May 2005

Reading the runes: is industry poised for the upturn?

Crystal balls don't work and neither do chicken entrails, but annual reports and quarterly statements taken together can give strong pointers to the way an industry is going. If that is true then prospects for the big powder producers - and almost by definition their main customers - are looking quite rosy...

Inco had a good year in 2004; so did Sandvik; and so, given quibbles over surcharges and the strength of the Swedish Krona, did Höganäs. And even GKN, parent company of giant US powder producer Hoeganaes reported positive PM returns, with their overall picture being marred only by currency fluctuations. First quarter reports reflect rather better than cautious optimism for the rest of this year.

The prospects generated by continuing strong business growth in Asia, a perhaps stronger-than-expected performance in North America, and growth in Eastern Europe were only blunted by at-best neutral returns from Western Europe where the Euro zone governments still labour under the twin burdens of high unemployment and soaring social costs, despite better trading figures from Germany.

Sandvik in particular seems to have overcome a threatened bout of corporate indigestion brought on by over-indulgence in massive acquisitions, vindicating chief executive Lars Pettersson's strategy of concentrating on reducing internal costs while bringing about the difficult changes associated with adapting cultures in acquired companies. Sandvik is the parent of MIM powder producer Sandvik Osprey and is a prolific consumer of hardmetal powders in its mining, cutting and steel working tool manufacturing operations. The 2004 results speak for themselves:

• Strong organic growth, +15 per cent;
• Profit after financial items, +54 per cent - the highest ever;
• Earnings per share SEK 17.70, +58 per cent

Sales amounted to SEK 54.6 billion and profit after financial items rose to SEK 6.5 billion, the highest level in Sandvik's history, said the group's annual report. "As a result of a strong industrial climate, increased market share and continued efficiency enhancement, the group advanced its position as a global market leader in its core businesses. The positive development in the world economy that started at the end of 2003 gained momentum during 2004, creating increased activity within most markets and industries.

"The strategy of continuous investments in marketing resources as well as plant and machinery strengthens competitive advantage and provides positive leverage when demand is high, such as in 2004. Demand for the Group's products and services was particularly strong in Eastern Europe, Asia and South America, where we have a well-established market organization and are a natural partner for domestic and global companies that establish operations in these regions."

Although Canadian nickel producer Inco could not reproduce last year's quite startling improvement in profitability, the first quarter results show a healthy 4.8 per cent increase in net earnings to $238 million from last year's Q1 adjusted net earnings of $227 million. So pleased was the board that it reinstated a 10-cent quarterly dividend on ordinary shares.

Chief executive, Scott Hand, said: "Inco continued to deliver impressive results in the first quarter of 2005. The nickel market remained very robust, with the average LME cash nickel price for the quarter surpassing the high\levels of last year. In our operations we exceeded our February 2005 guidance for production and nickel unit cash costs of sales after by-product credits for the quarter. We also continued to make good progress in advancing our growth projects at Voisey's Bay and Goro.

"Based on our strong cash flow from operations, very favourable financial position, confidence in our growth programme, and positive outlook for the nickel markets, I am pleased to announce that Inco's Board of Directors reinstated a quarterly cash dividend of $0.10 per share on our common shares."

The average London Metal Exchange (LME) cash nickel price for the first quarter of 2005 was $6.97 per pound, higher than any quarter for the past 16 years, as Chinese demand surged.

China was, however, not the only growth driver for nickel, said Mr Hand, as world stainless steel production remained strong. "Three of the key markets for nickel outside stainless steel, those being the high nickel alloy, special nickel products and alloy steel markets, remain very strong. We expect demand for nickel-containing products from the aerospace and energy industries to result in continued growth in non-stainless steel nickel use for the balance of 2005.

"We believe that strong nickel and stainless steel demand, particularly in China, will continue for the rest of 2005 and market conditions will remain tight given the continued shortfall in supply relative to demand. While we expect the LME cash nickel price to remain volatile, these favourable supply/demand fundamentals are expected to continue to have a positive effect on prices at least through 2005.

"During the quarter we produced 122 million pounds of nickel, two million pounds ahead of our February 2005 guidance. For Inco as a whole, we are forecasting production of 110 to 115 million pounds of nickel in the second quarter. We continue to look at ways to maximize production across the company and our full year production forecast remains at 490 million to 500 million pounds of nickel. We produced 67 million pounds of copper in the first quarter, and expect to produce 245 million to 255 million pounds for the year. We produced 112,000 ounces of platinum-group metals (PGM) in the first quarter, above our February 2005 guidance of 100,000 ounces to 105,000 ounces. We have increased our full-year PGM production target to 380,000 to 390,000 ounces.

“We remain on plan to meet our nickel unit cash cost of sales, after by-product credits, target for the year. In the first quarter, while we realised net cost reductions and related savings of about $3 million, we remain on plan to reach our 2005 goal of $60 million in cost reductions and savings as we move through the year.

“External feed, which we purchase for processing at our Ontario and Manitoba operations, adds to our costs, but this external feed has served as a bridge to fill our processing facilities until production of low-cost Voisey's Bay concentrate begins later this year.

“With Voisey's Bay on stream in 2006, our nickel unit cash cost of sales, after by-product credits, is expected to drop to about $1.95 a pound based upon our current assumptions in arriving at this estimate.”

With 2004 net sales of SEK 4.162 billion, up from 2003 levels of SEK 3.75 billion, operating margins exceeding 15 per cent and return on capital employed of better than 17 per cent, Swedish powder producer Höganäs had a better-than-fair year. Income before tax rose by 17 per cent. In the first quarter of this year net sales were SEK 1.095 billion, a 17 per cent increase. Currency effects resulting from a stronger Swedish Krona which dogged the Höganäs balance sheet last year continued, exerting a 3.5 per cent negative effect on turnover. However, more worryingly, volumes grew by just 2 per cent for the corresponding period.

This low volume increase, says the company, is partly due to some customers bringing forward deliveries in 2004 to mitigate the effects of increased surcharges at year-end. Demand remained firm in Eastern Europe and South America, while progress in Western Europe stayed weak. In Asia, progress compared to a year previously was more restrained, also partly due to stockpiling.

High raw materials costs, particularly molybdenum, continued to adversely affect operating income in the first quarter. This is because the surcharges applied since 2004 on iron powder are effective with a delay of about six months. The stronger Krona has exerted a negative impact of approximately MSEK 15 on operating income in 2005. Nevertheless, Höganäs expects income before tax for 2005 to be comparable with, or better than, 2004.