Metal companies report disappointing results

Paper company Stora Enso shares rise despite poor Q1 earnings

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Metal components company Rautaruukki and steel manufacturer Outokumpu have reported dismal first quarter earnings. While expectations were not very high in the current financial climate, reality fell far below the lowest of expectations.
      Also announcing a poor Q1 result on Thursday was the paper company Stora Enso, whose share price nevertheless surged following news of plans of job cuts in middle management.
     
Demand for steel products has declined sharply. In addition, Rautaruukki and Outokumpu are paying the price for unfounded optimism by their customers, leading to excessive growth in inventory.
      This happened because nobody could guess the depth of the economic decline.
      Turnover at Rautaruukki declined by 46 per cent, and that of Outokumpu by 60 per cent from a year earlier. Both companies also sustained a bigger loss than most analysts had expected.
     
The expansion of inventory is not exclusively a problem of the metal industry. Anssi Rantala, head economist of the OP-Pohjola Group, says that this has happened in many other sectors as well.
      “Now production is falling more quickly than it did in the late autumn. Later we might see things go in the other direction.”
      At some point, cutting inventory will end, and then corporate result figures will improve. This will be good news, but Rantala warns that it will not yet mean that the recession is coming to an end.
     
Even more disappointing than Rautaruukki’s poor Q1 result was its pessimistic forecast for the second quarter. Outokumpu also expects to lose money in April-June.
      Rautaruukki said that it may become profitable again in the second half of this year, but if this happens, it will not result from improved demand, but rather from cost-cutting and efficiency efforts, as well as lower prices of raw material.
     
Paper manufacturer Stora Enso saw its share price surge by 5.6 per cent, even though it announced a poor result on Thursday. The Company said that it plans to cut 2,000 jobs in middle management, which is believed to have been to the liking of investors.
      However, Anssi Rantala says that ultimately, the metal industry is in better shape than paper companies. The forest industry was having trouble with overproduction already before the economic decline, whereas the metal industry’s problems are mainly cyclical.
      Stora Enso CEO Jouko Karvinen presented statistics indicating that Finland is the most expensive place to produce paper. Production costs for the paper industry are cheapest in Brazil.
      “Finland’s problem is so great that this company alone cannot solve it”, Karvinen said.
     
Thursday’s positive news among companies announcing results on Thursday was elevator and escalator manufacturer Kone, which reported growth in sales, as if there were no recession at all.
      The company is a model example of how long order books protect engineering companies from cyclical fluctuations - at least initially.

More on this subject:
 Ministers promise support for ailing forest industry

Links:
  Press release: Outokumpu´s first quarter 2009 - significant operating loss, very strong cash flow
  Stora Enso Interim Review January-March 2009 23 April 2009
  Rautaruukki Corporation Interim Report for January-March 2009

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