004.
Taking into account a current assessment of the risks arising from the economy, currency parities and the development in the raw material markets which could result in wide fluctuation margins, from a present perspective we expect the Tubes Division to return in the low tens of millions.

The market expectations illustrated in this outlook for the current financial year 2004 together with various other underlying conditions and planned internal measures were combined prior to the start of the year as part of the Group-wide planning process to arrive at an overall plan for the Group. Based on the current status of this information, we anticipate that earnings before taxes will show an improvement over 2003 and will return a double digit million result for the current financial year.

The consolidated result comprises the sum of the individual planned results for each subsidiary company, taking into account also the holding company and certain consolidation effects. On the other hand, the capacity of the Group to pay a dividend is subject to the individual annual financial statements for Salzgitter AG to be prepared in accordance with the German Commercial Code (HGB). A decisive factor here is the consideration that only a part of the subsidiaries contribute directly and contemporaneously to the dividend-eligible result reported by SZAG. Due in particular to the much reduced MRW dividend to be expected in 2004 and to further possible provisioning measures which may be necessitated by the loss situation at its HSP and SZBE subsidiaries, the annual net income of SZAG is unlikely to hold the potential for more than a slight increase over 2003. This will also apply under the aspect that additional tax burdens may arise due to possible new fiscal regulations. Nevertheless, from today’s perspective it would appear possible to pay an appropriate dividend for the financial year 2004 out of operating profits.