IN SPITE OF THE VERY DIFFICULT YEAR FOR THE WORLDWIDE ECONOMY IN 2012 (DRAMATIC FOR THE EUROPEAN ECONOMY), DUFERCO YEAR-END REMAINED POSITIVE, ACHIEVING A NET PROFIT OF 20 MILLION USD (AGAINST 77 MILLION USD ACHIEVED DURING 2011). 

Such a result was attained thanks to the sustained performances of trading and diversification activities (mainly energies), whereas, even in 2012, our industrial production was non-profitable.

The global economic scenario remains very uncertain. In particular, the market experienced uncertainty factors caused by the persisting economical and financial difficulties in Europe. Some countries of the Eurozone faced severe recession and the 2013 prospects are certainly not positive. 

Because of the European crisis, the International Monetary Fund marked down growth forecasts for the current year, due to the weakened global activity and also the increased risks to the recent historical level of GDP growth of major dynamic economies. In spite of this scenario, global steel production increased, achieving a new record (more than 1.5 Billion Tons of steel were produced in 2012).

Logically, production increased especially in Asia and China, mainly due to the ever-increasing fixed assets investment level. For the near future, however, such production increase could cause a significant imbalance of global overcapacity, especially in China, should the economies of the developed countries experience GDP stagnation, and the developing ones reduce the growth of their fixed assets investment.

We repeat that the definition of the global steel market of the last three years can be, in fact, summarised as a reality of “two separate worlds”.

In Europe, North America and Japan, GDP growth is slow, sometimes even stagnant (the major part of European countries), while on the other side of the world, there is a very important GDP growth, especially in Asia, Latin America and the Middle- East.

These two separate worlds create a strong global imbalance, with excess capacity in the mature industrialized countries and shortage in the emerging countries.

Value creation in the steel industry continues to be significantly related to the control of raw material sources (iron ore, coking coal and other). The upstream factors thus determine the economic performances of industrial assets much more than the downstream factors.

This represents a reversal of the traditional fundamentals of the steel industry. Historically, the market balance was relatively clear, resulting in a pricing picture that was predictable, although not always positive for the steel industry. Raw material prices were set for the year. Raw material production was a known factor, since new investments were scarce due to the relatively poor outlook of the mining industry. Similarly, steel demand was relatively well known and growing only moderately. All of this changed during the past decade and is today influencing the stability of the markets for steel-making raw material. A huge margin shift from steel mills to mining has occurred and the cost curve of the different producers steepened (large competitive advantage of steel mills integrated upwards versus the “orphans”).

The future is uncertain, with a large range of factors affecting the future supply of steelmaking raw material. Apart from the need to develop new mines, the infrastructures required to supply raw materials, such as port and railway connections to loading ports, are a strong barrier to new projects. Uncontrollable events, such as adverse weather conditions, often have an impact on the supply. Demand is heavily influenced by China steel output and Chinese domestic iron ore production. 

The uncertainties on the future supply/ demand of raw material come from different directions:

• New project realisation could be seriously limited, due to insufficient infrastructures, financing problems and difficulties in acquiring environmental permissions; 
• Existing export restrictions in major exporting countries (i.e. India); 
• China is the determining factor on the demand side. A slow down of fix asset investment level could cause a reduction of steel production. I n parallel, China continues to develop its own iron ore mines (which, however, have high operating costs). 
• Conversely, should China and India continue to expand their steel production, prices of raw material will remain between moderate to high although they will not reach the peak price levels of the past. Should the advanced economies come back to a good rate of growth, we could even experience a new boom in raw material. 

This situation, in the medium long run, could lead to a progressive reconfiguration of ownership in the steel industry.
The winners will be those who have most effective access to raw material sources and energies, while all the others will need to be creative, since they will face challenging times. As mentioned above, in an extremely difficult business environment which has been characterised by poor performance of all our main competitors, whether trading companies or steel producers, we are reasonably happy to report a positive performance achieved during the 2012 financial year. In particular:

• Year on year, consolidated revenue slightly increased by about 5%; 
• The Group’s net financial indebtedness was unchanged with respect to the previous year, while liquidity remains healthy with increased levels of cash reserves (553 Million USD as of September 30, 2012 versus 505 Million USD as of September 30, 2011). 
• Bank facility financial covenants are in full compliance and well exceed the test thresholds. Trade credit line utilisation on aggregate averages about 60%. Bank support for Duferco remains strong with no formal reduction in our credit line availability due to the sovereign Eurozone debt crisis which has indirectly spilled over into trade finance. 

From the strategic point of view, the evolution in Duferco’s strategy and business model is linked to the dramatic environmental evolution and, within this context, to the great transformation of fundamentals and principles of the steel business.
As we said in our previous Annual Report, Duferco is adapting to the new configuration of the market and to new situations in the steel industry; its traditional model of unconventional “hybrid” (production, trading, distribution, transformation, logistics) had to be changed, specifically for the production activity. Having missed in the 90’s, the opportunity to invest in cheap mining assets, operating blast furnaces became too risky; our future was no longer under our control.
We had no mines, no size, and no tradition of “niche” products.
Our “updated strategy” can be outlined as follows:

• Focus on trading activities; 
• Industrial disinvestments on blast furnace and focus and defend on the production of electric arc furnace products; 
• The development and improvement of diversification activities (energy in particular). 

Focus on trading activities:

The extraordinary economic growth of the emerging countries and markets is, and will continue to be, a new and important development opportunity, especially for a global player like Duferco and its traditional trading and distribution activities.

Our refocusing on original core business is a deliberate strategic decision aimed at maintaining Duferco’s global role through trading and its presence in those parts of the world where steel production and consumption is likely to expand greatly in the future.

The development of the emerging countries and markets allows, and will continue to allow, Duferco to capitalise on its intangible assets, consisting of its name and reputation, financial credibility, and extensive expertise in various areas of steel business: trading, distribution, production, finance, logistics, and shipping.

Furthermore, the trading activity continues to be a vital scouting source for new business opportunities encountered during its normal activities: long-term commercial deals, new industrial/commercial alliances, investments in exotic areas.

The Trading Group operating results, across our entire portfolio of business, remained positive. We were especially pleased to record a substantial improvement in results in our South American distribution activities.

Our traditional trading business recorded a gross margin growth and our downstream distribution and processing business showed a satisfactory improvement, the latter being, in part, due to the aforementioned improvement in the OECD sector, and, in part, a reflection of our most recent strategic initiatives in South America.
The general pessimism surrounding the business at the start of 2013 may lead to a subdued next fiscal year, but the new energy and focus applied by us to this business will definitely maintain the long-term growth of our activities.
When benchmarked against many of our peers, we feel our centralised management model and strong presence in resource economies has continued to serve us well in these turbulent markets. 

Concentration on electric furnace production:

Duferco is a private company with consequent “limited” financial resources. Being the “orphan” of mining assets, as said before, the blast furnace production became unsustainable. The EAF production, instead, is more flexible, more suitable to our core experience of quick market responses, more regional.

Over the years, the company gained good expertise in the production of electric arc furnaces, also drawing benefit from its skills in the sourcing of scrap. The factors of profitability are more regional and manageable.

In 2012, merchant roll production (in Denmark) and beam production of Duferdofin-Nucor Joint-Venture (in Italy) continued to suffer from the European building market recession.

In Belgium, recently, important activities are being carried on to boost the commercial development of this business field, to improve its operational reorganization and technical engineering structures (important steps and investments are being implemented in the scrap yard and in the continuous casting and billet structures, as well as in the wire-rod heating furnace).
In Denmark, Italy and Belgium, the 2012 Financial Year was merely fair due to the poor market situation of building products, so management activity focused on protecting market share, constantly improving operating performances and on reducing impact of fixed costs, essential to face low-peak demand phases and consequently moderate productions.

The Fe/Vn production in South Africa has undergone a year of stabilization of the activity focused on rationalisation of the industrial process.
Notwithstanding a low level of prices, the economic results have been balanced; we are now well positioned to benefit from hoped-for improvements of the market. 

Growth and improvement of diversification activities

Duferco’s knowledge and understanding of the fundamentals of the steel business has allowed it to enlarge its activities in related markets.

Investments in diversification activities have continued with success also in 2012. These activities are related to our core steel business such as energy, shipping, logistics, environment and real estate, all of which have risk and volatility profiles, different from those of our core business.

Duferco’s strategy has entered the energy sector with a vertical integration structure, with activities ranging from trading of natural gas and electricity to production (renewable and conventional) and retail.

In particular, Duferco is expanding in the photovoltaic and small hydro power sectors through the acquisition of plants already in operation or under construction/authorisation process, benefiting by feed-in-tariffs.

These investments are growing rapidly.

Recently, Duferco has established a gross and retail company for electricity, gas and photovoltaic plants, based on its long experience in the trading and sourcing of energy for its industrial activities.

On the strength of its experience in shipping and logistics, with more than 15 million tons moved and 1,500 chartering in the last exercise, Duferco has entered in the shipping sector as service provider and also as an opportunistic asset player, developing the experience of partnerships with operators such as Sidernavi, Romeo Group and M.U.R. Our belief in the principle that the “law of gravity” always prevails, has allowed us to emerge without problems from the serious crisis of ship asset values.

Finally, Duferco, especially in Belgium, continues its activities in soil remediation in order to achieve a complete rehabilitation of polluted ex-industrial areas of the group and third parties. 

Duferco implements such activities, not only by providing the essential financial support, but also by providing management and management services (i.e. Duferco Engineering) which are critical for the implementation of these projects. .