Following record results reported by the metallurgical sector in 2017, growth slowed slightly in 2018. Eight of the ten largest companies still increased their revenues and only one of them, KCM, registered a net loss. The loss, however, was due to negative foreign currency effects and not to a drop in operating results. The big news in metallurgy in 2018 came from steel producers, whose two-digit growth offset the 120-million-lev decrease posted by the sector's traditional leader, copper producer Aurubis. As a result, revenues of the top 10 companies rose by more than 4% on average.
The performance of most companies in the sector this year will depend on external factors, mainly the global trade wars which have risks attached and make forecasting difficult.
With a revenue rise of nearly 30% steelmaker, Stomana Industry gets ahead of Plovdiv-based lead-and-zinc producer KCM and takes the third place in the sector. Its profit edges up a bit, which gives the company its second year in the black after a series of losses. Bulgaria's other steel producer, Burgas-based Promet Steel, preserves the fifth position but it reports the second-biggest jump in revenue among metallurgical companies (over 23%).
The growth in the Bulgarian steel industry was the result of several factors. "On the one hand, demand increased on a global scale. On the other, the introduction of quotas on imports from third countries, mainly Turkey, Russia and Ukraine, gave the European market a breath of fresh air," said Anton Petrov, chairman of the Bulgarian Association of the Metallurgical Industry and representative of Stomana Industry's owner, Greece's Viohalco. "At the same time consumption in the country increased due to growing construction," he added.
While the steel producers' main markets are the Balkan region and Europe, they already make exports to much more distant destinations like the United States and Canada. "The United States is a temporary market, which depends on the euro/dollar exchange rate. In this particular case the reason was the higher customs duties imposed by Donald Trump on steel from Turkey, which gave Bulgarian producers, mainly Promet Steel, the opportunity to take over some of the US markets lost by Turkey," Petrov explained.
The prospects for steel production are not that good this year.
"On the one hand, there is a slow-down in global consumption and even zero growth in some countries," Petrov commented. "On the other, the rapid changes are undertaken by the US administration in relation to the customs duties for Turkey and the North-American Free Trade Agreement create additional uncertainty on the market."
In Petrov's words, the discussed increase in the import quota for third countries will be disastrous for the sector, given the projections for almost zero growth in steel consumption in the European Union (EU). "European steel producers are the only ones that register a drop in production due to third-country competition. And that competition comes from the redirection of money flows due to the US duties and the high expenses European producers have for carbon emissions both directly and indirectly, through electricity prices. That affects their costs substantially," Petrov said. "The first signals are already here, as production in the EU is falling this year and so are margins. This year will not be as good as the last one."
The unrivalled leader in the ranking, copper producer Aurubis Bulgaria, which is part of Germany's Aurubis group, saw its revenue decreasing slightly last year after record results in 2017, and its profit falling by half. "The weaker net result was mainly due to the conditions on the market for raw materials, i.e. concentrates and scrap. Our revenue was affected by the slight drop in production volumes, year on year, which had an effect on the sales of our main products, cathode and anode copper. The more unfavorable conditions on the sulfuric acid market also had a negative impact on our overall performance," CEO Tim Kurt explained.
The 22-day shutdown of key production units in the plant this spring is the reason why the company projects smaller volumes in 2019. "That will have a one-off effect on revenue and profit for the year. Metal prices and the overall market situation are also expected to affect the end result. Last but not least, electricity prices will affect our expenses and that is something that the industry and institutions should work on together," Kurt added.
At the same time, Sofia Med, which is part of the Viohalco group and manufactures copper products, passed the threshold of 1 billion levs of revenue. What is more, the rise of more than a fifth followed another strong year in 2017, when sales surged by nearly 50%. The positive trend became possible after the company changed its focus a few years ago from products for construction to products for the industry, including the automotive sector. Despite the complex economic situation in Europe and other markets, in 2019 the company expects its sales to grow by about 5%.
Foreign currency effects
KCM descended one position in the ranking as its revenue declined 7%. It is the only company in Top 10 to report a loss for 2018. That, however, was due to negative foreign currency effects, while its operating result improved.
"The prices of our metals decreased considerably last year, which affected revenue, with sales falling by some 24 million levs. However, our raw material costs also went down, so we had a better operating result," said Rumen Tsonev, CEO of KCM 2000 Group, of which KCM is part. Last year the plant produced about 1,000 tonnes more zinc and about 600 tonnes more lead.
The company's net financial expenses increased substantially as a result of exchange differences and revaluation of debt denominated in foreign currency. "All our loans are denominated in dollars and the US currency appreciated at the end of the year," Tsonev explained. "We had very good results in terms of efficiency of production. The share of secondary raw materials we recycle is already more than 20%, which is a very good achievement."
Tsonev is cautious about making forecasts for this year. "In principle, the market is influenced by all global problems related to trade and customs wars. There is a demand on the whole, and it is increasing," he added.
Two ore-mining companies join the metallurgical ranking this year: gold producer Dundee Precious Metals Chelopech and copper producer Assarel Medet. Both saw their revenues rise, year on year, and achieved two-digit margins: the highest profitability in Top 10.
The mine in Chelopech produced more gold and copper in the form of concentrate. Its profit jumped by 77% to more than 150 million levs, which was due to higher metal prices and higher processing fees. The second project of Canada's Dundee Precious Metals in Bulgaria, a new gold mine in Krumovgrad, has also recently started production. The investment in it is worth some $165 million.
Assarel Medet's profit edged down a bit, which was mainly due to currency hedging effects, as well as to the implementation of new international accounting standards. In 2019, the company expects a dynamic copper market, which will depend mainly on the trade war between the United States and China, the economic growth in China and the growth in electric vehicle production.
Aluminium product maker Alcomet slightly increased its revenue due to higher aluminium prices, while the drop in profit by some 2 million levs was the result of market pressure, the company said.
This year Alcomet will complete its 40 million euro investment program launched in 2016, which is the largest investment made since the company was privatized. The modernization encompasses all the three shops of the plant: casting, rolling and extrusion. It will boost the plant's capacity, allowing for the production of new items, including for the automotive industry. With the recent launch of a new 2 500-tonne extrusion press, the company expects to increase extrusion output by at least 25% this year, although the effect of the investment will be fully felt only in 2020. The company aims to achieve a turnover of 550 million euro in 2023 and grow steadily until then.
Global trade, however, is going through a dynamic period, offering 'surprises' every month, according to Alcomet CEO. "The US-Chinese trade war has reached unsuspected dimensions. The Chinese producers, deprived of their traditional markets in the United States, are dumping their products in other markets and Europe," Huseyin Yorucu said.