Saarland Steel Bringing Flexibility to a Hardened Industry

The German steelmaker group SHS has bounced back to profitability but the market remains challenging. CEO Karlheinz Blessing doesn't rule out acquisitions.
The steel companies Dillinger and Saarstahl will need to bend more than steel to stay profitable.

Karlheinz Blessing won't forget 2013 anytime soon. "We pushed our limits to the maximum," said the chief executive of the Dillinger Hütte and Saarstahl steel companies controlled by the Saarland Iron, Steel and Mining Foundation.

For the first time in years, the two steel mills in southwestern Germany reported a combined operating loss of €300 million, or $345 million, and sales had declined significantly to €4.3 billion. Tough competition and excess capacity had pushed down prices, with only a few steel producers operating profitably.

Mr. Blessing was concerned. "If a company operates in the red for two years in a row, there's a problem," he told Handelsblatt.

To prevent that, the 57-year-old executive launched a cost-cutting program, which included eliminating jobs, and increased efficiency in both steelworks. He was able to reduce costs in the group, also known as SHS, "in the triple-digit millions." That and lower commodity prices were enough to return the group, Germany's third-largest steelmaker after Thyssen-Krupp and Salzgitter, back to profitability in 2014.

Toward the end of last year, however, SHS faced a new problem. Russia unexpectedly halted construction of the South Stream pipeline that was to transport gas through the Black Sea and to Western Europe. Dillinger is a partner in the Europipe joint venture together with steelmaker Salzgitter. Dillinger supplies half of the so-called heavy plates, which Europipe uses to make pipes for the gas pipeline.

We pushed our limits to the maximum. Karlheinz Blessing,, Chief Executive of SHS

South Stream production at the Europipe plant in Mülheim is on hold until February 19. “Until then, we won't know whether the project will be continued," Mr. Blessing said, noting Russia now has plans to have the pipeline pass through Turkey.

The joint venture so far has incurred no losses, according to Mr. Blessing. "The Russians have paid for everything delivered, even in December," he said.

Dillinger has a history of steelmaking spanning more than 350 years and is one of Germany’s oldest publicly listed companies. The integrated iron and steel maker specializes in the production of high-quality heavy plates used primarily for wind turbines, bridges, oilrigs and pipelines.

The energy sector accounts for about 70 percent of Dillinger's revenues but is undergoing significant change. Traditional power plant construction has stagnated, and the declining price of oil is forcing companies to postpone investments. "Many projects are currently on hold," said Mr. Blessing, who expects fewer orders from the energy sector over the next two years.

Competition has also become tougher, especially for Dillinger. The current glut of heavy plates in the market is affecting prices. "This forces us to pull out all the stops," Mr. Blessing said.

By reducing delivery times, adjusting capacity to meet demand and continuing to cut costs, he aims to keep the company profitable. "Cutthroat competition forces us to adapt," he added, noting the company has no plans to eliminate more jobs.

 

It will be difficult to remain independent, especially for smaller companies Lars Hettche,, Analyst with Bankkaus Metzler

Saarstahl, whose main customers include the auto industry and its suppliers, along with the machine-building sector, is in better shape. Plant utilization was high in 2014, "and we gained additional market share," said Mr. Blessing, who does not expect demand for Saarstahl's products to decline in 2015.

Mr. Blessing doesn't rule out acquisitions for both steel companies, which have the necessary funds. The losses they posted in 2013 were an anomaly.

Yet, some industry analysts believe the two steel companies will need to become even more strongly interlinked to compete in the long term. “It will be difficult to remain independent, especially for smaller companies," said Lars Hettche of Bankhaus Metzler, adding they could survive by banding together as providers of specialty products.

Mr. Blessing has his work cut out for him with restructuring of the Saarland steel industry. He will need time for that. Although his contract expires in 2016 with Dillinger Hütte and in 2017 with Saarstahl, he said he wants to stay. “I hope my supervisory board wants me, too," the executive said.

That statement should put an end to speculation of Mr. Blessing could succeed Horst Neumann as labor director with Volkswagen in Wolfsburg. Mr. Neumann is expected to retire this year.

"I'm a passionate motorist," said Mr. Blessing, an amateur racecar driver. "But I would like to complete the project here."

 

2015-02-04 Interlinked in Saarland-01

 

 Martin Wocher covers the steel industry for Handelsblatt. To contact the author: [email protected]