Economic Situation

General Business Conditions

The global economy expanded rapidly again in 2005, despite the sharp increase in crude oil prices. The recent IMF estimates are likely to put the increase in world production once again at 4%, which is, in turn, higher than the medium-term trend. China, where, in contrast to many other emerging markets, the rate of growth remained unchanged at a high level of + 9.3%, was again an important engine of global economic growth. In the industrial countries as well, the pace of the economy remained virtually unabated, although the trend varied substantially from region to region. Whereas the upswing in the USA held steady even if the rise in GDP (+3.5%) was somewhat lower than in the previous year, the increase in economic activity in the European Union was only modest (+1.5%). Following slack economic growth in the first half of the year, hampered by rising oil prices and the preceding appreciation of the euro in 2004, it was mid-year before there were increasing signs of an economic recovery. Stimulus came especially from foreign demand.

Macroeconomic Indicators in Germany

Favorable economic trends in exports also played an important role in the brightening prospects of the German economy. Exports in particular made a swift recovery and are likely to have risen by an annual average of 6.2%. Along with the depreciation of the euro in 2005, it was noticeable that a number of oil producing countries used their vastly increased income to buy German capital goods. In addition, the second half of the year saw stronger growth impetus from the domestic market. Capital expenditure increased substantially and investment in the construction sector rose again for the first time in second part of the year though, all told, falling short of the previous year's level. Private consumption remained the weak point. An important factor here was the decline in disposable income. The drastic increase in oil prices meant that expenditure on energy absorbed a larger share of disposable income. German GDP expanded an overall 0.9% (2004: 1.6%).

In 2005, steel remained in great demand worldwide, although the growth rates of production and consumption, dampened by slower economic momentum in the industrial nations, were lower year-on-year. The global production of steel came to around 1,130 million tons (+5.9%) in 2005. Steel consumption, which stood at 998 million tons (+2.7%) fell only marginally short of the billion ton threshold. Leading this development was Asia again, in particular China, where steel consumption rose to 300 million tons (+10.3%). By contrast, consumption in the USA fell by a good 5% under the pressure of high inventory levels, and the European Union also recorded a decline (−1.5%).

World Crude Steel Production

2005 was a challenging year for the European steel industry in comparison to the demand-driven boom year of 2004. Against the backdrop of the moderate development of the economy, the general conditions in which manufacturers were forced to balance demand and supply were characterized by at best modest real growth in steel consumption, inventory levels running at a record high, and a huge increase in the imports of non-member countries into the EU.

In the overheated environment of 2004, with steel prices climbing steeply, steel consumers and traders built up stocks way in excess of their needs. In the wake of an economy which had started to cool in the fall of 2004, especially in China and Asia, inventory levels had reached a historical high at the start of 2005. Consequently, in the first half of the year the order intake of European steel producers fell more than 20% short of the previous year's level, as initially inventories were reduced. For flat carbon steel, the decline came to 26%; orders for sections plummeted and stood 30% lower year on year. By contrast, the trend of heavy plate was far less dramatic as international demand in the sophisticated high-grade segment of the important customers groups in the production and transport of energy (pipelines and ship construction) remained firm during the whole of 2005. Only in the segment of simple commercial grades did the greater amount of material available cause fierce competition and sliding prices. Order activities picked up again once inventories had been reduced, in the second half of the year, with the result that, in a year-on-year comparison, the decline in orders narrowed considerably.

Steel manufacturers reacted to this market scenario by extensive production cut-backs, adjusting output to the order situation. Their efforts to balance out supply and demand were, however, hampered by the drastic increase in imports, especially in the first half of the year. The supply of material which, until the fall, exceeded demand led to prices slipping substantially in the second half of the year. The market-oriented supply policy of European manufacturers prevented prices from tumbling to a level known from earlier economic cycles. The turning point in late summer was therefore at a level which was higher than in the economic cycles of the past.

The trends in the sectors affecting the steel tubes industry varied greatly in 2005. Growth in the construction industry of Western Europe and the USA was lower than in the previous year, whereas it was higher year-on-year in Japan and China. The chemical industry, in particular in Germany and China, posted positive growth rates. Mechanical engineering was unable to match the expansion seen in 2004. In the automotive industry as well, China's faster growth rate outstripped all other countries, with exports of automobiles exceeding imports. This is a milestone for local manufacturers on the road to becoming leading producers in the global market.

The growth engine of the year 2005 was the energy sector. The increase in oil prices, which peaked at just under USD/bbl Brent 70, impacted not only exploration but also the construction of pipelines. Capital expenditure in new power station projects, driven by the increased need for energy, also had a positive effect on the demand for steel tubes in 2005.

Stockholders' inventories, which were at a very high level at the start of the year, returned to normal over the course of the year.

The price situation showed a varied picture. Seamless tubes recorded stable prices at a high level. The situation for welded pipes of up to 406.4 mm diameters depended on the business segment: Whereas, in the project business, prices remained relatively stable, they came under pressure in the stockholder business from declining hot strip prices and inventory reductions. The prices for largediameter tubes remained stable owing to brisk demand.

At 83 million tons, world steel tube production reached its highest level recorded to date, boosted by all manufacturing processes. The greatest year-on-year growth was generated by seamless tubes which climbed 8%. Welded tubes in both small and large diameter segments rose by 4% respectively.

World Steel Tube Production

The increase in world steel tube production of 4 million tons is primarily due to China where 3.5 million tons (17%) more was produced than in the previous year. Of this growth, the largest share was attributable to welded tubes of up to 406.4 mm diameter which rose +2.3 million tons (20 %), followed by seamless tubes and welded large-diameter pipes which posted +1.1 million tons (12%) and +0.1 million tons (11%) respectively. In all other regions of the world, production volumes remained virtually unchanged as against 2004.